An Estate Planner's Guide to Family Law Presumptions

• Publication year: 2018
• Author: By Priscilla N. Hatton, Esq., and Lorin B. Bender, Esq.*

AN ESTATE PLANNER'S GUIDE TO FAMILY LAW PRESUMPTIONS

By Priscilla N. Hatton, Esq., and Lorin B. Bender, Esq.*

I. INTRODUCTION

As estate planners, we prepare carefully crafted estate plans for clients who typically have a clear view of their family dynamics and ultimate wishes. We aim to be thorough and to provide multiple contingency plans so our clients' wishes are carried out upon their deaths. However, it cannot be ignored that, with the high rates of divorce, our clients' assets often are being apportioned and distributed not upon their deaths, but upon dissolution of their marriages. With the high rates of divorce, as well as growth in the areas of trust and probate litigation, it is perhaps more important than ever for estate planners to understand the various presumptions that apply to testamentary documents, property characterizations, marital property transfers, and attempted transmutations. This article provides an overview of the California presumptions in these areas to enable estate planners to evaluate the various risks and safeguards that can be put in place to ensure that their clients' estate plans accomplish their testamentary wishes.

II. CAPACITY IN MARITAL PROPERTY TRANSACTIONS

The first presumption to bear in mind when preparing testamentary documents is the presumption that everyone is sane and has capacity. To rebut that presumption, a contestant must prove by a preponderance of evidence that a testator lacked capacity when he or she signed the instrument, made the conveyance, or entered into the contract.¹ On this issue, the testimony of the drafting attorney is entitled to great weight.²

Many practitioners mistakenly believe that the same low threshold for testamentary capacity also applies to the execution of all trusts. But, there are, in fact, two capacity standards that can apply to testamentary documents.³ The first and lower standard for capacity applies to wills, codicils, and simple trusts or trust amendments.⁴ Courts evaluating capacity under this lower "testamentary capacity" standard consider the following factors as of the time the person executed the documents: (1) whether the person understood the nature of the testamentary act, (2) whether the person understood and could recollect the "nature and situation for the individual's property," and (3) whether the individual could remember and understand his or her relations to a living spouse, descendants, parents, and any others who would be affected by the testamentary document.⁵ A court also will consider whether the person suffered from a mental disorder involving delusions or hallucinations that resulted in him or her devising property in a way that he or she otherwise would not have done.⁶ This testamentary capacity standard "is exceptionally low."⁷ "It has been held over and over in this state that old age, feebleness, forgetfulness, filthy personal habits, personal eccentricities, failure to recognize old friends or relatives, physical disability, absent-mindedness, and mental confusion do not furnish grounds for holding that a testator lacked testamentary capacity."⁸

The second standard of capacity, the sliding-scale "contractual capacity" standard, applies to trusts and trust amendments that are more complex than ordinary wills.⁹ When a family trust addresses community property concerns, provides for the creation of multiple trusts, or contemplates estate tax consequences, the contractual capacity standard—outlined in the Due Process in Competence Determinations Act ("DPCDA") and codified in Probate Code sections 810 through 813—applies.¹⁰ To have capacity under the DPCDA, a person must be able to:

communicate verbally, or by any other means, the decision, and to understand and appreciate, to the extent relevant, all of the following: (a) The rights, duties, and responsibilities created by, or affected by the decision[,] (b) The probable consequences for the decision maker and, where appropriate, the persons affected by the decision[, and] (c) The significant risks, benefits, and reasonable alternatives involved in the decision.¹¹

This contractual capacity standard also applies when evaluating whether someone has the required capacity to enter into an ordinary contract or make a conveyance.¹² The party alleging a lack of capacity under this standard need only present evidence that a deficit in one or more enumerated mental functions significantly impaired the individual's ability to "understand and appreciate the consequences of his or her actions with regard to the type of act or decisions in question."¹³ The enumerated mental functions are grouped into four basic categories: (1) alertness and attention; (2) information processing; (3) thought processes; and (4) ability to modulate mood and affect.¹⁴

