Mcle Self-study Article Until Death Do Us Part: Part Ii: Areas of Divergence Between Marital Property Division at Death and Divorce

• Jurisdiction: California,United States
• Publication year: 2022
• Citation: Vol. 28 No. 4

MCLE SELF-STUDY ARTICLE UNTIL DEATH DO US PART: PART II: AREAS OF DIVERGENCE BETWEEN MARITAL PROPERTY DIVISION AT DEATH AND DIVORCE

Written by James P. Lamping, Esq.^*

I. INTRODUCTION

This article is a sequel to Until Death Do Us Part: Marital Property Characterization in the Postmortem Setting (2015) 24 California Trusts and Estates Quarterly No. 4. The previous article pointed out that many of the rules governing the division of marital property characterization in divorce proceedings also apply in the postmortem setting. This article, by contrast, will focus on the differences between these two contexts.

The previous article included a discussion of the similarities between the rules governing property characterization in both settings. Prior to the publication of the previous article, the topic of tracing commingled community and separate property following death was often met with reactions ranging from skepticism to derision. However, the notion has subsequently gained wider acceptance. As litigation of these issues becomes more prevalent, the need to complete the analysis with a discussion of the distinctions between death and divorce became apparent.

This article is divided into two sections. The first section will provide an update of the development of case law relating to the similarities between death and divorce. The second section will focus on the salient differences between property characterization upon death as opposed to in marital dissolution proceedings.¹ This is not an exhaustive discussion of every possible area in which the rules diverge. The goal of this article is to provide the practitioner with an overview of the most commonly encountered differences.

II. FURTHER DEVELOPMENTS

A. Introduction

Several recent cases have implications for marital property characterization in the postmortem setting. Two of these cases, In re Brace (2020) 9 Cal.5th 903 and Estate of Wall (2021) 68 Cal.App.5th 168, have been addressed generally by other articles in the Trusts and Estates Quarterly.² Those cases are briefly summarized here to lay a foundation for discussion regarding their implications for marital property characterization in the postmortem setting. These cases are significant and warrant a careful reading.

B. The California Supreme Court's In Re Brace Decision

In Brace, a married couple acquired real property in joint tenancy.³ The question presented to the California Supreme Court was whether the joint tenancy property was community property for bankruptcy purposes, or whether each spouse owned a one-half interest as his or her respective separate property.⁴ Specifically, the issue presented was the operation of the potentially conflicting form of title presumption and the presumptions created under the Family Code.⁵ The traditional application of the form of title presumption would result in the joint tenancy asset being characterized as the separate property of the spouses, whereas the presumptions under the Family Code would cause it to be characterized as community property.⁶

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As noted by the court in Brace, property held in joint tenancy between spouses had historically been treated as separate property upon divorce as a general matter under the form of title presumption; however, a gradual evolution in the law led to a community property presumption increasingly gaining traction.⁷ Among other things, Family Code section 760 creates a rebuttable presumption that assets acquired during marriage are community property.⁸ Notably, this presumption may be overcome by tracing the source of acquisition to a separate property source.⁹

The debtor-spouses in Brace argued that Family Code section 760 only applied between spouses in marital dissolution proceedings, whereas the bankruptcy trustee argued that the statute also applied in relation to third parties, such as creditors.¹⁰ After examining the legislative history and the applicable case law, the Brace court concluded that Family Code section 760 applied to third parties (such as creditors) in addition to parties to marital dissolution proceedings.¹¹ As a result, the creditor could treat the joint tenancy property as community property.¹² As discussed in detail below, the Brace decision specifically mentioned that joint tenancy property would not be characterized as community property upon the death of the first spouse.¹³

C. Trenk Turns the Tables on Creditors

The holding in Brace that real estate held in joint tenancy between spouses would be treated as community property in relation to third parties appeared to benefit creditors. Subsequent case law demonstrated otherwise.

