Recent Developments in Family Law

SUPREME COURT FINDS THAT PURCHASES MADE BY ONE OR BOTH SPOUSES FROM A THIRD PARTY WITH COMMUNITY FUNDS DURING THE MARRIAGE ARE NOT EXEMPT FROM THE TRANSMUTATION REQUIREMENTS FOR CONVERTING COMMUNITY PROPERTY TO SEPARATE PROPERTY. IN RE THE MARRIAGE OF VALLI (2014) 58 Cal.4th 1396

FACTS

During the marriage, the Husband (H) used community property funds from a joint bank account to purchase a $3.75 million dollar insurance policy on his life, naming his Wife (W) as the sole owner and beneficiary. Until the parties’ separation, the premiums on the policy were paid with community property funds from a joint bank account. H argued that the policy was community property because it was purchased during the marriage with community funds. W argued that the policy was her separate property because H arranged for the policy to be put solely in her name, thereby changing the policy’s character from community property to separate property.

The trial court ruled that the insurance policy was community property because it was acquired during the marriage with community funds. The court awarded the policy to H and ordered him to buy out W’s interest in the policy by paying her $182,500, representing one-half of the policy’s cash value at the time of trial. The Court of Appeal reversed, holding that the insurance policy was W’s separate policy. H appealed that ruling to the California Supreme Court.

CALIFORNIA SUPREME COURT DECISION

The California Supreme Court explained that married persons may, through a transfer or an agreement, transmute (i.e. change) the character of property from community to separate or from separate to community. However, a transmutation of 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” (Family Code § 852(a)). To satisfy the “express declaration” requirement, a writing signed by the adversely affected spouse must expressly state that the character or ownership of the property at issue is being changed. The express declaration requirement “does not apply to a gift between the spouses of clothing, wearing apparel, jewelry, or other tangible articles of a personal nature that is used solely or principally by the spouse to whom the gift is made and that is not substantial in value taken into account the circumstance of the marriage” (Family Code § 852(c)).

H argued because the express written declaration requirement was not satisfied, and placing of the life insurance policy which was purchased during the marriage with community funds in W’s name did not transmute the policy into a separate property asset of W. W asked the court to draw a distinction between interspousal property transactions subject to the transmutation statutes and property acquisitions from third parties, which she argued would not be subject to those statutes even when it has the claimed effect of changing community property funds to a separate property asset or vice versa. Since the transaction was between H and the insurance company issuing the policy, W argued there was no interspousal transaction and the transmutation requirements do not apply.

The California Supreme Court rejected W’s proposed exemption for spousal purchases from third parties. Because spouses most often use community funds to purchase gifts of relatively inexpensive personal items for each other, the statutory exemption necessarily implies that gifts not qualifying for the exemption (because they are either substantial in value or because they are not items of a personal nature) are transmutations subject to the express declaration requirement, notwithstanding the fact that many or most involve purchases from third parties. The Supreme Court agreed with the trial court’s characterization of the insurance policy as community property. The Court of Appeal’s Judgment was reversed.

COMMENTS

This is a major clarification of California law. Many of our clients tell us about assets such as car, real estate, bank accounts, life insurance policies, etc. that have been purchased during the marriage with community property (CP) funds but are held in the name of only one of the parties. For example, sometimes the family home is purchased only in wife’s name due to economic reasons. Or husband buys a car in his name because wife is unable to sign the purchase documents because she is unavailable to do so. Some courts have held that the way title to the asset is held is controlling. Those courts have held that the house in our example is wife’s separate property (SP) because the title is held in her name alone. The car in our example is the husband’s SP for the same reason. We have long believed these courts were wrong. Spouses often use CP money to purchase an asset in one spouse’s name with no intention the asset will be the spouse’s SP. The California Supreme Court has now clearly said they agree. If an asset is to be one spouse’s SP there must be a written document, signed by the adversely affected party, that clearly states the asset is one spouses’ SP.

CAUTION

A deed may be that written document. Be careful what you sign. When in doubt, ask an experienced family law attorney.