Community-vs-Separate Property

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In Arizona probate, trust and estate litigation, parties sometimes dispute whether property constitutes community property of the married couple or the separate property of just one of the spouses.  These disputes often arise between the surviving spouse and the estate of the deceased spouse or, sometimes, the estates of both spouses.  Either way, Arizona has several basic rules that help determine whether property is community or separate.

What is Community Property?

Basically, community or marital property is all of the property to which each spouse has an undivided one-half interest.  During marriage, “the spouses have equal management, control and disposition rights over their community property and have equal power to bind the community.” Although either spouse has the power to use and spend community property, they also owe each other fiduciary duties to ensure that community property is spent for community/marital purposes.  Community expenses include food, shelter, healthcare and other living expenses.

So, how do the Arizona Courts determine whether assets are community or separate property? Read on to find out.

Basic Rules to Determine Whether Assets and Income are Community Property

The characterization of property, separate or community, is a question of law for the court.  In making the classification, the Court follows several rules:

• Property acquired before marriage by one spouse is presumed to be the separate property of that spouse.
• On the other hand, property received during marriage is presumed to be community property of both spouses, unless it was acquired by gift, devise or descent (an inheritance) by one spouse.  Property received by gift or inheritance by one spouse is that spouse’s separate property.
• Earnings of both spouses received during marriage (marital earnings) are also presumed to be community property.
• In turn, property acquired with marital earnings is presumed to be community property.
• The profits of separate property accruing during marriage are either community or separate depending on whether they are the result of the individual management, toil and labor of a spouse, or the inherent qualities of the business or property itself.  If the profits are the result of the spouse’s effort, management or work during marriage, the profits are community property.  If the profits are the result of the inherent nature of the property, not the result of management or effort of the spouse, the profits are separate property.  If there is doubt about the treatment of the profits, the presumption of community property applies and the court will typically find that the earnings/profits received during marriage are community property.
• The spouse seeking to overcome the community property presumption has the burden of establishing the separate character of the property by clear and convincing evidence.

Once the status of property as community or separate is determined, it retains that character until changed by (a) agreement of the parties or (b) operation of law.  Where the character of property is changed, it is called transmutation: “the action of changing or the state of being changed into another form.”

Changing the Character of Community or Separate Property by Agreement: Pre- and Post-Nuptial Agreements

Arizona law allows spouses to agree to divide their property presently and prospectively. They may do so prior to marriage, via a prenuptial agreement or after marriage via a post-nuptial agreement.  Whether a premarital or post-nuptial agreement is valid and enforceable often arises in Arizona probate, trust and estate matters.

Arizona adopted the Uniform Premarital Agreement Act, which governs agreements made prior to and in contemplation of marriage.

Issues that May be Covered in a Prenuptial Agreement

In a premarital agreement, spouses may agree on numerous issues, including:

• The rights and obligations of each of the spouses in any of their property;
• The right to buy, sell, use, transfer, lease or otherwise manage and control property;
• The disposition of property on separation, marital dissolution, death or the occurrence or nonoccurrence of any other event;
• Changing or eliminating spousal support;
• Making a trust, will or other arrangement to enforce the agreement; and
• Any other issue that is not in violation of public policy or a statute imposing a criminal penalty.

However, the right of a child to support may not be adversely affected by a premarital agreement.

Requirements for an Enforceable Premarital Agreement

In order to be enforceable in Arizona, prenuptial agreements must be:

1. 1. In writing
   2. Signed by both parties

Premarital agreements are enforceable without consideration and become effective upon marriage of the parties.  However, premarital agreements are not enforceable if they are are not fair.  Thus, such agreements are not enforceable if the person against whom enforcement is sought proves either:

1. 1. 1. The person did not execute the agreement voluntarily; or
      2. The agreement was unconscionable when it was executed and before execution of the agreement that person:

(a)  Was not provided a fair and reasonable disclosure of the property or financial obligations of the other party.
(b) Did not voluntarily and expressly waive, in writing, any right to disclosure of the property or financial obligations of the other party beyond the disclosure provided.
(c) Did not have, or reasonably could not have had, an adequate knowledge of the property or financial obligations of the other party.

The issue of unconscionability of a premarital agreement is decided by the court as a matter of law.

Requirements for a Valid Post-nuptial Agreement

After marriage, spouses may also enter into an agreement to change the character of their community or separate property.  Upon marriage, the spouses owe fiduciary duties to each other.  As such, arguably, post-nuptial agreements are subject to more stringent review by the Court than prenuptial agreements.

As early as 1969, the Arizona Supreme Court recognized that spouses may enter into an agreement to divide their property presently and in the future (prospectively) even if it is not in anticipation of separation or divorce.  Since spouses owe fiduciary duties to each other during marriage, however, such agreements must include safeguards:

1. 1. 1. • The agreement must be free from any taint of fraud, coercion or undue influence;
         • Each must have acted with full knowledge of the property involved and their rights therein; and
         • The agreement must be fair and equitable.

In re Harber’s Estate, 104 Ariz. 79, 88, 449 P.2d 7, 16 (1969).

Changing the Character of Community or Separate Property by Law

In the absence of a written or oral agreement to change the character of community or separate property, the Court may still find that property was transmuted where the circumstances clearly show that one spouse intended to change his separate property to community property or vice versa.  There are many nuances and situations where separate property may be transmuted to become community property or vice versa.

If a spouse testifies that his separate property was, in fact, community property, the Court may find that the property was changed to become community property.

Commingling separate funds with community funds typically will not change (transmute) the separate property to community property unless the money is so mixed together that the Court is unable to determine how much was originally separate and how much was separate.  If the funds are still traceable, the entire account will likely not be changed to become community.  Even a spouse’s deposit of separate funds into an account containing community funds does not create the presumption of a gift of the separate property to the community.

Contact us for Help Today in Community vs. Separate Property Disputes in Arizona Probate, Trust and Estate Matters

Determining whether property is community or separate in Arizona probate, trust and estate disputes can be complicated and confusing.  If you have any questions about community or separate property in  probate, trust or estate matter, please give us a call at 480.607.7900 or contact our office.