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Considerations For Dividing Assets In A Divorce

Whose Business Is It Anyway? Considerations For Dividing Assets In A Divorce

By | Articles, Estate & Trust

Community Property

Sadly, according to recent statistics, roughly half of marriages end in divorce. When “irreconcilable differences” occur, one of many important considerations is how to equitably divide marital assets.

Arizona is a community property state. Absent other contracts or agreements, when a couple resides in a community property state, when they marry, everything that each of them earns from the day they get married belongs to both spouses.

In most cases, the assets a person had before marriage remain that person’s sole and separate property, as do any gifts or inheritances received after marriage. If one chooses to combine his or her sole and separate property with the couple’s community property, generally speaking, the property that is combined then becomes community property.

These legal principles apply to real estate and businesses that a husband or wife has an ownership interest in. In the context of divorce proceedings, as with all other community property, after receiving evidence submitted by the parties, the judge will determine the value of the asset, and then equitably divide the community property interest in the assets between the spouses.

Business Valuation

If the ownership of the business predates the marriage, the judge will examine what the community invested in the business by time and money during the marriage. The judge will also look at the value of the business on the date of the marriage and on the date the Petition for Dissolution was served. In order to present such evidence to the court, the spouse can hire a forensic accountant and obtain the businesses’ financial records for the past 5 years (or longer in some cases).

For some businesses, it may be necessary for the judge to assign a value to the intangible assets of the business as well as the tangible assets of the business. Intangible assets may include patents, trademarks, contracts, and goodwill. The courts recognize two types of goodwill, personal goodwill and enterprise goodwill. Personal goodwill is also known as professional goodwill and attaches to a particular individual such as a REALTOR®, surgeon, or a lawyer, rather than the business the individual owns. Enterprise goodwill or business goodwill comes from the attributes of the business itself.

A business valuation expert is essential to assigning a value to the intangible assets of a business to present to the court. Enterprise goodwill is recognized as a community asset of the business in all states, including Arizona. Some states have declined to include personal goodwill as a part of the community assets of a business. Arizona continues to include personal goodwill as a community asset of a business in a divorce.

SIDS (Sudden Income Deficiency Syndrome)

One spouse is often unfamiliar with a business that has been started and managed by the other spouse. This lack of knowledge leaves that spouse vulnerable to pre-divorce financial maneuvering that has become so common that it is known as “SIDS” (sudden income deficiency syndrome).

Example: A business that has been supporting the family for years that suddenly has little or no income or value. Clues that the sudden lack of income from the business is a result of improper financial maneuvering include correlating the drop in income with a time when the couple began having serious marital difficulties. Other clues include:

  1. when the spouse operating the business begins having the business pay his personal expenses; or
  2. when one spouse’s involvement in the business is reduced.

The more that one spouse performs work or provides services for the business, the stronger her claim is for an partial ownership of the business and the more likely the spouse is to have knowledge of the value of the business.

To prove to the court that the value or income of the business is not what it seems, an attorney will need to call upon a forensic accountant to assist in gathering evidence of manipulation to present to the court.

Prenuptial Agreements, Management and Operating Agreements

In Arizona, the laws regarding community property can be limited by contracts, such as prenuptial agreements. A “prenup” is the most common contract to limit or modify the application of community property law in a divorce. A prenuptial agreement can clearly state whether a business becomes community property after a marriage and which spouse will get to keep the business after a divorce. If a business is created after the marriage, the prenuptial agreement can determine whether that business is community property. In order to be a valid contract, the prenuptial agreement must be fair to both sides, and each party must fully disclose their financial condition. Each party should have their own attorney review and attest to the fairness of the prenuptial agreement and that their client was not coerced into signing the prenuptial agreement.

Absent a prenuptial agreement that establishes ownership and management of the business, the business should have a management agreement and operating agreement that restricts stock transfers to anyone without the consent of all partners. The operating agreement should define who would manage the business if a Petition for Dissolution is filed and served.

Conclusion

The equitable division of assets, especially business-related assets can be difficult. This article briefly summarizes the basic principles of how the business interests of a couple going through a divorce are treated by the courts in Arizona and the steps that can be taken to simplify the division of business interests in a divorce. Each situation is unique. If you or someone you know has questions concerning a specific situation, please contact us for a case strategy session.

