Recent Developments in Family Law

COURT FINDS THAT FAMILY CODE §853 DOES NOT APPLY TO ESTATE PLANNING TRUST INSTRUMENTS. IN RE MARRIAGE OF HOLTEMANN (2008) 166 Cal.App. 4th 166.

SYNOPSIS

Husband (H) and wife (W) separated after less than 3 years of marriage. H had considerable assets and W had few. To eliminate the need for probate and to reduce taxes in the event of H’s death, H and W consulted with an estate planning attorney. A living trust and “Spousal Property Transmutation Agreement” were prepared. The Agreement provided that the document was created solely for interpreting how property shall be disposed at the death of the parties and not in contemplation of separation or martial dissolution. Nevertheless the court of appeal affirmed the trial court’s decision that the Agreement effectuated a transmutation of separate property to community property.

FACTS

H and W separated in 2006 after a 3 year marriage. When the parties married, H had considerable assets and W had few.

During the marriage H and W jointly retained an Estate Planning Attorney to prepare Estate Planning documents that would eliminate the need for probate and minimize taxes in the event of either spouse’s death. The parties executed a “Spousal Property Transmutation Agreement” and a “Holtemann Community Property Trust.” An introductory provision of the Transmutation Agreement provided, “The parties are entering into this agreement in order to specify the character of their property interests pursuant to the applicable provisions of the California Family Code. This agreement is not made in contemplation of a separation or marital dissolution and is made solely for the purpose of interpreting how property shall be disposed of on the deaths of the parties.” The Transmutation Agreement also provided, “Husband agrees that the character of the property described in Exhibit A (including any future rents, issues profits, and proceeds of that property) is hereby transmuted from his separate property to the community property of both parties . . . The parties further acknowledge that, but for such agreed disposition of the subject property, [H] would not have affected the within transmutation of his separate property into community property. Wife agrees not to amend, modify or change the dispositive provisions of any of the trusts established pursuant to said declaration of trust without husband’s prior written consent and agreement.”

The trust provided that it was created to hold the parties’ community property which was created by the transmutation of the separate property of H concurrently with the execution of the trust. It further stated that each party acknowledged that the transmutation of H’s separate property into community property was “undertaken upon the condition of and with this trust instrument in mind”, in particular with the disposition of the trust estate upon the death of the parties and that but for such agreed disposition, H would not have affected the transmutation of his separate property into community property.

The parties agreed to bifurcate the issue of the validity of the transmutation agreement. The trial court found that under the express terms of the transmutation agreement, H had transmuted his separate property identified in Exhibit A to community property.

APPELLATE COURT DECISION

The court of appeal affirmed. On appeal, husband argued that the estate planning documents were not sufficiently specific to transmute his separate property to community property. He said the language in both documents indicating that the documents were executed solely for estate planning purposes rendered his intent ambiguous. The court of appeal rejected this argument. Family Code § 850(b) provides that married persons may transmute the separate property of either spouse into community property by agreement or transfer, subject to the provisions of §§ 851 to 853. Section 852(a) provides, “A transmutation of real or personal property is not valid unless made in writing by an expressed declaration that is made, joined in, consented to, or accepted by the spouse whose interest in the property is adversely affected.” An express declaration is language expressly stating that a change in the characterization or ownership of the property is being made.

A writing signed by the adversely affected spouse is not an express declaration for purposes of § 852(a) unless it contains language which expressly states that the characterization or ownership of the property is being changed. The court of appeal noted that the transmutation agreement and trust repeatedly referenced the transmutation of H’s separate property into community property. Rejecting H’s argument that the statement in the transmutation agreement that the document was made solely for the purpose of interpreting how property shall be disposed of on the death of the parties, the court of appeal found that regardless of the motivations underlying the documents, they contain the requisite express, unequivocal declarations of a present transmutation.

H next argued that the transmutation was limited to estate purposes only. The court of appeal rejected this argument, explaining that it was not aware of any authority for the proposition that a transmutation, once affected, can be limited in purpose or otherwise rendered conditional or temporary. Once the character of the property has been changed, a “re-transmutation” can only be achieved by an express agreement to that effect that independently satisfies the requirements of § 852(a).

Finally, H argued that the transmutation and trust are governed by § 853(a) which provides, “A statement in a will of the character of property is not admissible as evidence of a transmutation of property in a proceeding commenced before the death of the person who made the will.” The court concluded that H failed to demonstrate that §853 is intended to apply to anything other than wills.

COMMENTS

Be careful what you sign! It is very common for married couples to visit an estate planning attorney. The attorney will prepare numerous documents that the parties sign without a careful reading or true understanding of the documents legal effect. If you have a will, trust, or documents prepared by an estate planning attorney it might be wise to review those documents to be sure you understand their legal effect.