Tips of the Trade: Brace Yourself: Why in Re Brace May Prove 2020's Most Significant Non-probate, Non-trust Case for California Probate and Estate Planning Practitioners

• Publication year: 2021
• Author: By William Broderick-Villa, Esq.*

TIPS OF THE TRADE: BRACE YOURSELF: WHY IN RE BRACE MAY PROVE 2020'S MOST SIGNIFICANT NON-PROBATE, NON-TRUST CASE FOR CALIFORNIA PROBATE AND ESTATE PLANNING PRACTITIONERS

By William Broderick-Villa, Esq.*

MCLE Article

A major benefit of membership in the Trusts and Estates Section of the California Lawyers Association is the Trusts and Estates Quarterly, which often points the practitioner to relevant crossover areas of law that might otherwise escape one's radar. Two excellent, recent family law crossover articles¹ have a wealth of information to help the practitioner avoid common pitfalls. This article builds on that and analyzes the probate and estate planning ramifications of a crossover bankruptcy/family law case decided by the California Supreme Court on July 23, 2020: In re Brace.² This article specifically seeks to answer the following questions:

1. Is every California Joint Property ("JP") deed (in the form "To H and W as joint property" or "To H and W as joint tenants") presumptively invalid absent a written transmutation agreement?
2. If so, as In re Brace strongly suggests, who has standing to challenge such mischaracterization?
3. What duties does In re Brace impose upon the estate planning attorney who comes across married clients' deeds purportedly showing title in joint tenancy?
4. When three parties, two of whom are married, purport to hold title as "joint tenants," must the attempted joint tenancy fail, as a matter of law, resulting, by default, in a tenancy in common as to the unmarried party?

In re Brace is a bankruptcy case certified to the California Supreme Court by the Ninth Circuit. As such, it might be easy to overlook its probate and estate planning ramifications. In re Brace reaffirms that the community property presumption set forth in Family Code section 760 trumps the form of title presumption³ set forth in Evidence Code section 662. The case then confirms third-party standing to challenge joint tenancy characterization. In In re Brace, a third party (the bankruptcy trustee of one of the spouses) successfully re-characterized a joint property designation as community property. The reasoning in also applies outside the bankruptcy context, as will be argued in this article, with significant ramifications for the estate planning and litigation bar.

I. FOUR COMMON LAW UNITIES OF JOINT TENANCY; A REFRESHER

At common law, in order to create a valid joint tenancy,⁴ four "unities" are essential: time, title, interest, and possession.⁵ If one of the unities is absent or fails, the joint tenancy fails, and a tenancy in common results.⁶

Among other requirements, all tenants must have equal interests as to the joint tenancy interest⁷ (one of the required "unities") to own property under in joint tenancy.

The equality of interest requirement simply means that the interests of the joint tenants in the subject or interest involved in the joint tenancy must be equal.... [I]f A, B and C own Blackacre in joint tenancy and A conveys his interest to B, such conveyance would destroy that interest in joint tenancy, and B would become, as to that interest, a tenant in common with C. But B and C would still remain joint tenants as to the interest originally acquired.⁸

If a joint tenancy is not created, a tenancy in common generally results where circumstances do not indicate partnership or community property ownership.⁹ Therefore, a declaration of joint tenancy in a deed is not dispositive of whether or not a joint tenancy has in fact been created.¹⁰

II. TRUE JOINT TENANCY INTERESTS ARE SEPARATE PROPERTY (AS OPPOSED TO COMMUNITY PROPERTY) INTERESTS

To eager realtors and homebuyers (and perhaps a few careless attorneys), it might seem immaterial whether spouses take title in "joint property" or in "community property." A lay person might be excused for conflating "joint" and "community." In common parlance, the words have a superficial similarity. But attorneys need to be more exacting and precise in distinguishing the concepts. Especially in light of In re Brace, which again reaffirms the longstanding rule that "joint property" is a separate property interest.¹¹ Conversely, "community property" cannot be jointly held.¹² The distinction has consequences beyond the Family Law Code and family court. For instance, a judgment creditor of one spouse is allowed to reach the community

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property of both spouses (including that of the non-judgment debtor spouse) to satisfy a judgment debt.¹³ In contrast, separate property of a non-judgment debtor spouse is beyond the reach of the other spouse's judgment creditors.¹⁴

California is a community property state, and all property acquired during marriage is presumptively community property.¹⁵ Nevertheless, in the experience of this author, the vast majority of spouses¹⁶ wanting to fund property into their trust hold that property, on title at least, as "joint tenants." Nor is this a recent issue.¹⁷ Many people are unaware of how title is held (and, even when made aware, still cannot explain the differences between joint property, community property, and tenancy in common. The Supreme Court reaffirmed the supremacy of the community property presumption (set forth in Family Code section 760) over the form of title presumption (set forth in Evidence Code section 662). Spouses may hold property acquired after marriage as "separate property," but to do so there must be a written (since 1985) transmutation agreement.¹⁸ Spouses cannot rely on the language of joint tenancy in the deed, standing by itself, as the necessary written transmutation evidence.¹⁹ In other words, an explicit and valid transmutation agreement is required.²⁰

Spouses may not transmute community property without written consent of the spouse whose interest in the property is adversely affected.²¹ Spouses desiring the jus accrescendi (or right of survivorship) no longer need to transmute community property into a joint tenancy. Since the year 2001, California law has allowed an option to hold community property with right of survivorship.²² Because, as In re Brace notes,²³ "[t]he particular manner in which property is acquired, titled, or held by a married couple is conceptually and legally distinct from the underlying character of the spouses' ownership of the property as separate or community." A closer examination follows comparing the manner in which property is titled versus the underlying character of the ownership of the property, under various scenarios.

A. Hypothetical One: Spouses and a "Third Wheel"

Imagine a deed granted to three people (two of whom are married), such as "To H and W and Brother-in-law, All as Joint Tenants." Absent a separate written transmutation agreement between H and W, the spouses really hold their combined two-thirds interest as community property, not as the separate property suggested by the titling in "joint tenancy." This much is clear from In re Brace.²⁴ But what about the third wheel: brother-in-law?

Civil Code section 686 provides the default rule and framework for analyzing brother-in-law's interest. It states:

Every interest created in favor of several persons in their own right is an interest in common, unless acquired by them in partnership, for partnership purposes, or unless declared in its creation to be a joint interest, as provided in Section 683, or unless acquired as community property.

Brother-in-law, as the third wheel, is not part of the marital community and thus does not hold community property. Nor does he hold his interest "in partnership, for partnership purposes" (under the facts presented). Therefore, either he...