In Bell-Kilbourn v. Bell-Kilbourn, the Arizona Court of Appeals considered whether a disclaimer deed rebuts the presumption of community property even when the deed was executed for a collateral purpose such as to obtain favorable financing terms.
Background
This case involved a married couple who had purchased a home together during the marriage. The parties agreed to use community funds to pay off debt in Wife’s name in order to improve her credit worthiness and enable her to apply for the loan in her name only. This practice is not uncommon, even today, to enable the parties to obtain quicker loan approval or more favorable terms.
The property was deeded to Wife as “a married woman as her sole and separate property.” To complete the transaction, Husband executed a disclaimer deed to renounce his interest in the home and acknowledge it as Wife’s separate property. The parties paid the mortgage using community funds until Husband filed for divorce.
The family court ruled that the home was community property. It reasoned that there was no evidence that Husband intended to gift his interest to Wife when he executed the disclaimer deed.
Wife appealed.
Presumption of community property
Under Arizona law, property acquired during the marriage by either spouse is presumed to be community property. This means that how the property is titled does not determine its status as community or separate property. This presumption is rebuttable if a spouse can prove that property was subject to an exception (gift, inheritance, etc) or that the parties intended for property to be acquired as separate property.
In this case, the Court of Appeals reversed the family court’s decision and found that the disclaimer deed, even though it was signed to facilitate credit approval, rebutted the presumption of community property and made the home Wife’s sole and separate property.
But the analysis did not end there. The character of an asset as sole and separate property does not necessarily preclude the other spouse from receiving some value from that property in the divorce. As in this case, the non-owning spouse may be entitled to a community lien; an equitable interest in the community funds used to purchase and/or improve the separate asset. This calculus may entitle the non-owning spouse to reimbursement of a percentage of the principal payments made and, additionally, a proportionate share of appreciation to the property value.
Conclusion
This is an extremely common fact pattern. Lenders often require one spouse to execute a disclaimer deed when their credit would adversely affect the lending process. If that disclaimer deed is later determined to be valid—and it is a very difficult burden to prove otherwise—the home will not be community property and the disclaiming spouse’s interest may be significantly less than if it were.
Unfortunately, most people who sign disclaimer deeds do not speak with a lawyer before doing so. This is understandable as there is probably no reason to anticipate divorce at that point, so the deed seems inconsequential. We also hear stories that some lenders misrepresent the effect of disclaimer deeds and promise the parties that it doesn't change the property's status as community property.
