Arizona is a community property state. Property acquired by either spouse during the marriage is presumed to belong to the spouses together, as community property. Same for income earned. Property already owned prior to the marriage, or obtained through gift or inheritance, is separate property. In addition, the spouses can agree that what would otherwise be separate property is to be community property, and vice versa.
But most people don’t keep things neat. Which is why it is so important to have a Phoenix Divorce Lawyer to help sort it out.
A common situation was addressed in the 2008 case of Rueschenberg v. Rueschenberg: the husband already owned a business prior to the marriage–so it is separate property-- but during the marriage the business increases in value. What part of the increase in value is community property that must be split with the wife in the event of
divorce? Some of it? All? None? How is the
property division done?
When the value of the business is increased during the marriage, the presumption is that this increase is community property. This presumption can only be overcome by "clear and convincing evidence" (which in Arizona is a higher standard than "more likely than not", but not as high as "beyond a reasonable doubt"). In determining the community interest in the husband’s separate business, if the profits and/or increase in value result from the inherent qualities of the business and external factors (such as marketing efforts by others, or population growth in the market region), the profits and increase are separate property; if the profits and/or increase result from the individual toil and application of the husband (and/or the wife, if she works in the business), they are community property. But the presumption is the latter. This is true even if the community was already compensated to some extent in the form of earnings extracted from the business.
In Rueschenberg, the Court said that we must first determine the increase in the business value during the marriage, and the net income during the marriage. Then we determine what percentage of the increase in business value is due to community efforts. Likewise, we determine what percentage of the net income is due to community efforts (might be the same percentage, might not be). The community is entitled to those percentages. One then must determine what has already been distributed to the community in salaries to the spouses or other distributions of income. If this amount is less than the combined total to which the community is entitled, then the community is entitled to a share of the business equal to the difference. On the other hand, if the community has been over-compensated, the spouse who owns the business has a claim for reimbursement against the community. The Court gave the following hypothetical as an illustration:
"Assume that a ratio of two-thirds/one-third was determined to apply to the share due the community and separate property, respectively, for its contribution to the growth of the business. Assume the amount of net earnings was $80 and increase in value was $20. The combined total of the increase is $100. The community would be entitled to $66.67, and the sole and separate property would be entitled to $33.33. If the community had already received $80 from net distributable earnings, it may not be entitled to any further amounts unless issues such as waiver, commingling, or other equitable considerations required otherwise. In fact, under this hypothetical, the sole and separate property owner may claim monies from the community if there are no other pertinent factors."
Obviously, this gets complex. The difficult is not so much the formula, but rather coming up with the numbers to plug into the formula. What is the value of the business now? What was the value then? How much of the change is due to community efforts vs. other factors? What has been distributed already? You don’t want to get involved in this without the expert legal advice of a hard fighting, straight talking attorney.