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 in
this 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!

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