Think you're going to split everything down the middle in your divorce because you're in a community property state? Not so fast. There might be trouble ahead.
In this episode of the Modern Divorce podcast, host Billie Tarascio talks with Modern Law "Godfather" Don Colburn who shares the inside scoop for what you need to know when splitting up your stuff in a community property divorce settlement. How you keep your 'stuff' will be the key. You'll want to pay particular attention to the property and assets you brought into the marriage and whether that stuff got mixed together in joint bank accounts, down payments on property and more.
And inheritances? Even if you're not divorced and not planning on it, these cautionary tales will make you think about how you should or shouldn't cash that check.
Can I get the house? Billie Tarascio and Don Colburn talk property division
Billie Tarascio: [00:00:00] Hi there. This is Billie Tarascio with the Modern Divorcepodcast. And today I am joined by the godfather attorney, Donald Colburn, and we are going to talk about issues related to inheritance separate property, community property, and who owns the house when there's a disclaimer, deed done.
Don Colburn: [00:00:48] Hello? All of you.
I'm doing great.
Billie Tarascio: [00:00:54] Doing great. Doing great. I'm glad that we're talking about this because it comes up all the time.
Don Colburn: [00:01:00] It does.
Billie Tarascio: [00:01:01] So many of our clients huh. I have a situation where they purchased a house during marriage or one spouse has. And at some point during the life of that property, either when it was purchased or during a refinance, somebody signed a disclaimer, deed.
And it might not be owned by them anymore. It's happens all the time. Um, Don, what should someone do if they find themselves in that situation.
Don Colburn: [00:01:28] You should go talk to a lawyer. It sounds like it is black and white. Uh, it is not. And a lot of it depends on what the intention of the parties were.
For example, if, uh, the parties. Mistakenly signed a warranty deed, and it was intended to be separate. It was funded by separate property. Uh, the realtor understood that the title company understood it. And all of a sudden they mistakenly issued a, a warranty deed to both of them as community property, under certain circumstances, it can be unwound generally.
Uh, what you bring into the marriage. If you keep it separate is separate and the court is obligated to award that to you generally. Uh, what you inherit either before the marriage or during the marriage is separate. If you keep it separate and then generally everything acquired during the marriage. Uh, which is, uh, funded by community funds earnings during the marriage, uh, and so forth is community.
except if you intend it to be separate. So whenever you have a situation where there is property claim to be separate, or there is a waiver deed, or there's a disclaimer, deed or a warranty deed, and that was not intended, you really, really need to get to lawyers who understand the situation because it's complicated and it is not as simple for people to figure out.
Billie Tarascio: [00:03:19] you're, you're absolutely right. You know, the wounds seem fairly simple, right? If it had it before you're married, it's separate. If it's inheritance and separate, if you earned it during the marriage community. Um, but in reality, for anybody who gets married, Who's not, you know, starting their lives together.
When two people start their lives together and stay married a long time, then the community property rules work as intended. Right. You, you started out together and you took the bargain on each other and you know, it just, it works out how it works out. And then when you get a divorce, everything gets split.
That's the severe case. But if you're dealing with people who got married a little later in life, or who are on a second marriage, then the community property rules get very messy.
Don Colburn: [00:04:10] Exactly. And you might want to consider a prenuptial agreement in those circumstances before you get married or a post-nuptial agreement.
That's a whole nother topic and is complicated. Also.
a little preventive medicine saves a lot of disgruntlement and anxiety and discord down the line.
Billie Tarascio: [00:04:33] You're exactly right. So the thing that people need to understand is when you're getting married, you are opting into a construct. And if you are a. You know, a couple that starts out with nothing, then the community property construct might work perfectly for you.
But if you are, um, on your second marriage or your third marriage or older than the community, property construct might not be in your best interest. And you should know by not doing a prenuptial agreement, you're still opting into some constructs. So do you want to be in charge of that or not? And whether or not you decide to get a prenup, you need to understand.
What it means, and it might be messier for you not to get a prenup than to get a prenup or at least think about, you know, what you're going to do. So for instance, let's, let's think about it. You know, we've got a, we've got a client who is on his second marriage and he, um, he got married and she moved into his house with his kids.
The wife did now it's his house from before marriage. So does she have a claim.
Potentially for an equitable lien, which is another complicated. She probably doesn't have a title claim as long as it remains in his separate name. But there's case law that provides that if you pay for it and you're living there for a long, long period of time, the community may have an equitable lien that the court's got to determine and decide upon.
