"i Do ... Owe You What Now?": Spousal Fiduciary Duties and Their Impact on Trust and Estate Practitioners

• Citation: Vol. 22 No. 4
• Publication year: 2016
• Author: By Robert Gorini, Esq.,* Ryan Cunningham, Esq** and Michael Gorini, Esq.*

"I DO ... OWE YOU WHAT NOW?": SPOUSAL FIDUCIARY DUTIES AND THEIR IMPACT ON TRUST AND ESTATE PRACTITIONERS

By Robert Gorini, Esq.,* Ryan Cunningham, Esq^.** and Michael Gorini, Esq.*

I. INTRODUCTION AND OVERVIEW

The United States and California constitutions protect marriage as a fundamental right.¹ The Supreme Court calls the institution "a keystone to the Nation's social order."² In an opinion foreshadowing much of the recent right-to-marriage litigation, the Supreme Court of Massachusetts observed that marriage "fulfils yearnings for security, safe haven, and connection that express our common humanity," that "the decision whether and whom to marry is among life's momentous acts of self-definition" and that "the benefits accessible only by way of a marriage license are enormous, touching nearly every aspect of life and death."³

This article will not touch every aspect of life and death. Instead, the authors explore the rights and duties flowing from the esteemed institution, in particular those rights and duties as they intersect with rising societal concerns with elder abuse.⁴ Specifically, this article examines those portions of the Family Code providing the legal foundation for spousal fiduciary duties; the Lintz v. Lintz⁵ decision applying those code sections in the estate planning context; the issues facing estate planning attorneys as they navigate this field; and the authors' thoughts on balancing the competing interests involved in preserving access to the right to marry, while protecting elders (and individuals with diminished legal capacity) from abuse.

"I do." It is a beguilingly simple affirmation. It requires only the most basic cognitive understanding, yet launches an array of duties bewildering to even an experienced family law or probate attorney. Resolution of that tension is beyond the scope of this article. So, too, is divorce.

Rather, the goal of this article is to start a conversation. Access to marriage and the protection of elders are both, fundamentally, about human dignity. Thus, the authors concede that this detailed analysis of existing spousal fiduciary duties, presumptions, and case law would be a beggarly way to conclude a discussion on such an important issue. But, perhaps, it is not the worst way of starting one.

II. SPOUSAL FIDUCIARY DUTIES OUTLINED BY THE CALIFORNIA FAMILY CODE

A. Community Property and Separate Property Characterization

The California Family Code primarily defines the fiduciary duty spouses owe to one another in sections 721, 1100, and 1101. Although these sections integrate aspects of the California Corporations Code relating to duties non-marital partners owe each other, the foundation of spousal fiduciary duties is dictated in substantial part by the distinction between community property and separate property, an issue not present in the business-entity context. In the realm of spousal fiduciary duties, characterization of property is critically important.

Courts answering the characterization question have long recognized that the "most basic characterization factor is the time when property is acquired in relation to the parties' marital status."⁶ The well-known presumption for California clients is that property obtained during marriage, or from fruits of the community effort, will be community property (net of community expenses). Assets owned prior to marriage, obtained during marriage as a consequence of owning separate-property assets (such as rents from separate property rental apartments), or received by bequest or gift during marriage, constitute separate property.⁷ A spouse claiming that property obtained during marriage constitutes separate property, as opposed to community property, must prove that claim by a preponderance of the evidence.⁸ The community property presumption supersedes the form-of-title presumption found in California Evidence Code section 662. Thus, evidence of title held solely in a spouse's name alone is insufficient to rebut the presumption, though it may seem sufficient to surpass a preponderance of the evidence standard.⁹ Likewise, tracing income derived from a separate property asset that is deposited into a jointly-held bank account would supersede the joint title on the bank account itself.

