The Arizona Court of Appeals recently rendered a decision regarding Arizona community property law in an Arizona divorce case. A summary follows.
In Quinlan v. Quinlan, Not Reported in P.3d, 2009 WL 3644806 (Ariz.App. Div. 1), the wife appealed from a ruling from the Arizona divorce court arguing that the family court erred in determining that Husband's IRA accounts were his sole and separate property, among other things. In this case, husband and wife were married in October 1989; wife filed a petition for dissolution of marriage in October 2006, and the decree of dissolution was entered in July 2008.
In this case husband worked for a drug company for many years prior to the parties' marriage and for a relatively short time during marriage. During his employment, husband acquired an interest in the drug company’s profit sharing plan. Most of his shares were acquired prior to the marriage. After husband was terminated his entire profit sharing plan was rolled over into an IRA bank account. Eventually, those funds were rolled over into a second IRA account to hold real property investments. Both IRAs were in husband's name only. Ultimately, the family court found that 84.62% of the IRA accounts were husband's sole and separate property and 15.38% were community property under Arizona community property law.
Wife's argument was two-fold. First she argued husband's IRA accounts were community property due to commingling, agreement, and gift of husband's original profit sharing plan stock funds and second, in the alternative, if husband's IRA accounts remained his sole and separate property, the community was entitled to an equitable lien for the increased value of the IRA accounts due to community efforts.
Wife contended that when “she took over” management of the first IRA, a “transmutation occurred and the funds became community property in their entirety since the sole and separate nature of that asset was lost.” The Court of Appeals disagreed stating that “a mere change in the form of an asset does not necessarily change its character as either community or separate”. Wife relied on the commingling rule in Cooper v. Cooper, 130 Ariz. 257, 259, 635 P.2d 850, 852 (1981), which states unless one can explicitly trace his or her separate property, commingled community and separate funds will be presumed community property. The Court of Appeals held that wife's reliance on Cooper was misplaced because Cooper involved a savings account that was owned by the wife prior to marriage and that during the marriage, deposits were made to the savings account, some from checks the husband made payable to the wife.
The Court of Appeals found that while the profit sharing plan shares changed in form, their identity as community or separate shares was not lost. So, the Arizona family court was correct when it apportioned the shares husband earned prior to the marriage, and awarded those as his sole and separate property and the shares earned during the marriage were awarded to the community.
Wife also argued that because she took over management of the IRA accounts during the marriage and because husband purportedly told wife that the funds were for their shared retirement, the IRA accounts became community property by gift and/or agreement. However, wife testified that the agreement was not reduced to writing and there were no witnesses to the agreement. Husband testified that while he told wife the IRA Accounts would be used when they both retired if they were still married, he never gave or promised wife any interest in the IRA accounts. The Arizona family court found the purported statement by husband to wife of “we're in this together,” if made, was insufficient to transform the nature of the property or create a gift and further found there was no gift or agreement to transmute Husband's IRA Accounts to community property. The Court of Appeals deferred to the Arizona family court's factual findings, and as a result, found that there was sufficient evidence for the Arizona family court to determine that the IRA accounts were husband's sole and separate property.
Wife then argued next that if the IRA accounts were husband's sole and separate property, the increases in husband's IRA accounts were due in part to community efforts and therefore, the community was entitled to an equitable lien in the amount of the increase in value of the IRA accounts. The Court of Appeals recognized that increases in the value of separate property during marriage due to community efforts should be divided between the separate property of the owner and the community property of the spouses. And that when the value of separate property is increased, the burden of proof is on the spouse who contends the increase is due to the inherent nature of the property rather than community efforts. Additionally, when there is an increase in value due to both the inherent nature of the separate property and community efforts, the increase must be apportioned between the two accordingly.
Wife contended that the increase in the IRA accounts was not solely attributable to the inherent nature of the stock, but was also due to her “effort in researching and analyzing the market, managing the sale and purchase of the stock, devising and implementing new investment strategies.” The Arizona family court found the increase in value of the IRA accounts was “solely because of the inherent nature of the investments, and not because of any community efforts.” Here, the Court of Appeals disagreed that the increase in value of the IRA accounts can be attributed solely to the inherent nature of the investments.
Wife argued that while community efforts may not have caused the stocks themselves to increase in value, the community efforts in research and management increased the overall value of the IRA accounts. While husband testified that “there was little or no effort other than a discussion by either of us” regarding investments made for the IRA accounts, he also testified both he and wife made investment decisions during their marriage. Husband testified that “[o]n occasion, [he] would call the Wells Fargo person,” however, the investment decisions were made by both parties. In his testimony, he also admitted community efforts were used to select and manipulate certain assets held in the IRA accounts. Furthermore, wife acted as property manager on some of the rental properties held in the real estate investment IRA.
The Court of Appeals recognized that as the party asserting the increase in value is separate property and not community property, husband bore the burden of proof. And that Husband did not meet his burden regarding his assertion that the increase in the IRA accounts was due solely to the inherent nature of the assets and investments rather than the inherent value coupled with some degree of community efforts.
The Court of Appeals also recognized that the testimony of both husband and wife indicated that there was at least some degree of community effort during marriage in regards to researching and acquiring investments in the IRA accounts. And, as a result, increases in the value of separate property during marriage that are due at least in part to community efforts should be “apportioned between the separate property of the owner and the community property of the spouses.” Therefore, the Court of Appeals disagreed with the Arizona family court's finding that the increases in value of the IRA accounts were due solely to the inherent nature of the investments and not due in part to some amount of community efforts. As a result, the Arizona family court’s ruling was reversed and remanded.
Cases regarding Arizona community property law in Arizona divorce cases can be very complicated and fact-specific. It is always a good idea to seek the assistance and advice of a good Arizona divorce and family law lawyer when dealing with these issues. Contact Nirenstein Garnice Soderquist PLC and we will be glad to answer any questions you may have.
