When Are Disability Insurance Payments Considered Community Property Under Arizona Law?

As you may have guessed from the title to this writing, whether disability insurance payments are considered community property under Arizona law depends on the circumstances of each case. Before delving into a discussion of some of those circumstances, it is important to first review the basics of how Arizona statute classifies community property.

Arizona statute states that “[a]ll property acquired by either husband or wife during the marriage is the community property of the husband and wife . . . .” Ariz. Rev. Stat. Ann. § 25-211(A). The statute goes to list a few exceptions to general rule that property acquired during the marriage is community property, including property that is “[a]cquired by gift, devise or descent” and property [a]cquired after service of a petition for dissolution of marriage, legal separation or annulment if the petition results in a decree of dissolution of marriage, legal separation or annulment.” Id.

Additionally, proceeds of community and separate property generally retain their character as community or separate property so long as they are traceable. As the Arizona Court of Appeals has noted, “[t]he mere fact that . . . property was commingled does not cause it to lose its separate identity, as long as the separate property can still be identified.” In re Marriage of Cupp, 730 P.2d 870, 873 (Ariz. App. 1986). Together, these various standards create a presumption that any property acquired during the course of a marriage, as well as the proceeds of such property, are an asset of marital community and, under Arizona law, such presumption may only be overcome by clear and convincing evidence to the contrary. See id.

With these principles in mind, we can now turn to the issue of how disability payments are classified for purposes of the division of assets in an Arizona family law case. In Hatcher v. Hatcher, the Arizona Court of Appeals confronted the question of whether a lump sum payment made from an insurance plan that “provided for benefits to the employee’s family or to the employee in the event of accidental death, dismemberment or disability” during the course of the marriage was community property or separate property. See generally Hatcher v. Hatcher, 933 P.2d 1222 (Ariz. App. 1996). The non-disabled spouse in Hatcher argued, in part, that the lump sum payment should be treated as community property because the premiums for the insurance policy had been paid for with community property funds and because the benefits had been received during the course of the marriage. See id. at 1225. The Hatcher court disagreed, reasoning that:

Whether paid for by the employer or the employee, the amount expended [for disability insurance] is to protect against a risk of disability which may, but usually does not, occur. The amount paid to protect against this risk does not accumulate in a fund, nor does it build into an equity having an ascertainable value. Although the entitlement to this benefit may be attributed to employment and thus have a community origin, the money so expended does not produce a community asset subject to division at dissolution. What it produces is coverage for the individual spouse against the risk of disability and loss of future earning ability…. While disability income protection may arise during marriage, it is for the protection of community earnings during the existence of the marriage and for the protection of separate earnings of the disabled spouse in the event of dissolution.

Based on this analysis, the Hatcher court ultimately determined that the portion of the lump sum payment representing lost in earning during the marriage were community property and the portion of the payment representing the disabled spouse’s future earning ability was that spouse’s separate property. See id. at 1225-26.

In Helland, the Arizona Court of Appeals later revisited the Hatcher opinion when a non-disabled spouse appealed a trial court’s decision to characterize disability payments made after the dissolution of the marriage as the separate property of the disabled spouse. See generally Helland v. Helland, 337 P.3d 562 (Ariz. App. 2014). Affirming the trial court, the Helland court cited the Hatcher opinion and elaborated upon the worked “acquired” as the term is used in Section 25-211(A). Id. at 565. The Helland court explained that “the Arizona Supreme Court has rejected a narrow construction of the word “acquired” and stated it must be applied ‘in the light of the uses and purposes of community property and the establishment of community right.’” Id. (citation omitted). Employing this broader understanding the word “acquired”, the Helland court reasoned that “the policy . . . is not an annuity or other investment with an expected rate of return, as disability benefits are paid only under certain conditions and are contingent upon the insured’s ongoing disability” and “[a]ccordingly, the community did not acquire a right to future disability benefits payments when it purchased the policy.” Id.

The major takeaway of the above points is that whether disability insurance payments are separate property or community property depends on both the time and the nature of the payments. Navigating asset division in a divorce, legal separation, or annulment can be overwhelming and time consuming. If you are looking for the help with a family law matter in the State of Arizona, contact Huffman-Shayeb Law, PLLC today for a consultation and take the first step toward protecting your property rights and your financial future!