Transmutation by Deed in California Is a Risky Business

• Publication year: 2020
• Author: By Rosemary B. La Puma, Esq. and Andrea L. Kushner, Esq.

TRANSMUTATION BY DEED IN CALIFORNIA IS A RISKY BUSINESS

By Rosemary B. La Puma, Esq.^* and Andrea L. Kushner, Esq.^**

MCLE Article

I. INTRODUCTION

Two recent California cases analyzed the validity of transmuting property by real property deed. Both cases based a portion of their analysis on the form of title.¹ However, evidence of form of title in characterizing property contradicts In re Marriage of Valli, which stated that the general presumption in Family Code section 760, that all property acquired during marriage is community property, trumps the form of title presumption in Evidence Code section 662 when characterizing property.² Accordingly, these new cases have created uncertainty for estate planners in the area of real property transmutation. Part II of this article discusses the law to date regarding transmutation by deed, generally and specifically. Part III reviews In re Marriage of Kushesh & Kushesh-Kaviani and In re Marriage of Begian & Sarajian, the two recent cases that partly rely on form of title evidence in analyzing the validity of a transmutation by deed. Part IV addresses the necessity of an analysis of undue influence after a finding of a valid transmutation by deed. Part V explains the history of transmutation law, the public policy behind the current transmutation law, its similarity to the policy behind the California Uniform Premarital Agreement Act (CUPAA), and how the new cases frustrate this policy. Finally, Part VI enumerates suggestions for estate planners to avoid testifying at their clients' divorce trial, being sued for malpractice, and violating the Rules of Professional Conduct when transmuting real property as part of an estate plan.

II. OVERVIEW OF CURRENT CALIFORNIA LAW REGARDING TRANSMUTATION A. California Transmutation Statutes

California's transmutation provisions are found in Family Code sections 850 to 853. Subject to the fraudulent transfer rules,³ spouses by written agreement may convert separate property to community property, or vice versa.⁴ Statements in wills do not qualify as a transmutation, at least not until after the death of the testator.⁵ A joinder or consent to a non-probate transfer that meets the transmutation requirements outlined in Family Code section 852 is effective.⁶

The actual transmutation statute reads as follows:

A transmutation of real or personal property is not valid unless made in writing by an express declaration that is made, joined in, consented to, or accepted by the spouse whose interest in the property is adversely affected.⁷

The statutes do not define "writing" or "express declaration."⁸ Furthermore, the statutes do not describe the manner in which an "adversely affected" spouse must consent to, join in, or accept a transmutation.⁹ As a result (and not surprisingly), transmutations have been the subject of much litigation in California courts.¹⁰ A review of the relevant case law is necessary to understand the complexities of California's transmutation doctrine.

B. California Transmutation Cases

1. Pre-1985 Oral Transmutation

Before January 1, 1985, California recognized that transmutation agreements between spouses could be oral, or even based on some evidence of an "agreement or understanding" between them.¹¹ Estate of Raphael involved a dispute over whether the decedent's property was his separate property, as alleged by his brother and administrator of his estate, or whether his property was community property, as claimed by his widow.¹² The trial court found that the decedent transmuted all his separate property into community property after he married.¹³ The trial court relied on the decedent's widow's testimony that the decedent told her that they were partners, as well as the parties' income tax returns (wherein each spouse reported half of their earnings) as evidence of the oral transmutation agreement.¹⁴ The decedent's brother appealed the ruling.¹⁵ The Court of Appeal affirmed the trial court's ruling:

The object of the oral agreement of transmutation was fully performed when the agreement was made for it immediately transmuted and converted the separate property of each spouse into community property, and nothing further remained to be done. The income tax returns for 1941 through 1944 constitute evidence of the fact that the parties regarded their property as community property.¹⁶

