Question: I am an Arizona resident in the process of getting a divorce. If I form an Arizona limited liability company before my divorce is final, will my wife own a community property interest in my interest in the new LLC?
Answer: It depends. How’s that for a lawyer answer. Arizona Revised Statues Section 25-211.A defines community property. It states:
25-211. Property acquired during marriage as community property; exceptions; effect of service of a petition.
A. All property acquired by either husband or wife during the marriage is the community property of the husband and wife except for property that is:
1. Acquired by gift, devise or descent.
2. Acquired after service of a petition for dissolution of marriage, legal separation or annulment if the petition results in a decree of dissolution of marriage, legal separation or annulment.
Arizona Revised Statues Section 25-213 defines separate property. It states:
25-213. Separate property
A. A spouse’s real and personal property that is owned by that spouse before marriage and that is acquired by that spouse during the marriage by gift, devise or descent, and the increase, rents, issues and profits of that property, is the separate property of that spouse.
B. Property that is acquired by a spouse after service of a petition for dissolution of marriage, legal separation or annulment is also the separate property of that spouse if the petition results in a decree of dissolution of marriage, legal separation or annulment.
Section 25-211 states the general rule and subsections 1 and 2 state the exceptions to the general rule. If somebody gives money or property only to one spouse, the property is separate property unless the recipient changes the separate property to community property. The words “device or descent” mean inherited property. If a parent dies and leave money or property to a married child, the money or property is separate property unless the recipient changes the separate property to community property.
Separate property can be changed to community property and community property can be changed to separate property. It is best to document changes in the character of property with a written document such as a deed (for real property). Married people who have separate property and who want to keep the property as separate property must take care not to change the separate property into community property. Separate property can be changed to community property if it is titled in the name of both spouses or if money is deposited in a joint bank account. Also, if community assets such as wages or salary are used to benefit separate property, it can cause some or all of the separate property to become community property. For example, if a man inherits a home from his parents and uses some of his salary (community property) to pay the mortgage or make improvements to the home, a part of the home will become community property.
Now, back to the question. If Spouse 1 is an Arizona resident and Spouse 1 forms a new Arizona LLC after service of a petition for dissolution of marriage, legal separation or annulment on Spouse 2 and if the petition results in a decree of dissolution of marriage, legal separation or annulment, Spouse 1 is the sole owner of the interest in the LLC as separate property. Otherwise, Spouse 1’s interest in the LLC is deemed by Section 25.211.A.2 to be community property.
My Lawyer Recommendation: An Arizona resident who is married who wants to insure that the he or she will be the sole owner of an interest in a new Arizona LLC should not rely on the divorce becoming final, but should get the non-owner spouse to sign a document in which the non-owner spouse disclaims any interest in the LLC membership interest or other property to be acquired as separate property. Of course, if the non-owner spouse will not sign the disclaimer, the divorce must become final for the owner spouse to own one hundred percent of the new LLC.