In Trenk v. Soheili (2020) 58 Cal.App.5th 1033, an attorney was sued for malpractice.¹⁴ To settle the dispute, the attorney agreed to make payments to the client.¹⁵ The obligation was secured by real property that the attorney held in joint tenancy with his wife; however, the wife did not execute the note or deed of trust.¹⁶ The attorney eventually stopped making payments.¹⁷ A foreclosure was then initiated by the client's sister, who the client designated as the beneficiary on the deed of trust.¹⁸

The attorney and his wife filed an action arguing that the security interest should be voided.¹⁹ The court agreed. Family Code section 1102, subdivision (a) requires that a deed of trust secured by community property real estate be executed by both spouses.²⁰ According to the Trenk court, Brace made it clear that an asset held in joint tenancy between spouses would generally be treated as community property in relation to third parties—including creditors.²¹ Inasmuch as the joint tenancy property held by the attorney and his wife was to be treated as community property in relation to creditors, the fact that the attorney's wife had not signed the note and deed of trust rendered them voidable under Family Code section 1102.²²

It bears mention that the Trenk decision went to great lengths to describe the lack of evidence presented at trial to rebut the community property presumption.²³ Under different circumstances and with different evidence, the outcome might have been different. Trenk also presented an unusual fact pattern. A safe assumption is that most creditors would require both joint tenants to agree to a security interest in real property. Consequently, it is unlikely that the factual scenario in Trenk will arise often. That said, Trenk offers an interesting counterpoint to the creditors in Brace who benefited from the characterization of joint tenancy real property as community property.

D. An Off the Wall Decision

Estate of Wall (2021) 68 Cal.App.5th 168 has the dubious distinction of misinterpreting not one—but two—California Supreme Court decisions in this author's opinion, calling into question its value as precedent. Practitioners should nevertheless be aware of the decision so they may provide an analysis on the arguably incorrect premise on which the court based the decision.

In Estate of Wall, a husband and wife wanted to take title to their home in joint tenancy; however, they were unable to obtain financing due to the wife's credit history.²⁴ The husband purchased the property in his name alone and encouraged the wife to sign a quitclaim deed, but repeatedly assured the wife that she would be added to title in the future.²⁵ Additionally, the wife had contributed funds towards the acquisition, maintenance, and improvement of the property.²⁶ Upon the husband's death, title remained in the husband's name alone.²⁷

The wife filed a petition in probate court seeking an order that the property was community property.²⁸ The wife argued that the property was presumed to be community property under Family Code section 760 because it was acquired during the marriage.²⁹ Additionally, the wife argued that the husband's actions breached the husband's spousal fiduciary duties to the wife.³⁰ The husband's children objected.³¹ Among other things, they pointed to the presumption under Evidence Code section 662 that the title in the husband's name alone accurately reflected the underlying ownership.³²

The trial court determined that the presumption that an asset acquired during marriage is community property prevailed over the presumption that title to the real property accurately reflected ownership.³³ The trial court relied upon Justice Chin's concurring opinion in In re Marriage of Valli (2014) 58 Cal.4th 1396, which stated that the community property presumption prevailed

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over the form of title presumption in litigation between the spouses.³⁴ For purposes of these presumptions, the trial court held that the children essentially stepped into the shoes of the deceased spouse.³⁵ The trial court found tracing evidence to be "interesting," although not dispositive.³⁶ The trial court concluded that the deceased spouse breached his spousal fiduciary duties to the surviving spouse and awarded the property to the surviving spouse.³⁷

The Wall decision pointed to excerpts from Brace stating that the form of title presumption trumped the community property presumption upon the death of the first spouse.³⁸ However, Brace involved property held in joint tenancy between the two spouses, whereas Wall involved real property titled in the name of one spouse alone.³⁹ The Wall decision failed to recognize that critical distinction and instead purported to apply Brace's joint tenancy analysis to property held in the name of one spouse alone. The reasoning of the Wall decision was premised upon an incorrect application of Brace, and therefore its conclusion was incorrect in this author's opinion.

Joint tenancy is inherently different from property titled in one person's name alone at death. Property properly held by two people in joint tenancy passes outright to the surviving joint tenant upon the first death. Two spouses holding property in joint tenancy produces the same result. The deceased spouse's decision to leave the asset outright to the surviving spouse through the joint tenancy therefore...