Transmutation and the Ascendance of Undue Influence

• Citation: Vol. 14 No. 3
• Publication year: 2008
• Author: By Howard S. Klein, Esq.

TRANSMUTATION AND THE ASCENDANCE OF UNDUE INFLUENCE

By Howard S. Klein, Esq.^*

I. INTRODUCTION

California law pertaining to transmutations has a checkered history. As outlined in this article, while statutory changes in 1985 promised to provide some clarity, the injection of undue influence law has, to an extent, muddled the picture once again.

Briefly, transmutation involves not merely the interspousal transfer of title to property, whether from a spouse's separate property to the other spouse's separate property or to community property, or the transfer of community property title to the separate property of a spouse; transmutation involves the intentional transfer of beneficial interest in that property.¹ Transmutation has implications both from an estate planning perspective and from a family law - marital dissolution or legal separation - perspective.²

People transmute property for a variety of reasons, including to:

• Obtain a step-up in basis for both halves of community property on the death of the first spouse.³
• Acquire a loan, or better loan terms, where one's spouse has better credit, and the lender relies on the credit of that spouse.
• Obtain asset protection, by removing the debtor spouse from title to property.
• Make a gift of one-half of one's separate property to a spouse.
• Facilitate estate planning vehicles such as Grantor Retained Annuity Trusts, Qualified Personal Residence Trusts and Irrevocable Life Insurance Trusts.
• Obtain fractional discounts on the transfer of real property or minority discounts on the transfer of closely held stock.

While the purposes for transmuting often appear straightforward at the time of the transaction, California practitioners have often learned the hard way that a transmutation should be carried out carefully, with full disclosure, and in strict compliance with statutory requirements. Even so, while the statutory requirements have evolved through the years, the application of undue influence to the area of transmutation has also evolved, undermining to a degree the certainty sought by practitioners and brought by statute.

II. TRANSMUTATION BEFORE 1985

Until January 1, 1985, California practitioners could not be certain of what constituted a valid, enforceable transmutation. The law permitted oral or implied transmutations. Family Code section 721 provided that either spouse could enter into any transaction with the other, or with any other person respecting property, which either might if unmarried, so long as the transaction was fair and there was full disclosure of relevant facts. A transmutation could be based upon an oral or written agreement,⁴ and the mutual consent of the parties would provide the consideration to support transmutation.⁵Mutual consent could be established by presenting substantial evidence of an implied agreement between husband and wife for that purpose.⁶ The acts and conduct of the spouses in dealing with the property, as proven by the testimony of one of the spouses, could establish an oral agreement.⁷ Later, in In re Marriage of Weaver, the Court of Appeal held that a spouse must prove a pre-1985 oral transmutation of separate property to community property by clear and convincing evidence.⁸

As the Law Revision Commission observed in its 1984 study of transmutation law, this possibility of oral or implied transmutations fostered creative or even fraudulent attempts at transmutation in dissolution proceedings: "It encourages a spouse, after the marriage has ended, to transform a passing comment into an agreement or even to commit perjury by manufacturing an oral or implied transmutation. The convenience and practice of informality recognized by the rule permitting oral transmutations must be balanced against the danger of fraud and increased litigation caused by it."⁹

III. THE STATUTORY CHANGE EFFECTIVE 1985: IN SEARCH OF CERTAINTY

Effective January 1, 1985, former Civil Code sections 5110.710-.730 were enacted and were subsequently recodified effective January 1, 1994 as Family Code sections 850-853. These statutes perpetuated the existing law for pre-1985 transmutations,¹⁰ but required prospectively that valid transmutations of real or personal property (a) be made in writing, (b) by an express declaration (c) that is made, joined in, consented to, or accepted by the spouse whose interest in the property is adversely affected.¹¹

These requirements for transmutation are expressly made inapplicable to interspousal gifts of tangible articles of a personal nature used solely or principally by the donee spouse and that are not substantial in value.¹² The statute further provided that a statement in a will cannot be used as evidence of transmutation in a family law case in a proceeding commenced before the testator's death.¹³ However, this rule of non-admissibility does not apply to statements in living trusts.

IV. INTERPRETATION AND CLARIFICATION OF THE STATUTORY CHANGE

Following the enactment of the statute requiring written transmutations, several appellate opinions have interpreted the statutory

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language, and a legislative change further clarified the matter. The leading transmutation case is the California Supreme Court opinion in Estate of MacDonald.¹⁴ In MacDonald, the Supreme Court held that a writing signed by the adversely affected spouse does not qualify as an "express declaration" under Family Code section 852 unless it contains language that expressly states that the characterization or ownership of property is being changed. However...