That gives you rights, even though you don't have any legal title to that property. And if enough community funds have been, uh, Spent on that separate residence, you may get an equal distribution under the case law. Again, uh, you need advice and counsel and you need somebody experienced in dealing with it to guide you through that and get your protection, whatever side you're on.
Yeah. I mean,
you would think it would be as simple as no. She moved into his house. It was his house. Pre-marriage no, it should be his property. Right? It's not that simple. It's just not that simple. So, um, The, the moral of the story is if anybody tells you that, that this is a simple thing, and two people should walk away, that only works at both.
People agree to it. Otherwise you can have very, very different opinions about how property should be distributed. The other thing I want to talk about is let's say you have, um, you have, you talked about title rights. And equitable rights. What's the difference between the title, right. And an equitable
Don Colburn: [00:07:26] right.
Idle is whose name is on the property. And even if only one person's name is on the property, if the intent was to take it as joint for community or vice versa, both are on there. Uh, and it was done in error. You may be able to unwind that equitable rights, uh, adult, family, law courts, or courts of equitable.
So there's case law that allows you as we have discussed where you have no title, right? You have no legal interest in the property. You have an equitable interest that the court can assign to you in a family of law. Situation. Most people go into marriages without thinking about any of this, even though it's a second marriage and the discord often happens at the other end.
So a little bit of, of analysis upfront goes a long way to keeping these from being a costly lengthy dispute. When the marriage doesn't work out.
Billie Tarascio: [00:08:39] Yeah. Another issue that we're seeing come up a lot right now, the housing market in Phoenix is hot and it's hot around the country. And, and many times when our refinance happened or when someone took title for whatever reason, only one spouse is on the property.
Now, if that spouse decides to sell the property, it can be sold and it can be sold quickly. What can the. Non owning spouse do to protect their rights.
Don Colburn: [00:09:07] Uh, they can, uh, right. The realtor say that there is a family
thing, if that is true and that your client has. Uh, equitable rights to that property and ask that it not be sold. You can ask that the proceeds be put in trust for that reason, if it is sold, uh, until the issue is resolved on equitable liens where one's party's name is not on the title and the character of that property is determined as is required by the family court.
Uh, there are lis pendens, rights but those require additional analysis. Uh, and oftentimes just letting the realtor know. Uh, and you can we'll stop the transaction. Uh, there is some risk in that because if you have a deal and it does not go through and you've interfered with it, uh, then there may be issues, but all of that is very complicated.
It is a fact by fact case, and you need to consult with somebody who's knowledgeable about it in order to protect your rights.
Billie Tarascio: [00:10:23] What you're saying is so important because there are so many people on social media, giving legal advice, lay people who are like lay people, meaning non lawyers who are like, it doesn't matter.
It's all 50 50 anyway. And the moral of the story is it's not 50 50. Anyway. It's just not like sometimes it is. And many, many times it's not. The law regarding community property is not as simple as you would think it is. So let's say somebody inherits money and, um, they use a portion of it to buy a marital home.
Do they get that money back
Don Colburn: [00:11:05] once it's converted to community and no longer separate that money's gone. And you need to keep separate property either that you bring into the marriage. Totally separate in an account that community funds earnings during the marriage property, during the marriage investments, during the marriage aren't commingled with, and the same is true with inherited property, whether it's before or during the marriage, you got to keep that separate.
Or creates all kinds of problems and these issues come up all the time and they really need, uh, people to sit down. And explain the circumstances, get the documents that back it up. And depending on the circumstances, figure out what your options are, what the cost is, and then decide upon a course of actions based upon individual facts.
And again, it's really important. You get to, uh, a family law firm that analyzes these kinds of things, because it's not simple.
Billie Tarascio: [00:12:15] You're right. And not every family law attorney might be aware of all of the nuances of, of these laws. So for instance, let's say somebody gets that inheritance and they want to buy a house and they want and get a bigger house if they put their inheritance towards the marital home, but they want to protect that.
So maybe they come up with an agreement with their spouse, like, would that be enforceable? Could you do that?
Don Colburn: [00:12:42] Yeah, she can do that. And that's basically called a postnuptial agreement. It's got to meet certain terms and conditions. Uh, there's gotta be consideration for it. There's gotta be full disclosure.
You both have to have a right to counsel and then you have a shot at it being, uh, allowed an acceptable as a binding agreement. A lot of things you can do before. Or the marriage and during the marriage by agreement, but again, yeah. You have to have knowledgeable people. So it's enforceable.