Fair Housing Act

HUD Says Screening Based on Arrest Record May Violate Fair Housing Act

By | Articles, Real Estate

As many as 100 million U.S. adults – or nearly one-third of the population – have a criminal record. The U.S. Department of Housing and Urban Development (HUD) recently issued a warning and compelling statistics that reveal that certain protected classes are being disproportionately impacted by their criminal history.

The Fair Housing Act prohibits discrimination in the sale, rental, or financing of dwellings and in other housing-related activities on the basis of race, color, religion, sex, disability, familial status or national origin. 42 U.S.C. §3601 et seq.

Although criminals are not a protected class under the Fair Housing Act, criminal background-based restrictions may violate the Act if, without justification, the restrictions negatively impact one race more than others (known as “discriminatory effects liability”). In addition, where two or more applicants have similar criminal backgrounds, the Act is violated if the housing provider prefers one race over another (known as “disparate treatment liability”).

HUD warns that a housing provider violates the Fair Housing Act if the provider’s policy or practice has an unjustified discriminatory effect, even if the provider had no intent to discriminate. This is noteworthy because under this standard, an ostensibly neutral policy or practice that has a discriminatory effect violates the Act if it is not supported by a legally sufficient justification. And according to the statistics quoted by HUD, housing decisions based on criminal records conclusively result in a discriminatory effect on certain races of people.

HUD does, however, mention the following safe harbor: the policy or practice may be lawful notwithstanding its discriminatory effect as long as the decision is supported by a legally sufficient justification. For example, safety. Some landlords and property managers site the need of protecting other residents and their property as legal grounds for denying applicants based on their criminal background. For sure, ensuring resident safety and protecting property are among the fundamental responsibilities of a housing provider, and courts may consider such interests to be both substantial and legitimate, assuming they are the actual reasons for the policy or practice.

But a word to the wise: denial of housing opportunities based on past history of criminal arrests (without proof of conviction) will not likely satisfy this test. Indeed, according to the U.S. Supreme Court, “[t]he mere fact that a man has been arrested has very little, if any, probative value in showing that he has engaged in any misconduct. An arrest shows nothing more than someone probably suspected the person apprehended of an offense.” Schware v. Bd of Bar Examiners, 353 U.S. 232, 241 (1957); see also United States v. Berry, 553 F.3d 273, 282 (3d Cir. 2009) (“[A] bare arrest record – without more – does not justify an assumption that a defendant has committed other crimes and it therefore cannot support increasing his/her sentence in the absence of adequate proof of criminal activity.”); United States v. Zapete-Garcia, 447 F.3d 57, 60 (1st Cir. 2006) (“[A] mere arrest, especially a lone arrest, is not evidence that the person arrested actually committed any criminal conduct.”). Thus, a housing provider who denies housing to persons on the basis of arrests alone (without proof of conviction) cannot prove that the exclusion actually assists in protecting resident safety and/or property.

On the other hand, denial of a housing-related opportunity based a criminal conviction is likely okay. But the housing provider must still prove that such policy or practice is necessary to achieve a substantial, legitimate, nondiscriminatory interest. A blanket ban on anyone with a conviction record – no matter when the conviction occurred, regardless of the crime, or what the person has done since then – will be unlawful.

According to HUD, a blanket ban against anyone with a criminal record results in discrimination against certain races of people because of the disparities in the U.S. criminal justice system. As a result, the housing policy should differentiate between various crimes and the date of the convictions. For example: [1] convicted sex offenders need not apply (regardless of the date of conviction); [2] convicted felons guilty of violent crimes, kidnapping, terrorism, drug manufacturing, need not apply (regardless of date of conviction); [3] conviction of any drug-related offenses involving possession only, or alcohol-related offenses where no one was injured or killed, must be at least 2 years old.

To summarize, the Fair Housing Act does not prohibit housing providers from considering an applicant’s criminal background when making housing-related decision. But according to HUD’s recent warning, the Act does prohibit housing-related decisions based solely on the applicant’s criminal history. And the Act may prohibit housing-related decisions based solely on the applicant’s conviction record without evidence of a legally sufficiency justification such as safety concerns. As a result, housing providers should immediately implement thoughtful application policies and practices that consider the type of crime, evidence of a conviction, the date of the conviction, and the person’s behavior since the conviction.