Spouses owe different duties to each other depending on the community or separate property nature of the assets (and expenses) being controlled. Specifically, spouses owe a higher duty to one another when transacting with community property (or the other spouse's separate property) than they owe each other when dealing with their own separate property. However, some practitioners may be surprised to learn that spouses may still owe some spousal duties to the other with respect to their own separate property to the extent spouses still must provide one another "support" under Family Code section 720 or make certain disclosures regarding the nature of separate property assets. The authors note that although these types of claims solely as to separate property are uncommon, the existence of the rights and consequent duties placed upon a spouse with regard to separate property assets do likely exist. However, for the practical reasons explained below, such potential rights are likely subsumed by other fiduciary duties that may arise prior to any litigated situation.

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B. California Family Code section 721

Family Code section 721 sets out the basic fiduciary duty spouses owe one another in inter-spousal transactions:

(a) Subject to subdivision (b), either spouse may enter into any transaction with the other, or with any other person, respecting property, which either might if unmarried.
(b) Except as provided in Sections 143, 144, 146, 16040 and 16047 of the Probate Code, in transactions between themselves, spouses are subject to the general rules governing fiduciary relationships that control the actions of persons occupying confidential relations with each other. This confidential relationship imposes a duty of the highest good faith and fair dealing on each spouse, and neither shall take any unfair advantage of the other. This confidential relationship is a fiduciary relationship subject to the same rights and duties of nonmarital business partners, as provided in Sections 16403, 16404, and 16503 of the Corporations Code, including, but not limited to, the following:

(1) Providing each spouse access at all times to any books kept regarding a transaction for the purposes of inspection and copying.
(2) Rendering upon request, true and full information of all things affecting any transaction that concerns the community property. Nothing in this section is intended to impose a duty for either spouse to keep detailed books and records of community property transactions.
(3) Accounting to the spouse, and holding as a trustee, any benefit or profit derived from any transaction by one spouse without the consent of the other spouse that concerns community property.

As is readily apparent, the confidential relationship between spouses imposes a duty of the highest good faith and fair dealing on each spouse, and neither shall take any unfair advantage of the other (referred to by some courts as a "duty of good faith").

1. Duty of Disclosure under Section 721

The fiduciary relationship described by Family Code section 721 is subject to some of the same rights and duties of non-marital business partners as provided in Corporations Code sections 16403, 16404, and 16503. These Corporations Code sections deal primarily with access to, and production of, information and accountings, despite the fact that Family Code section 721 specifically states there is no duty obligating either spouse to maintain such records.¹⁰ Despite this language, courts have focused on language in Corporations Code section 16403 requiring each partner to furnish to all other partners "without demand, any information concerning the partnership's business and affairs reasonably required for the proper exercise of the partner's rights and duties under the partnership agreement." Courts have held that this language provides an affirmative duty to provide records or make a showing that the records were always available and obtainable by the non-managing spouse, and it seems that courts have declined to hold an uninformed spouse liable for failure to "request" any salient information.¹¹ Corporations Code section 16403 also includes language mandating that the controlling or managing spouse affirmatively provide information to allow for the proper exercise of the other spouse's rights and duties. Practically speaking, though, this degree of strict bifurcation of particular duties that regularly occurs in a business setting rarely occurs in a marriage, making this duty difficult to enforce without some form of inquiry or need by the non-controlling spouse.

Moreover, while Family Code Section 721, subdivisions (b)(2) and (3), specifically mention community property, courts have expanded this section to cover transactions and matters affecting a spouse's separate property, reasoning that such expansion is in keeping with public policy and spouses' duties to exercise the "highest good faith and fair dealing" and to refrain from taking "unfair advantage of the other."¹²In In re Marriage of Walker, a wife managed the finances, in particular the husband's separate property IRA account, and made significant withdrawals for the benefit of the community and to pay for community expenses, at a time when the community property estate was otherwise exhausted.¹³ The court there found that, despite the separate property nature of the property, Section 721 did place upon the wife a duty of affirmative disclosure to the husband as to these assets.

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However, California courts have refused to interpret the statutes creating spousal fiduciary duties as encompassing all duties found in the Corporations Code.¹⁴ Thus, although there is a duty to maintain records under the Corporations Code...