The Court of Appeal reached a similar result in Estate of Nelson.¹⁷ Nelson involved real property acquired by husband prior to the marriage.¹⁸ Approximately two weeks before the marriage, husband presented wife with a premarital agreement confirming that the property was his separate property.¹⁹ Husband assured wife that the agreement did not mean anything during the marriage, and he was just having her sign it because he had issues with his first wife.²⁰ During the marriage, husband referred to the property as belonging to both of them.²¹ The couple filed joint state income tax returns reporting the property's income, which was only permitted at that time for reporting community income.²² Wife was also involved in the management of the property.²³ The trial court held that the premarital agreement was invalid, and that the property was transmuted from husband's separate property to the parties' community property by oral agreement.²⁴ The Court of Appeal affirmed, holding that enough evidence of transmutation was presented at trial:

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Whether the statements and conduct of Nelson indicated an intent to transmute his separate property into a community interest was a question for the trier of fact [citation] and we conclude that there is clearly sufficient evidence to support the court's finding in this regard.²⁵

However, the Court of Appeal arrived at a different result in In re Marriage of Jafeman.²⁶ In Jafeman, the trial court considered a divorce dispute regarding the residence in which the parties lived during the course of their marriage.²⁷ Husband owned the home prior to their marriage.²⁸ The trial court held that the character of the home was community property based on testimony that the parties referred to the residence as "our home."²⁹ However, the Court of Appeal found that the testimony was in conflict, with the wife testifying that the property was always referred to as "our home," and the husband asserting that the parties always distinguished between his residence and the wife's residence.³⁰ The Court of Appeal reversed, explaining that "the mere fact that Edward [husband] referred to the residence as 'our home' does not constitute substantial evidence of an intent to relinquish his separate property interest in the property."³¹

The Law Revision Commission recommended amending the Civil Code to require more formality around transmutation agreements to minimize litigation of this issue in dissolution proceedings. In response, the Legislature enacted Family Code section 852 in 1984.³² The cases discussed above demonstrate the uncertainty that a lack of formality can create. As discussed more fully below, permitting transmutation by real property deed creates a lack of certainty that defeats the purpose of the 1984 legislative amendments.

2. Post-1985 Transmutation "Express Declaration" Requirement

The California Supreme Court addressed the requirements for a valid transmutation under Family Code sections 850 to 853 (formerly Civil Code sections 5110.710 to 5110.740) in Estate of MacDonald.³³ In that case, the spouse of an IRA account holder signed a "consent" to a beneficiary designation.³⁴ In holding that the consent did not constitute a transmutation of wife's community property rights, the Supreme Court first determined the plain language of the statute required the instrument contain an "express declaration" evidencing an intent to transmute the property:

In our view, the Legislature cannot have intended that any signed writing whatsoever by the adversely affected spouse would suffice to meet the requirements of [Family Code section 852, subdivision (a)]. First, to so construe that statute would render mere surplusage all the language following the words "unless made in writing," including the phrase "an express declaration."³⁵

The Supreme Court then proceeded to create a bright line test for determining the validity of purported transmutation agreements between spouses. It interpreted the "express declaration" provision of the identically-worded predecessor statute to section 852(a) as requiring language which expressly states that a change in the characterization or ownership of the property is being made:

[W]e conclude that a writing signed by the adversely affected spouse is not an "express declaration" within the meaning of [the statute] unless it contains language which expressly states that the characterization or ownership of the property is being changed.³⁶

The McDonald Court also held that the determination of whether the language of a writing purporting to transmute property meets this test must be made by reference to the writing itself, without resort to parol evidence.³⁷ Applying this test, the Court held it was not met in this case.³⁸ However, the majority explained that it is not necessary to use such words as "transmutation," "community property," or "separate property."³⁹

Later, in Valli, the Supreme Court considered a $3.75 million life insurance policy purchased with community property funds by singer Frankie Valli.⁴⁰ Frankie named his wife, Randy, as the owner of the policy.⁴¹ At divorce, Randy argued that the policy was her separate property and that the "form of title" presumption applied.⁴² Frankie argued that the general community property presumption applied and that naming Randy as the owner of the policy did not fulfill the requirements to transmute the policy from community property to Randy's separate property.⁴³ The Supreme Court held that "unless the statutory transmutation requirements have been met, the life insurance is community property."⁴⁴ Justice Chin's concurring opinion explains that...