If you or someone you know has questions regarding multi-family housing, landlord tenant issues, or other real estate matter, please call or email today.

Christopher J. Charles is the founder and Managing Partner of Provident Law®. He is a State Bar Certified Real Estate Specialist and a former “Broker Hotline Attorney” for the Arizona Association of REALTORS® (the “AAR”). He is also an Arbitrator and Mediator for the AAR regarding real estate disputes; and he serves on the State Bar of Arizona’s Civil Jury Instructions Committee where he helped draft the Agency Instructions and the Residential Landlord/Tenant Eviction Jury Instructions.

Christopher is a licensed real estate instructor and he teaches continuing education classes at the Arizona School of Real Estate and Business. He can be reached at chris@newnewprovidentlawyers.mystagingwebsite.com or at 480-388-3343.

Law Approving Vacation Rentals in Arizona

Governor Ducey Signs Law Approving Vacation Rentals in Arizona

By | Articles, Real Estate

Keeping true to his goal for Arizona to become to the sharing economy of what “Texas is to oil and what Silicon Valley used to be to the tech industry,” Governor Ducey signed SB1350 paving the way for vacation rentals in Arizona. Prior to SB1350, cities such as Scottsdale, Phoenix, and Sedona opposed residential rentals for less than thirty days.

Now state law prevents cities and counties from banning short-term rentals and establishes uniform tax laws for vacation rentals.

Click here, to review an overview of the new law in Arizona. This new law protecting vacation rentals in Arizona is the first of its kind in the nation. Airbnb and VRBO are now lobbying across the country for similar laws in other states.

Although SB1350 prevents cities and counties from restricting vacation rentals, in limited situations HOAs may restrict short term rentals pursuant to CC&Rs.

For more information regarding vacation rentals, call or email Mr. Charles today, to schedule a consultation.

State Senate Votes to Protect Vacation Rentals

Breaking News! State Senate Votes to Protect Vacation Rentals

By | Articles, Real Estate

Due in part to the convenience of our new “Sharing Economy” through websites like VRBO and airbnb, vacation rentals are booming. Short-term rentals, however, are under attack by certain cities and HOAs. Some cities such as Sedona, Arizona and Coronado, California, have passed legislation to expressly prohibit rentals for less than 30 days. And other cities including Scottsdale and Phoenix have recently taken the controversial position that although their codes and zoning ordinances do not expressly prohibit vacation rentals, any rentals for less than 30 days in residential districts are illegal as “commercial use.”

In an effort to clarify owners’ property rights in Arizona, the State Senate recently voted to pass SB1350 sponsored by Senator Debbie Lesko. SB1350 prevents cities from restricting vacation rentals and clarifies taxation issues. The bill is currently pending before the House of Representatives.

Governor Doug Ducey endorsed vacation rentals in his State of the State address: “Arizona should be to the Sharing Economy what Texas is to oil and what Silicon Valley used to be to the tech industry.”

If you or someone you know has questions regarding vacation rentals, please call our office today to schedule a consultation.

Please see below for more information on vacation rentals:

Ways to Increase Your Odds at Mediation

Tax Liens and What Property Owner’s Need to Know About Mortgage Foregiveness Tax

By | Articles, Real Estate
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If you own a property you know that getting the mortgage is only the beginning. There is also real property tax, state tax and tax liens, just to name a few. As a property owner it’s always good to keep yourself informed.

In this video Arizona State Bar Certified Real Estate Specialist, Attorney Christopher J. Charles provides some useful information and explains the details about Arizona tax liens.

Understand short-term lease is

Short Term Leases

By | Articles, Real Estate

What is a short-term lease? What does the Super Bowl have to do with short-term leases? Watch this video to listen to Arizona State Bar Certified Real Estate Specialist, Attorney Christopher Charles, explain the “ins and outs” of short-term leases in Arizona.

