MAY 21, 2012 VOLUME 19 NUMBER 20
Arizona is one of the nine U.S. states which recognize “community property” (a tenth, Alaska, allows couples to voluntarily create community property interests). The other eight community property states: California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.
Mention community property to a lawyer who has never studied or practiced in one of the community property states, and you are likely to see a twitch at the corner of his or her eyes. There is much mystique about how community property works, but it is actually pretty straightforward: all property acquired during the period of a marriage is presumed to be community property, and therefore belongs half to each spouse. In the event of divorce, the courts will probably unwind the community interest by dividing each asset in half — though it may be possible (depending on state law) to segregate assets so that roughly half the total value of community property goes to each spouse.
But of course the devil is in the details. There are lots of ways in which the simple statement of community property principles can get confusing.
The probate estate of Frank Kerns (not his real name) demonstrated one such confusion. Frank left a widow, a son from his first marriage, and an Individual Retirement Account (an IRA). He and his second wife had been married for several years, and at first he had named his wife as the sole beneficiary of his IRA. At some point, however, he changed the beneficiary designation on his IRA, naming his son as beneficiary as to 83% of the account, and his wife as beneficiary as to the other 17%. That was how the beneficiary designation read when he died.
Frank’s widow brought an action in probate court, arguing that community property rules made one-half of the IRA hers — and that Frank could not change the beneficiary designation as to “her” half. She asked the probate judge to order that she was the beneficiary of her half, and that the maximum amount Frank could leave to his son was the other 50%. The probate judge agreed.
The Arizona Court of Appeals did not agree with Frank’s widow. Or, rather, the appellate court did not agree with the conclusion of the argument. Frank’s son and widow agreed that the IRA was community property, but the Court of Appeals adopted Frank’s son’s interpretation of what that meant for the IRA.
Some community property states have adopted what is often called an “item” theory of community property. Under that analysis, one-half of each community property item belongs to each spouse, and if that theory applied to Frank his widow would be right. He would not have the power to name his son as beneficiary for anything more than what we might think of as “his” share of the IRA.
But the Court of Appeals decided that Arizona has embraced an alternate approach, generally referred to as the “aggregate” theory of community property. Under that analysis, Frank owned one-half of all the couple’s assets taken together — but so long as his widow received at least one-half of the aggregate community assets, she could not complain about what he had done with “his” half of the aggregation. Since Frank’s widow may have received some other assets (perhaps by beneficiary designation, or payable-on-death titling), the appellate court remanded the case back to the probate judge for a determination of whether “her” share of the couple’s assets had been properly protected.
Frank’s widow also argued that IRA and other retirement accounts should receive special treatment. Retirement funds, she insisted, are intended to provide for the care of the beneficiary and his or her spouse — and it should not be permissible to direct them to children or others except in unusual circumstances. The Court of Appeals was not persuaded, holding that all assets left to a spouse are intended to help provide for the spouse. In re the Estate of Kirkes, March 8, 2012.
So is community property really hard to understand, or are the principles difficult to apply? Not really. States where community property principles are not relevant also have complications and exceptions. But the basic rules are clear in both kinds of states: in community property states, property acquired during the marriage is generally presumed to be community property unless it was acquired by gift or inheritance. Property owned before the marriage generally remains separate property of the spouse who brought it into the marriage — unless he or she does something to convert it into community property. And then there are those details.