Ellsworth Family Law

Consequences of Disclaimer Deeds or Quitclaim Deeds in Arizona Divorces

Signing a disclaimer deed on a house purchased during the marriage can have dire, unintended consequences in an Arizona divorce. Often, the largest assets most people have when they get divorced are their house and retirement. It is somewhat unsettling to think that signing a little piece of paper, which has become commonplace in many transactions, will result in one spouse losing out on their community share of one of those large assets–the house. This article explains the legal effect of signing a disclaimer deed as it relates to property division in an Arizona divorce, to hopefully provide guidance to those in this situation and/or to caution those looking to purchase a house.

In Arizona, property is characterized as either community or separate. The character of property is determined at the time it is acquired. Property acquired before marriage is that spouse’s separate property. Property acquired during the marriage is presumed to be community property. Upon a divorce in Arizona, the courts are required to divide community property equitably, which for the most part means equally. In contrast, the courts are required to award the separate property to the spouse who owns it; meaning separate property is not divided between the spouses. Thus, the character of property during a divorce is important because it will determine whether you or your spouse gets half of that property.

With the house being one of the largest assets most people own, it is important (for at least one of the spouses) that the house be characterized as community property both parties get one-half of the equity in the house. This is exactly what is given up by spouses when a disclaimer deed is signed at the purchase of the house.

Sometimes people intend for a house purchased during the marriage to be characterized as one person’s separate property. This is often the case where one spouse buys a house with inherited funds or money they had prior to the marriage. However, in other cases, the parties will purchase a property and “think” that the house will belong to both of them. And yet, because one spouse signed a disclaimer deed to the property when it was purchased, the house really belongs to the other spouse as their separate property. Why do people do this and why is this the case?

First and foremost, people typically sign a disclaimer deed so the other spouse can obtain a better interest rate on the mortgage. Most people buying a house have to do so by taking out a mortgage on the property. The interest rate on the mortgage will affect the monthly payments, and thus, will affect the “amount” of house one can afford. If one spouse has a significantly better credit score than the other, then having the spouse with the better credit score purchase the house will likely mean a better interest rate and in return a bigger house for the married couple. In order to accomplish this, the bank will require that the non-purchasing spouse sign a disclaimer deed (or quitclaim deed), which in effect waives any property interest in the house. When purchasing the house, most people don’t think about the consequences of these actions, especially as it relates to a possible divorce. Instead, people are just happy they were able to buy a bigger, better, newer house than they otherwise could have if both spouses and their credit scores were used to borrow the money from the bank.

Now, here is why signing the disclaimer deed will have dire consequences upon an Arizona divorce even though the parties’ intent was simply to buy a bigger house, and not necessarily for one spouse to actually have that house as their separate property. The disclaimer deed is a legal document that has legal consequences. Further, the disclaimer deed will clearly state that the spouse signing it is waiving (disclaiming) any interest in the house being purchased. There was a (somewhat) recent case in the Arizona Court of Appeals on this very issue that affirmed the court’s position on this issue from decades past. The case is Bell-Kilbourn v. Bell-Kilbourn.

In that case, the spouses decided to boost the wife’s credit score and then have her apply for a loan to purchase a house. The wife applied for a loan, the parties obtained the down payment from the seller of the house, and the husband signed a disclaimer deed, renouncing any interest in the house. The wife was given a warranty deed by the seller giving her the title to the house as her separate property. Two years later, the couple were getting divorced and dealing with the division of the house. Because the house was acquired during the marriage it was presumed to be community property. However, the wife tried to rebut that presumption by pointing to the disclaimer deed. The trial court ruled that the house was community property because it seemed clear that the intent of the parties was to only put the wife’s name on the house to obtain better credit, and thus it would be fair and equitable to divide the house as community property. The wife filed an appeal, contesting the ruling of the trial court regarding the characterization of the house as community property.

On appeal, the parties relied on the Bender case to support their positions. In the Bender case the court found that the house belonged to only one spouse where a disclaimer deed was signed. The court reasoned that married couples are free to determine the status of their property, and the disclaimer deed constituted a binding contract that must be enforced in the absence of fraud or mistake. Despite the fact that the couple in the Bell-Kilbourn case allegedly used community funds to purchase the house (separate funds were used in Bender), the court still came to the conclusion that the house belonged to the wife. First, the court noted that the record did not actually reflect that community funds were used to buy the house. Second, and more importantly, the character of the funds used to make the down payment is not important, but what is important is the legal effect and plain intention stated in the disclaimer deed–that the husband disclaims all interest in the house.

In summary, even though the husband signed the disclaimer deed for purposes of the wife getting a better interest rate on the mortgage on the house, that reason does not alter the character of the property, which was found to be the wife’s separate property. (Of note, these types of situations may become more complicated and require additional documentation in a case where one of the spouses had an interest in the house prior to both parties taking an interest.)

What does this all mean to you? Well, if you’ve signed a disclaimer deed to your property, you may be in the same position as the husband was in Bell-Kilbourn should you end up in a divorce. There are a few ways to avoid this result, which you should discuss with an attorney before taking any action. First, you may not want to sign a disclaimer deed unless you actually intend for the property to belong solely to your spouse. Second, you and your spouse could elect to re-title the house in both parties’ names either through a conveyance, or transfer to a trust; however, caution should be taken to not trigger unintended consequences from this action such as acceleration clauses on loans. Third, it could be possible to do a post-nuptial agreement to restructure how you and your spouse intend to hold property and/or divide it upon death/divorce. Again, an attorney should be consulted for any of these options to make sure more unintended consequences are not created.

For spouses who find themselves in the position of having signed a disclaimer deed, all hope is not lost. The community may still be entitled to a community lien on the property based on improvements, enhancements, and mortgage payments made that reduce the principal on the loan–assuming community funds were used for these things. There are additional cases in Arizona that address these very issues to determine how much the community, and thus the non-owner spouse, is entitled to receive due to increases in value of the separate property of the other spouse. This will be addressed in another post soon to come.

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