This chapter only applies to a married person who is a resident of a community property state who acquires or is contemplating acquiring a membership interest in an Arizona LLC. The issues discussed in this chapter are base on Arizona law. If you live in a community property state other than Arizona the community property law of your state applies to you and it may be different than Arizona’s community property.
Section 8.1 Why You Must Understand Community & Separate Property Law & the Consequences of Not Understanding
Because Arizona is a community property state, members and managers of the company should understand some important and fundamental concepts about Arizona community property and separate property law. Even if your Arizona limited liability company is owned solely by an entity, a trust or a single person now and the issues are not relevant today, it is possible that circumstances may change in the future and one or more married people might acquire membership interests in the company. Whenever there is at least one married person who owns a membership interest in the company, community and separate property issues will arise.
The following is a list of important concepts you should know about Arizona community property and separate property:
a. Only married people can own separate and community property.
b. The characterization of community property or separate property affects ownership of the property at issue. Ownership or lack of ownership has economic and other legal consequences.
c. If the property is community property, the spouses jointly own all of the property and each owns an undivided one half of the entire property. For example, if Arizona residents Jack and Jill are married and own a $200,000 debt-free home as community property, they jointly own the entire home and each owns an undivided one half interest in the home with a value of $100,000.
d. If one spouse owns property as separate property, then that spouse owns all of the property and the other spouse owns none of it. Using the same facts as in the preceding paragraph, if Jill owns the $200,000 home as separate property, she owns all of the home and Jack does not have any interest in it. Jill’s separate property interest in the home has a value of $200,000 and Jack has nothing.
e. Arizona has two types of community property:
(i) community property with right of survivorship (avoids probate), and
(ii) community property (probate required).
The difference between the two types of community property is that when spouses own property as community property with right of survivorship and one spouse dies, the other spouse automatically becomes the sole owner of the entire property without the need for an Arizona probate. If you want to avoid probate with respect to community property, make sure that the title to the “community property says community property with right of survivorship” and not merely “community property.”
f. When a spouse owns property as separate property and the spouse dies, the separate property may or may not be inherited by the surviving spouse. If the spouse who owns separate property has a Will, the separate property will pass to the heir(s) named in the Will. A surviving spouse does not automatically inherit separate property owned by a deceased spouse. If the owner spouse dies without a Will, the separate property will pass to the heir(s) of the deceased spouse according to the applicable laws of intestate succession and the surviving spouse may or may not inherit the separate property. Lesson: If a spouse owns separate property and wants to be sure that the proper heir(s) inherit the separate property after he or she dies, the owner spouse should have a Will that specifies the desired heir(s).
g. Arizona law has a presumption that all property acquired during marriage is community property unless the property came from a gift or from an inheritance. For example, if Jack is married to Jill and Jack’s parents give him $50,000, the gift is John’s separate property and Jill has no claim to or interest in the $50,000.
h. If a spouse who owns separate property is not careful, the owner spouse can transmute his or her separate property into community property owned jointly with the other spouse. For example, if John deposits his $50,000 gift from his parents into his joint checking account with Jill, John will convert his separate property gift to community property owned jointly by both spouses. Another way to convert separate property into community property is to take community property such as salary earned by either spouse and use some or all of the salary to pay the mortgage on or make repairs to a home that is owned as separate property by one of the spouses. Lesson: Never use community property to benefit separate property (unless you want to convert it to community property) because it will convert some or all of the separate property to community property.
Section 8.2 How to Determine if a Married Member Owns an Interest in the Company as Separate Property or Community Property
The legal significance of the presumption of Arizona law that all property acquired during marriage (other than from a gift or an inheritance) is community property is that the burden is on the spouse who claims the property is separate property to prove that the property is not community property. Translation: Property acquired by an Arizona resident during marriage will be deemed by an Arizona court to be community property unless the person who claims separate property has some real and substantial proof that that the property is not community property.
If a married man files Articles of Organization with the ACC that names only the man as a member of the company and there is no Operating Agreement or an Operating Agreement that does not name the wife as a member of the company, Arizona law provides that the woman owns a community property interest in the company with the man. The fact the woman is not named as a member in the Articles of Organization or the Operating Agreement does not mean that she does not have a community property interest in the company. She will own a community property interest unless the man can produce evidence to the contrary.
Section 8.3 Disclaimer Form to Be Signed by a Spouse Who Does Not Have an Interest in the Membership Interest of His or Her Spouse
The best way to prove that a membership interest of a married spouse is separate property is to have the nonmember spouse sign a document in which he or she disclaims and waives any interest in the membership interest of the member spouse. I call this type of document a “Disclaimer.”
If you need a Disclaimer for a married Arizona resident who wants to own his or her membership interest as separate property, purchase my editable Word format Disclaimer from Keyt Forms for $47. You can edit this document to make it work for your LLC’s members that desire to own their membership interest as separate property.
Warning: A married member who intends to own his or her interest as separate property must have the spouse sign the Disclaimer to obtain clear title to a separate property ownership interest in the company.
Section 8.4 Affect of Arizona Community Property Law on Nonresidents of Arizona
Caveat: The discussion in this Chapter about community property and separate property is a general discussion of Arizona community and separate property law, which applies to members who are residents of Arizona. We cannot predict or comment on how a court in a state other than Arizona will treat membership interests in the company owned by married members who are not residents of Arizona. If we prepare the Operating Agreement to state that the membership interest of a married non-Arizona member is separate or community property and/or prepare a Disclaimer for the non-owner spouse to sign, it does not mean that a non-Arizona court will apply the law of its state in a way that is contrary to Arizona law. Non-Arizona residents who are married should consult an attorney in the state in which they reside to determine how their membership interest in the company will be treated in their states and take any action necessary to protect and/or substantiate their interests in the company.