As a general rule, in an Arizona divorce or legal separation, the parties are awarded an equitable distribution of the community property and each party is awarded their respective separate property.
Property acquired during marriage is presumed to be community property. Separate property is typically defined as property obtained prior to marriage or obtained during marriage via gift or inheritance. While separate property remains the sole and separate property of a spouse, there is Arizona case law which permits the community to gain an equitable lien in the separate property of the other spouse. In some cases, a payout for the community value of the equity in the separate asset will be paid.
A typical instance in which the community may gain an equitable lien in the separate property of a spouse is when one spouse mixes community time and labor with their separate funds. For example, you may have one spouse whose primary business during marriage is to take his sole and separate funds and engage in hard money lending. He spends all of his working day engaged in this activity. Under this scenario, the community has an equitable lien in the profits and business because of the community labor that was involved. “Arizona courts have long agreed that the results of a spouse’s labor are community property.” Rueschenberg v. Rueschenberg, 219 Ariz. 249, 252, 196 P.2d 852, 855 (2008). The Court in Rueschenberg went on to say, “[W]here either spouse is engaged in a business whose capital is the separate property of such spouse, the profits of the business are either community or separate in accordance with whether they are the result of the individual toil and application of the spouse, or the inherent qualities of the business itself.” Id. at 257, 860. Other examples include when a husband may own a house at the time of the marriage, but the couple may share responsibility for mortgage payments and home upkeep, using a joint checking account or other co-owned funds. Or a wife may own investments which the couple adds to during the marriage using “community funds,” or in other words, jointly-owned financial assets.