The Law About Post-Possession Agreements

Laying Down the Law Post-Possession Agreements

By | Articles, Real Estate

As discussed in our recent post regarding pre-possession agreements, key provisions of the Dodd Frank Act (“Dodd Frank”) took effect in 2015.  Dodd Frank aims to revamp the United States regulatory system, especially in regard to mortgage lending.  To that end, Dodd Frank created material changes to the residential real estate mortgage closing process.  For example, the Truth in Lending and Good Faith Estimate document has been replaced with the new Loan Estate (“LE”) and the HUD-1 Settlement Statement has been replaced with the Closing Disclosure (“CD”).  The mortgage industry has spent billions of dollars to adapt to these changes.  For instance, Quicken Loans reportedly hired 350 employees for 18 months just to implement the Dodd Frank changes.

On average, these new changes are adding an extra week to the beginning of the closing process. In addition, the new changes are adding an extra week on the tail end of the closing.  As a result, whereas for recent history most residential closings typically closed in about 30 days, many closings after Dodd Frank are now taking around 45 days.

Due to the longer and less predictable closing periods, buyers and sellers are encountering occupancy challenges and requesting pre or post-possession agreements until their pending transaction can close escrow.  (This column previously addressed pre-possession agreements – the situation where the buyer requests that the seller allow the buyer to take possession prior to the close of escrow.  We not turn our attention to post-possession agreements – where the seller asks the buyer for permission to remain in the home for a short period after the close of escrow.)

Post-possession agreements present unique and interesting legal issues. They also present substantial risk to the buyer.  In fact, Commissioner’s Rule R4-28-1101(k) warns: “A salesperson or broker shall recommend to a client that the client seek appropriate counsel from insurance, legal, tax, and accounting professionals regarding the risks of pre-possession or post-possession of a property.”

Arizona’s statute of frauds requires that any agreement for the sale or interest in real estate must be in writing.  A.R.S. §44-101(6).  But one key exception to the rule concerns a lease for less than one year.  So technically a verbal post-possession agreement is legal.  Under no circumstance, however, should a buyer (or his agent) ever agree to a verbal post-possession agreement.

Although post-possession agreements create certain risks for the buyer, those risks may be minimized with the proper insurance policies and with a thoughtful and thorough post-closing occupancy agreement.  Also, the buyer can request an “escrow holdback” to protect his or her interests. For example, the buyer can request that the escrow company withhold $50,000 from the purchase price in escrow which shall not be released to the seller until: [1] the seller peacefully surrenders possession of the premises by the agreed-upon date; [2] the seller transfers possession in the same condition as it was during the final walk-through inspection; [3] the seller pays any agreed upon rental charges in the post-occupancy closing agreement; and [4] any other reasonable terms the parties agree to.  The escrow hold back strategy provides the buyer with sufficient protection to essentially offset the risks associated with post-possession agreements.

Below are common pitfalls common to post-possession agreements (many of these risks are also common to pre-possession agreements):

  • Risk of Loss – who has the risk of loss during the post-closing occupancy period?
  • Insurance – does the seller have valid insurance coverage during the post-closing occupancy period? Does the buyer have valid insurance coverage?
  • Repairs and Maintenance – who is responsible for repairs and maintenance?
  • Occupancy Rights – who has the right to occupy the property (the buyer should require the seller to expressly identify the names of everyone who will be occupying the property and consider obtaining background check on all occupants)
  • Rental Amount – what is fair rent for the term?
  • Security Deposit – what is a fair security deposit? Is the security deposit limited to 1.5 times the monthly rent pursuant to the Arizona Residential Landlord Tenant Act?  Probably not (see below).
  • Buyer’s Remedies– the buyer should expressly identify what remedies are available if the seller fails to move out when agreed, including liquidated damages paid from the escrow holdback discussed above. Also, the buyer should request that the seller agree to immediately voluntarily surrender possession and that the seller may perform a non-judicial lockout in the event of a breach.  To that end, the parties should expressly represent and warrant in the post-possession agreement that the property is not the seller’s residence or domicile and that the parties’ relationship is governed by the Inn Keeper’s Statements and not the Landlord Tenant Act.

If you or someone you know has questions regarding pre or post-possession agreements or any other real estate matter, please call or email today.