Disclaimer Deeds, Community Property, and Separate Property
Sometimes, when a couple wants to buy real estate, one of them has significantly better credit than the other. Putting the mortgage and the deed in the name of that spouse only can significantly reduce the couple's monthly mortgage payment. Typically, the lender will want the other spouse to execute a deed denying any claim to the real estate and recognizing that the property is the sole and separate property of the purchasing spouse. This is called a "disclaimer deed." One may be tempted to view this as just a bunch of papers to be signed at the close of escrow; after all, Arizona is a community property state, and all property acquired during the marriage is presumed to be community property. So despite the deed language, the house is still community property, right?
Wrong.
In Bell-Kilbourn v. Bell-Kilbourn, a 2007 case, the couple married in 2000. In 2003, they decided to buy a residence. In order to maximize the chances of obtaining financing on favorable terms, the parties decided to improve the wife's credit rating and then apply for a loan solely in her name. Consequently, the parties used community funds to pay all separate and community debt in the wife's name. The strategy worked. The deed was placed in the wife's name as her sole and separate property, and the husband executed a disclaimer deed. Thereafter, the parties lived in the house with their children and used community funds to pay the mortgage until June 2005 when the parties separated and the husband moved from the house. The wife alone then paid the mortgage.
At trial, the judge decided that the real estate was community property. After all, in Arizona, all property is presumed to be community property. The judge said it seemed clear, from the conduct of the parties, that the parties never intended that husband would be making a gift to the wife of his interest in the property. But the wife appealed, arguing that the disclaimer deed rebutted the presumption.
The Court of Appeals agreed with the wife. The Court said that a disclaimer deed executed contemporaneously with the acquisition of the property must be given effect, unless the party who signed it can show fraud or mistake. This is based on two older Court of Appeals cases, neither of which featured this exact fact pattern: Bender v. Bender, a 1979 case, and
In Re Sims' Estate, a 1970 case.
There are are, however, two important caveats, according the the Court. The first is that this property was never community property. If it had been (for instance, if this had been a refinance instead of a purchase), a disclaimer deed would not have worked, since it doesn't transfer anything (a disclaimer deed only says "I don't have and have never had an interest in the property"); a quit-claim deed would have been required to transfer title. More importantly, if the house had started off as community property, the requirements would have been stricter: the wife would have been required to show contemporaneous conduct of the parties in order to demonstrate the parties' intent that she own the house as her sole and separate property. But this requirement of corroborating evidence of contemporaneous conduct only applies if the spouse claiming an interest in the property had a community or sole property interest
before the transaction at issue and regardless of any community property presumption. That was not the case here. Consequently, the judge was wrong to look at the intent and conduct of the parties.
Obviously, Court of Appeals approach raises legal formalism above the real-life expectations of the parties when they were buying the house and paying the mortgage. Maybe the Arizona Supreme Court will look at this issue one day; they never have addressed it. But for now, if you signed a disclaimer deed so your spouse could take title as sole and separate property, the smart thing to do is to ask your spouse (very, very, nicely) to go down to the county recorder's office and retitle the deed. ("Do I want a divorce? No, of course not, honey; don't be silly.").
The second caveat is the issue of a community lien. Remember the mortgage payments? Most were made with community funds. Any community funds expended to pay the mortgage or enhance the value of the house entitled the community to a share of any equity attributable to those efforts--and gives the community a lien upon the separate property for that amount. So the Court sent the case back to the trial court with instructions to address this question.
Community property and property division issues can be complicated. That's why you need a
Phoenix Divorce Lawyer working for you.