This article is a follow-up to a previous article you can find on our website “Consequences of Disclaimer Deeds or Quitclaim Deeds in Arizona Divorces.” The law regarding disclaimer deeds in Arizona has since evolved a bit due to new case law recently decided by the Arizona Court of Appeals.
Before April 2020, if you purchased a house during a marriage and one of the spouses signed a disclaimer deed, the house would lose its characterization of being community property and immediately become the sole and separate property of the non-disclaiming spouse. The result would have major ramifications in a divorce if the house remained in the non-disclaiming spouse’s name. In that case, instead of both spouses being entitled to 50% of the value of the property, the disclaiming spouse would only have a 50% interest in any community funds used to improve the house or pay down the mortgage principal and a small portion in any increase in value. This was done under the case Drahos v. Rens from 1986, where courts use a formula to decide how much of an interest a disclaiming spouse would have in property that was the sole and separate property of the other spouse.
For example, let’s say that a couple gets married and buys a house. Husband signs a disclaimer deed to the house because he is still in school and does not have an income. At the time of the marriage, the property had a fair market value of $250,000. Time goes on and the couple ends up filing for divorce. During the marriage, the property has appreciated, and the fair market value is now $350,000, an increase in value of $100,000. Also, the couple did not make any significant improvements to the house but did pay down the mortgage principal by $20,000 using community funds. Instead of the husband getting one-half of the increase in value of the home, the court would take this information and crunch the numbers via a formula. The result would be the husband only having a claim for $14,000 from the equity in the house instead of receiving one-half of the equity or $60,000. As you can see, the disclaimer deed can have major implications and consequences.
However, the Arizona Court of Appeals has modified this scenario in the recent case Femiano v Maust decided in April 2020. The Femiano court disregarded the formula when the property is purchased during the marriage with community funds. In Femiano, the couple had been married for several years before they purchased a house that they were still living in when the divorce started. The home was purchased 100% with community property and would be deemed community property but for the wife signing a disclaimer deed. Additionally, the couple paid the mortgage with community funds during the marriage. At the divorce trial, the superior court applied the above formula from the Drahos case. The result was the wife only receiving $8,047.89 instead of $31,635.50. The wife appealed the decision and the court of appeals agreed with her and held that since the home was purchased with 100% community funds and the mortgage was paid using 100% community funds, the Drahos case does not apply. Therefore, the wife is entitled to one-half of the house equity or $31,635.50 instead of the $8,047.89 she was awarded by the superior court.
In summary, the main takeaway from this new case law, is that if the property is purchased with community funds during the marriage, then a disclaimer deed does not come into play during a divorce. Nevertheless, if the property is purchased with sole and separate funds, then a disclaimer deed does come into play and the disclaiming spouse would only receive a fraction of any improvements or increase in value. As always, we recommend sitting down with a family law attorney for consultation if you have questions about disclaimer deeds and divorce.