YOURS, MINE, AND OURS – Protecting your separate property

First of all, what, of all your property, is your separate property?

Arizona is a community property state, so unless you have a PreNuptial Agreement
abrogating community property, everything you accumulated after you were married belongs to you both– with a few exceptions:

1.Gifts – things that are clearly gifts to you, and you alone, i.e., your great aunt Jane gave you a necklace worth $500 for your birthday. The exception– Gifts from your spouse purchased with community funds probably will not count as your separate property if you are to be divorced.

2.Things or money you inherited – Whether these came to you by virtue of the deceased person’s estate plan, or from a person in your family that died without a Will, these are definitely your separate property.

3.Property that you owned prior to your marriage – depending on how you have handled it since the marriage, these things could still be your separate property.

4.Rent, proceeds of sale, or increase in value (sometimes) you receive for property you owned prior to marriage.

Does this only matter if we are getting divorce?

No, though it’s very important in divorce, this also impacts your estate planning. Especially if you and your spouse both have children from prior relationships, it is important to delineate what belongs to you. Otherwise, it’s possible that your separate estate may be distributed in a way that you never contemplated.

SO WHAT ARE THE RULES TO KEEP YOUR SEPARATE PROPERTY FROM BECOMING COMMUNITY PROPERTY??

Arizona statutes (A.R.S.§25-213) protect separate property, but only if you obey certain rules and standards. The problem is, the rules are confusing and they change from time to time as the courts interpret the statutes differently. Here are the basics:

1.Real estate – This can get pretty complicated, especially if you sell and reinvest. You might want to consult with a lawyer before you take any action that affects the title of real property in any way, but here are some basic principles

  • DO NOT title real estate that you owned before marriage in joint name or joint tenancy. Even if you just refinance, don’t change the title to joint name because when you do this, Arizona law presumes that you intended to make a gift to your spouse of one-half of the value of the equity. With the right evidence you might be able to overcome this presumption, but the legal fees will be high and you might not win it, depending on the circumstances.
  • If you sell or refinance, you absolutely MUST put the proceeds into a separate account in your sole name. If you commingle these funds with joint funds, they can become community.
  • DO NOT pay for mortgage payments, repairs, or maintenance for separate property from joint funds. When you do this, the community then has a claim against your separate property, and it will take an expert witness to figure out what/how much that claim might be.
  • If you sell separate property, or if you use separate money such as an inheritance to buy or improve marital property (which could be other real estate, or also investment in a business), before you do this you MUST have a contract with your spouse that says what your rights are with respect to that property in the event of the sale of the marital property, divorce, or death.

2.Bank and Investment Accounts – This one is pretty easy, just follow these simple rules and you should be fine.

  • DO NOT put separate funds into a joint account. If you commingle the funds to the point that you can’t distinguish what was yours and what was joint, the court will find that all of it is jointly owned. If you keep separate funds in a separate account, no matter how long you are married, that account is still your separate account. You can pay community expenses from your separate money, but once you do the community doesn’t owe this back to you unless you and your spouse have an agreement, preferably in writing.
  • Keep detailed records of your sole and separate money and transactions.

3. Business Interests– This can get really complex, so here are some of the general rules. Again, it might be wise to consult with counsel about questions inthis area.

  • DO NOT jointly title your separate business. This includes listing your spouse as an officer or shareholder with the Corporation Commission, or changing title for purposes of estate planning, or changing title to your spouse just so that you can qualify as a minority owned business.
  • Be aware that the increase in value of your separate business can be considered community when that increase is attributed to work that you performed during marriage. The only way to avoid this is if you can prove that the business appreciated as a result of market forces such as real estate appreciation, or a reasonable rate of return on an investment.
  • Pay yourself a reasonable salary, and deposit that salary into a joint account. That gives you an acceptable claim that the community was appropriately compensated for your work during the marriage. Any remaining business profits would then go into a separate account – and not the same account in which you keep other separate money.

Those are the basics, but it’s important to know that if you don’t keep clear records, or if you violate these basic principles, the result is almost always– what was yours, is now “Ours.”

As always, we’re here to help!