Legal Implications of Community Property
While love may be in the air in the spring, October is the most popular month to get married. With the excitement of the engagement and all the planning for the wedding, travel and gifts, few couples spend the time to reflect on how their financial rights and obligations will change after marriage. Like leftover cheese, these issues are often pushed to the back of the fridge, and pulled out as a smelly mess of discolored mold at some inopportune moment in the future, such as financial difficulty or divorce. The best time to review the legal ramifications of community property and how a spouse can protect themselves is before the couple walks down the proverbial aisle. Arizona is a community property state, thus the rights and obligations are substantially different after marriage. Below is an introduction to these topics, but if you have questions or want DeAngelis Legal to explain how community property the law applies to you or your child’s situation and whether a marital agreement is appropriate, please call us for an appointment.
What is Community Property?
Arizona’s community property laws state that once married all salary and income is presumed to be community property, owned equally by the couple. In addition, all assets purchased during marriage are presumed to be community property assets, regardless of whether the property is titled in the name of one or both spouses.
Are there exceptions to the presumption of Community Property?
If not commingled with community property, (i) property owned prior to marriage, (ii) gifts and inheritances from others and (iii) personal injury settlements are considered sole and separate property. The parties can also agree through a marital agreement to treat property as separate property that would otherwise be considered community property. For example, if one spouse owns a closely held business or profession and will continue to work after marriage, that spouse would want to avoid the presumption that their post-marital efforts will convert the asset to community property by entering into a pre-marital agreement or post-marital agreement. Spouses with substantial differences in their incomes may also want to consider a marital agreement to refute the presumption that the income is owned equally.
Are debts and obligations Community Property or Separate Property?
Both, and the answer can be surprising. Debts incurred prior to marriage remain the separate obligation of the spouse who incurred the debt, unless assumed by the other spouse. This includes business loans, student loans, home loans and credit cards. But debts incurred by either spouse during marriage are considered community property and both spouses are responsible for repayment of the debt. However, a special rule applies to personal guaranties. A personal guaranty of another’s debt must be signed by both spouses for community property to be bound, otherwise only the signing spouse’s separate property and interest in the community property are available to satisfy the debt. Another surprising and often overlooked obligation created by getting married is that each spouse is committing to provide care and support for the other spouse. This obligation cannot be waived in a marital or divorce agreement if it would require the spouse needing care to apply for governmental assistance.
What other rights and obligations are triggered by getting married?
Immediately upon marriage a spouse has first priority to make healthcare and financial decisions for an incapacitated spouse. In addition, the surviving spouse is entitled to 100% of your property upon death unless you have children by a previous marriage or a valid will or trust.
How do I protect my financial assets during marriage?
Couples don’t get married expecting to have financial difficulties or file for divorce. Just like they don’t expect to get into a car wreck, but they still purchase car insurance and put their seatbelt on. Educating themselves on marital property laws, staying involved in financial decisions and taking certain actions to protect their finances are part of being a responsible adult, just like wearing your seatbelt and purchasing insurance. These actions may not prevent you from running into financial problems or a divorce, but they will reduce the adverse impact.
- Before Getting Married:
- Know your spouse. It takes time for people to let their guard down. Ask questions and make sure the answers make sense.
- Consider background and credit checks to confirm representations and potentially flush out any undisclosed issues.
- Talk with your future spouse regarding finances. Work out budgets, expectations and contingency plans.
- Consider entering into a comprehensive marital agreement which clearly defines the rights and obligations of the couple during marriage.
- After Getting Married:
- Budget. Spending more than you make each year eventually leads to stress, conflict and sometimes bankruptcy. Make a budget, review it regularly and maintain an open dialogue on sticking to it.
- Trust and confirm. Trusting your spouse is the cornerstone to any marriage. However, there is nothing wrong with monitoring your finances. Each credit reporting agency allows you to receive your credit report at least once a year at no cost or consequence. Use this tool to check for fraud and undisclosed increases in debt.
- Create a balance sheet and review it together annually. Are your finances trending stronger or weaker? Are assets increasing and debt decreasing? What is the trend? If they are getting worse, why? Are you adjusting your lifestyle to address the revenue and expense imbalance?
- Make sure each spouse is covered by healthcare insurance, even if it is simply catastrophic coverage with a high deductible. Most bankruptcies in the United States are the result of unexpected healthcare emergencies.
- Create an estate plan that names your preferred agents for healthcare and financial decisions as well as where you want your assets to go upon your death. For more information on estate planning see http://www.deangelislegal.com/estate-planning/
- Retain sole and separate property assets separately. Keep sole and separate property titled in your own name or in a trust designated as your separate property. Put gifts, inheritances and injury settlements in a separate account and leave the money there for emergencies or personal desires. Avoid using separate funds to purchase joint assets or household expenses. If it is necessary to access these funds during marriage, the couple should borrow the funds from the spouse and evidence the loan with a promissory note. Doing so will overcome the presumption that the separate property was converted to community property and owned equally by each spouse.
- Limit Personal Guaranties. Lenders often require both spouses to sign personal guaranties to ensure they can collect the debt from any and all community and separate property held by either spouse. However, if the debt is incurred for the benefit of sole and separate property of one spouse, the non-owning spouse has all of the downside risk and potentially none of the upside benefit. In such situations the non-owning spouse should limit the guaranty to the extent of the community property of the couple, or at least exclude their sole and separate property. Depending on the negotiating strength of the couple, the guaranty could be limited to (i) the sole and separate property of the borrower, (ii) the borrower’s interest in the community property, or (iii) the entire community property to protect the non-owner’s sole and separate property.