Arizona Disclaimer Deed: you MUST read this

In Arizona, property acquired during the marriage is typically community property. Upon divorce, the courts will equally divide community property. However, when a spouse signs an Arizona disclaimer deed when purchasing a house, the signing spouse no longer owns an interest in the house. Thus, the house becomes the other spouse’s separate property. As a result, the house will not be divided equally, but rather awarded to the other spouse.

In this article, I will cover the following about Arizona disclaimer deeds:

• basics of community property versus separate property
• the common circumstances why people sign a disclaimer deed
• why signing a disclaimer deed has such significant consequences
• and two legal options a spouse has to potentially recover up to half of the value of the house

If you prefer, the Podcast has an episode dedicated to covering community property vs. separate property here. You can listen to that episode if that’s easier for you.

Arizona is a community property state. According to A.R.S. 25-211, property acquired during the marriage is community property (except for gifts and inheritances). According to A.R.S. 25-318(A), the court basically has to divide community property equally in the divorce. Conversely, separate property is not divided in the divorce. Rather, separate property is allocated to the spouse that owns it.

Even though Arizona is a community property state, spouses can still own separate property. For instance, according to 25-213, all property owned prior to the marriage (and any income/value derived from such property) is the separate property of that spouse, as well as any gifts or inheritances received. Additionally, spouses are free to do what they want with their separate and/or community property. In other words, a spouse can give the other spouse his/her property, such as in the form of a gift, or in the case of this article, a disclaimer deed.

If you’ve read this far, then you probably have (A) signed a disclaimer deed yourself, and (B) are feeling really frustrated at the consequences. Don’t worry. You are not alone and you are not the only person to sign an Arizona disclaimer deed. (I’ll cover some of the remedies in the next section below.)

In some situations, a married couple may truly intend to have a house be one spouse’s separate property. For instance, if one spouse receives an inheritance, and wants to buy a house with that inheritance, that spouse may want to have the other spouse sign a disclaimer deed so the house remains his/her separate property, just like the inheritance would be separate property. However, I believe the next scenario to be more prevalent.

A common scenario

Because Arizona is a community property state, many spouses sign an Arizona disclaimer deed to help reduce the cost of buying a house. Here is a common scenario. A married couple wants to buy a house. They apply for a loan. Because one spouse has a much lower credit score, they will get a better interest rate (and therefore a lower monthly payment) if only the spouse with the higher credit score buys the house. Of course, people want to get the most house they can afford. So, if having only one spouse buying the house means a lower monthly payment and being able to afford “more” house then why not, right?

In this scenario, the lender (bank) will require that the spouse with the lower credit score (the one not buying the house) sign a disclaimer deed. The community property laws are the reason why. You see, if the spouse with the lower credit score doesn’t sign a disclaimer deed, then that spouse would have a community property interest in the house because it was acquired during the marriage. This is not good for the lender because the lender does not want anyone to have an ownership interest in the house who is not on the mortgage loan. This is why the lender will require a disclaimer deed.

In the above scenario, it seems obvious that the married couple did not intend for the house to belong to only one of them. Rather, the married couple bought their house in this manner to save money. However, as shown in the next section, the legal result is the same.

In a case called Bell-Kilbourn v. Bell-Kilbourn, the court of appeals addressed this very legal issue: whether signing a disclaimer deed transformed a house purchased during the marriage into only one of the spouse’s separate property. The couple in that case decided to have the wife purchase a house after increasing her credit score. The husband signed a disclaimer deed and the wife received title to the house as her separate property. A couple years later, the parties were divorcing and dealing with whether the house was community property or the wife’s separate property.

Because the house was acquired during the marriage, it was presumptively community property. However, the wife tried to rebut that presumption because the husband signed a disclaimer deed. At trial, the judge ruled that the house was community property because it seemed clear that the disclaimer deed was only signed to get a better rate, and it was the fair and equitable thing to do. The wife appealed that ruling.

The Arizona Court of Appeals reversed the trial court. The Court of Appeals held that a disclaimer deed is a legal document and its legal effect must be followed. In short, the Court of Appeals viewed the disclaimer deed as a type of contract, which must be upheld in the absence of mistake or fraud.

Regardless of the intentions, based on the Bell-Kilbourn case, the current legal standard is to give effect to a disclaimer deed absent fraud or mistake.

If you have not yet signed a disclaimer deed, but are confronted with that scenario, you should probably consult with an attorney before you sign a disclaimer deed.

If you have already signed a disclaimer deed, don’t give up hope. You can still potentially recover something either through an affirmative defense or community lien.

Affirmative defense: fraud or mistake

You can get the court to ignore the disclaimer deed if it was procured by fraud or mistake. In essence, you would need to show the court that your spouse defrauded you into signing the disclaimer deed. Importantly, claiming fraud and/or mistake is an affirmative defense and you need to allege it in your initial pleading (Arizona Rules of Family Law Procedure, Rule 32). If you fail to do this, then it is very possible that the trial court will deem your defense waived.

Community lien

Even if your spouse didn’t defraud you, or at least you cannot convince the court of such, you may still be able to recover something from the house, which would be in the form of a community lien. A community lien can arise when community funds are used to improve another spouse’s separate property.

For example, let’s say you and your spouse bought a house during the marriage 5 years ago and you signed a disclaimer deed. Assuming you and your spouse don’t have a prenuptial agreement that could alter things further, let’s say you and your spouse paid on the mortgage on that house with your incomes. Your incomes during the marriage are community (because the income is acquired during marriage). By paying down your spouse’s separate mortgage on the house, a community lien arises. The courts use a formula to determine how much the community lien is worth.

I will point out that the community lien is not going to be a dollar for dollar reimbursement for what was paid on the house. Nevertheless, it will be something. The longer you and your spouse have been paying on the mortgage, the larger the community lien will be (most likely, depending on other factors such as refinances, etc.).

An Arizona disclaimer deed is a legal document and it has legal effect. If you signed a disclaimer deed, then chances are the court will award the house to your spouse as his/her separate property. However, there are still options to get something out of the house, even 50%.

You can allege some affirmative defenses in your pleadings if you believe you signed the Arizona disclaimer deed as a result of fraud or mistake. If you are successful in this claim, the court will deem the house community property.

Even if you are unsuccessful in claiming fraud or mistake, chances are you still have a community lien claim. You will need to gather information and evidence to determine the value of a community lien should the court still award your spouse the house as his/her separate property.