Billie Tarascio: [00:13:17] Right? So just, just an agreement between the two of you.
That's an email might not cut it, but if you both intend for this inheritance to go back to the person who invested it, then it might be worth just spending a couple hours with an attorney to get an actual binding enforceable document. Do those documents have to be report recorded?
Don Colburn: [00:13:41] They should be.
Billie Tarascio: [00:13:43] Postnuptial agreements can be re recorded.
Don Colburn: [00:13:45] Yes. Yes they can. You can, you don't have to re record the entire agreement, but you give, give notice to creditors and other people that there is an agreement. You don't want that in the public domain and recorded, but the verification that you do have this agreement so that people that are lending money, doing things are on notice that you have a separate agreement, they can ask for it, but it's not available to the general public.
Billie Tarascio: [00:14:14] That's a really, really. Um, important thing to do. So essentially, if you make that sort of agreement, you know, then title the title to the property is no longer clear because you, as the person who invested your inherited money, you have a right to get that money back.
You have an interest, you have a, a right to title. So just like any other yeah. Um, lien holder or mortgage or refi, or HELOC would go document the fact that they've got that interest. You want to go ahead and document that interest too, even though the specific terms are private.
Don Colburn: [00:14:50] Another thing that is happening a lot in today's environment.
It used to be the opposite when property doubt values were going down, but the law says the community ends upon service of the petition for dissolution and. One party frequently is in the house. They are paying for everything related to the house until it's decided what's going to be happening in the family court.
Well, all of a sudden, if, for example, if you filed a year ago and served that house is probably worth 25, 30% more. And so you have to figure out what happens to the appreciation. It used to be what happens to them. additional liability after you sell it that you both have, and those are complicated issues also.
Billie Tarascio: [00:15:45] Yeah, absolutely. So there's two issues there's who are responsible for paying the mortgage and expenses associated with the house. So just because you're out of the house doesn't mean necessarily that you're not still responsible for a portion of those expenses and then there's, well, what about all the appreciation that happened during that time?
Um, and so one of the rules with that,
Don Colburn: [00:16:08] uh, generally a party can request reimbursement, if they are paying for all of the expenses at our house, and it is community property, even though they're living there, when it's eventually sold or allocated, they can claim those back and the party that's not living there would argue that all of those ought to be the responsibility of the person who's residing at it.
And oftentimes you reach an agreement through negotiation as to how all of that will be handled in a settlement.
Billie Tarascio: [00:16:43] Yeah. And I think most often you're responsible for at least paying that person back for the amount of principal they paid down. Maybe not the expenses associated with the property, like the taxes and the insurance.
But if you paid down on that equity, usually you're responsible to pay back at least half of that. So does that mean that you also, the person. Can the person who's not living in the house, count on the equity as of the date of the divorce or the date of service when the community ends.
Don Colburn: [00:17:17] Usually, I think that date of divorce with the escalating values.
And for example, you have appraisals done. When do you do the appraisal? You do the appraisal. If you're on the side, that wants to keep it low on the date of service. But the other side is going to say appraise it now because I have an interest in there it's not been distributed to me. And until that that's done, uh, it should be the date of distribution or more close there too.
The same is true of retirement funds. You have to figure out what each is contributed after service. But you have to, before distribution, you have to figure out what was in there as of the date of service and the gains on that without additional contributions, through the data distribution and it's complex.
Billie Tarascio: [00:18:17] Well, I think, um, I'm really glad that we did this podcast because. Community property is much more complex than you might think. And especially if you add on real estate deals, separate property businesses, then you really need to get yourself to an attorney like Donald, like the godfather who has 40 years of experience, who knows the ins and outs of these issues.
Any other words of wisdom for people?
Don Colburn: [00:18:50] You know, the, it is not black and white. It is murky and gray and you need to get to people that understand that and can make the best arguments. And then nobody wants to go. Trial, but, you need to use that through negotiations and enhance your position. And then if you can't resolve it, uh, figure out the cost of going to trial.
And, and a lot of times, if it takes two parties to resolve it, and if you don't have a resolution, you have to go to trial, but that doesn't happen very often.
Billie Tarascio: [00:19:21] No, thankfully it doesn't. Most of the time we are able to reach agreements and usually those agreements are, are something that most people can live with nobody's ever happy, but if you can both live with it, you've you've you can call it a win.
Don Colburn: [00:19:35] Exactly. Thank you so much, Done. We'll talk to you soon. Thank you.