Arizona is a community property state. See ARIZ. REV. STAT. ANN. § 25-211. This means that when a married couple divorces or separates, Arizona courts are required to equitably divide any assets that have become property of the marital community. See ARIZ. REV. STAT. ANN. § 25-318. With some exceptions, any property acquired during the course of a marriage is presumed to be the property of that marital community. See § 25-211. This includes investment assets and business. Accordingly, if a business is started during the course of a marriage, there is a possibility that the value of the business will need to be divided between spouses who are divorcing or separating.
On the other hand, during the course of a marriage, each spouse may continue to own or acquire their own separate property. See ARIZ. REV. STAT. ANN. § 25-213. If a business was started before the date of the marriage and was owned separately by one spouse, or if there is a prenuptial or post-nuptial agreement regarding property acquired during the marriage, there is a chance that the business might be found to be the separate property of the spouse who started the business. See id. In such an instance, generally, the business will not be divided, but rather affirmed as the separate property of the owner/spouse. § 25-318. In other words, the business would not be equitably divided during the divorce or legal separation.
It is important to note while a business itself may be considered separate property, the income received from that business might still be considered community property if it is the result of a spouse’s labor. In the Koelsch case, the Arizona Supreme court noted that “it is established law . . . the fruits of labor expended during the marriage are community property . . . .” Koelsch v. Koelsch, 713 P.2d 1234, 1239 (Ariz. 1986). Accordingly, if the profits and increases in value are the result of the “individual toil and application of the spouse,” those profits and increases are regarded as community property. See Rundle v. Winters, 298 P. 929, 931 (Ariz. 1931). However, if the profits and increases in value are the result of the “inherent qualities of the business,” those profits and increase are regarded separate property. See id.
Furthermore, even if an asset is determined to be separate property, there are instances in which contributing marital assets to the business may create a “community lien” or “equitable interest” that entitles the non-owning spouse to equalization or offsets in the division of the remaining assets. See Tester v. Tester, 597 P.2d 194, 196 (Ariz. App.1979) (“The community is entitled to reimbursement when community funds are spent to increase one spouse’s equity in separate property.”). In the Rueschenberg case, the Arizona Court of Appeals held that when the efforts of a marital community cause an increase in the value and profits of a separately owned business, the court must equitable divide those gains when substantial justice requires it. See Rueschenberg v. Rueschenberg, 196 P.3d 852, 857 (Ariz. App. 2008). On this issue, the Rueschenberg court wrote:
In essence, our community property laws transform the community into an equity partner with the sole and separate property-owning spouse to the extent the community’s efforts have generated net earnings, increased the value, or otherwise increased the net worth and/or market value of the company . . . . The community’s share is not eliminated just because the laboring spouse has been paid a fair salary along the way.
Id. at 860.
Navigating the ins and outs of asset division in a divorce or legal separation can be very complex. Competent and diligent legal representation can go a long way toward protecting your property interests during a family law case. If you are considering initiating or are involved in divorce or legal separation in the State of Arizona, and need the guidance of an experienced and compassionate law firm, do not hesitate to contact Huffman-Shayeb Law, PLLC to set up a consultation and discuss your options.
Disclaimer: This publication is for educational and informational purposes only, and represents Huffman-Shayeb Law, PLLC’s understanding of the present state of Arizona law. This publication does not constitute legal advice or counsel, and should not be construed as a comment on the merits of any particular case. It should be noted that the laws and requirements of the State of Arizona may change at any time and that this information may not be complete or correct.