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III. MARITAL PROPERTY CHARACTERIZATIONS

Estate planners preparing estate planning documents for married couples should be aware of general presumptions affecting the characterization of marital property. California is a community property state that characterizes marital property as either separate property, community property, or quasi-community property.¹⁵ Separate property consists of both property owned by a married person before marriage and property acquired after marriage by gift, bequest, devise, or descent, as well as any rents, issue, or profits derived therefrom.¹⁶ Community property, in turn, consists of any property that a married person acquires during marriage while domiciled in California, regardless of where the property is situated.¹⁷ Three presumptions arise from these property classifications.

The first, the "community property" presumption, creates a rebuttable presumption at both divorce and death that all property acquired by spouses domiciled in California during marriage is community property.¹⁸ This presumption can be rebutted by proving by a preponderance of the evidence that a spouse had a separate property interest in the property.¹⁹"[V]irtually any credible evidence may be used to overcome [the presumption], including tracing the asset to a separate property source, showing an agreement or clear understanding between parties regarding ownership status and presenting evidence the item was acquired as a gift."²⁰ It is generally accepted that the appropriate standard of proof for overcoming a community property presumption is preponderance of the evidence.²¹

The second presumption is the "joint title" presumption, which presumes that property acquired during marriage in joint form, such as tenancy-in-common or joint tenancy, is community property.²² This presumption, codified at Family Code section 2581, applies only at dissolution of marriage or legal separation (not at death).²³ In contrast to the community property presumption, tracing and oral agreements cannot overcome the joint title presumption.²⁴ Rather, the joint title presumption can be rebutted only by clear and convincing evidence of "a clear statement in the deed or other documentary evidence of title by which the property is acquired that the property is separate property and not community property or proof that the parties have made a written agreement that the property is separate property."²⁵ When there is a conflict between this presumption and the community property presumption at divorce, the joint title presumption controls.²⁶

The final presumption with respect to property characterizations is the "form of title" presumption. The form of title presumption, codified at Evidence Code section 662, creates a presumption that title is as it is reflected in the documents through which the parties acquired title. This presumption applies when there is a division of property at dissolution of marriage or death.²⁷ The form of title presumption supersedes the community property presumption and is based on a public policy favoring the stability of titles to property.²⁸ The form of title presumption can only be rebutted with clear and convincing proof of "an agreement or understanding between the parties that the title reflected in the [instrument] is not what the parties intended."²⁹

Notwithstanding the foregoing presumptions, even if property is deemed community property, a spouse may establish a right to reimbursement for separate property funds expended on that community asset by tracing the funds. Spouses have a right to reimbursement for the use of separate funds used for "down payments, payments for improvements and payments that reduce the principal of a loan used to finance the purchase or improvement of the property."³⁰ However, there is no right to reimbursement for "payments of interest on the loan or payments made for maintenance, insurance, or taxation of the property."³¹ The reimbursement amount is limited to the net value of the property at the time of the division of the property.³² Married couples also can contractually waive their right to reimbursement for separate property contributions to a community asset—provided they do so in a signed writing.³³

On the other hand, when community funds are used towards payments on separate property assets, depending on the purpose of the payment, the community may obtain a proportionate interest in the separate property asset rather than a mere right to reimbursement. If community funds are used to make payments of principal on separate property assets, such as payment of the principal portion of a mortgage, the community receives a proportionate interest in the property.³⁴ If community funds are allocated towards improvements on separate property, the community only has a right to reimbursement of such funds.³⁵

Though the foregoing marital property presumptions lay the groundwork for determining the characterization of marital property, spouses may attempt to circumvent the presumptions by using transmutation agreements. Transmutation agreements must comply with strict requirements to alter property characterizations.

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IV. TRANSMUTATION IN MARITAL PROPERTY TRANSACTIONS

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