The following is intended for people who may be involved in dissolution of marriage (divorce) cases in Arizona, to explain the difference between community and separate property, and to describe the ways in which assets are assigned values and in which assets and debts are divided between the parties.

        All of this material consists of simplified generalizations that are subject to exceptions in various situations. The law in states other than Arizona may be different. The law is constantly changing due to new statutes that are enacted by the Legislature and new cases that are decided by the courts. This article provides background information, rather than legal advice about a particular case, and cannot take the place of consulting with a lawyer.

        When a husband and wife marry, they immediately become part of an entity called the marital community. Every asset acquired by either of them during the marriage is owned 50/50 as community property, no matter which party's earnings were used to acquire the asset. The exception is that assets acquired during the marriage by gift or inheritance are a spouse's separate property, as are assets owned before the marriage. A rule of thumb is that if an asset is acquired during the marriage by working for it, it is probably community property, but if the asset is acquired during the marriage without working for it, it may be separate property.

        It is common for separate property to be transmuted (which means changed) into community property. If, for example, a person uses separate funds to purchase real estate and includes the other spouse's name on the deed, there will usually be no right to reimbursement of the separate funds. If a person uses separate funds to pay community debts, there also will usually be no right to reimbursement. One of the most common ways of transmuting funds is by co-mingling. If separate funds are co-mingled in a bank account with community funds (which would include a person's own wages during the marriage), that is likely to result in the entire account becoming community property.

        A retirement plan is community property, if the employment was during the marriage. If only part of the employment was during the marriage, then a corresponding part of the retirement plan is community property. This is often determined using a Van Loan formula, which involves a fraction in which the denominator (bottom number) is the number of months of participation in the plan and the numerator (top number) is the number of those months during which the parties were married to each other. A retirement plan can be community property even if the employee spouse is not yet vested.

• The value of a defined benefit plan (a traditional pension) can only be determined by an actuary, who determines the total benefits to be received between the employee spouse's retirement and his or her life expectancy. The actuary then calculates the present cash value of the right to receive that amount in the future.



• A defined contribution plan, such as a profit sharing or 401K plan, is valued at its current balance. That is also the way an individual retirement account (IRA) is valued. This does not require an actuary. There is no adjustment of the value to represent the income taxes or penalties that would be payable if the balance were withdrawn.

        Real estate, motor vehicles, household effects, etc. are valued at fair market value, which means what they could be sold for today, in their present condition as used items. Valuing real estate often involves looking at recent sales of comparable properties, and valuing motor vehicles often involves consulting a service such as the on-line Kelly Blue Book. Sometimes an appraiser is hired to give a formal written opinion.

        Valuing a business or professional practice is complex and almost invariably requires an appraisal prepared by a certified public accountant who is familiar with the standards of value applied by the court. The appraisal will include book assets such as inventory, building, accounts receivable, and equipment. These may or may not be included at the same value as they are carried on the balance sheet. In many instances, the appraisal will also include intangible assets (often known as goodwill). For a business, the intangible value may reflect a formula based on receipts. For a professional practice or a business, the intangible value may reflect a formula based on how the professional's or owner's earnings compare to those of his or her peers. Among the other factors taken into account may be a minority discount if the parties own less than a controlling interest in the business or practice and the effect of any stock redemption or buy-sell agreement.

        If a separate asset has gone up in value during the marriage, it may be subject to a community lien, which is a reward to the marital community for contributing to the increased value. This is referred to as a Cockrill lien. An increase in value of separate property that results solely from market factors (for example, an overall rise in real estate values) is separate property. If an increase results partly from the efforts of either spouse during the marriage or partly from the expenditure of community funds, it may be partly community property.

• In the case of a business, the issue is how much of the increased value of the business resulted from one or both parties' work during the marriage and whether there was appropriate compensation for that work.



• In the case of a residence, there are two issues: If the community paid for improvements, how much is the residence worth with the improvements and how much would it be worth without the improvements? If the community made mortgage payments, how much of the equity (the difference between the amount owed on the mortgage and the fair market value) is accounted for by the community's payments?

        Most debts incurred during the marriage are community debts, which means the parties are jointly and severally liable for 100% of the debt, rather than each being individually responsible for 50%.

        After the community assets have been identified and valued and the community debts have been determined, the assets and debts are divided in a way that is fair and equitable, which almost always means the net awards to the parties must be substantially equal. The balance owed on debts assigned to a party is deducted from the value of assets awarded to him or her, to determine the net award. Sales commissions and capital gains taxes that would be payable if an asset were sold are not taken into account.

        One party can receive more than a substantially equal share in the division, if the other has committed community waste. That means hiding assets or disposing of them in an abnormal or fraudulent way. An example would be paying living expenses for a paramour. Being bad at sticking to a budget is not community waste. Community waste is the only exception to the principle that assets and debts must be divided without regard to marital fault.

        Sometimes the division can be accomplished by apportioning assets in their entirety between the parties, but sometimes it is necessary to sell an asset and divide the proceeds of sale unequally, so the overall division will be substantially equal. Sometimes, one party receives more than his or her one-half share and signs a promissory note to make installment payments to the other as a way to equalize the division. The promissory note should include interest and should be secured (for example, by a lien against real estate that could be seized if the payments on the note were not made).

        A retirement plan can be divided using a qualified domestic relations order (QDRO). Generally, a QDRO is written by a lawyer who practices in the area of employment benefits law, rather than by a divorce lawyer. If the non-employee's share is transferred directly into an IRA, it does not count as a distribution from the plan and no taxes are payable, so no withholding is required. This is possible only with a defined contribution plan. With a defined benefit plan, the QDRO provides that the non-employee spouse will wait and begin to draw a pension later according to the terms of the plan, unless the pension is already being paid and the non-employee's share therefore can start to be paid immediately. With a defined benefit plan, lump sum payment from the plan of an amount representing the non-employee share of the future pension benefits is not available. Sometimes, however, the employee spouse is awarded the entire pension, and the non-employee is awarded other assets to offset the present cash value. This eliminates the need for a QDRO.

        The apportionment of debts in dissolution of a marriage is not binding on the creditors. If the party who is ordered to pay a community debt does not pay, the creditor can sue the other party. The decree of dissolution of marriage is irrelevant to that lawsuit, although it may be a basis for the party who is sued by the creditor to sue the party who was supposed to pay that creditor.

Under the current law, there is a community cutoff date, after which money earned is separate property and debts incurred are separate debts. The cutoff is the date when the party who did not file the case is served with court papers or signs an acceptance of service form, at the start of the case. Under the prior law (which applied to cases started before August 21, 1998), the cutoff date was not reached until the dissolution of marriage case was finally completed.