August 2016 - The Character of Transmutations

by Denise Trevino

A transmutation is the act of changing the character of property during marriage from separate property to community property, community property to separate property, or separate property of one spouse to the separate property of the other spouse. The significance of a transmutation occurs at death or divorce. Properly transmuted property will be honored and awarded according to the written agreement. Improperly transmuted property will be awarded to the community or to the sole owner of the property before the attempted transmutation.

Prior to 1985, proof of an oral agreement was all that was necessary for a transmutation. Attempting to prove oral agreements resulted in long, contentious trials that could have unpredictable results. After 1985, California Family Code Sections 850 to 853 required all transmutations to be in writing and contain an express declaration of a transmutation. Although the new law did not curb long, contentious trials, it provided more predictability. Section 852(a) of the Family Code requires a transmutation to be in writing and contain an express declaration of an intent to transfer property by the spouse whose property is adversely affected.

Requirement for Express Declarations
After 1985, it was up to the judiciary to determine what qualified as an express declaration. One of the first cases, In re Estate of MacDonald, 51 Cal. 3d 262 (1990), involved a couple who both had children from previous relationships. The wife divided their property so that each spouse could transfer his or her interest to their respective children. The only asset the couple did not transfer by written agreement was the husband’s pension plan.

The pension plan designated the husband’s trust as the beneficiary of the plan. The beneficiaries of the trust were the husband’s children. The pension plan was distributed to three separate IRA accounts in the husband’s name. The financial institutions where the assets were held each prepared adoption agreements that the wife signed. The agreement stated, “Consent of spouse: Being the participant’s spouse, I hereby consent to the above designation.” Id. at 272. Three months after signing the consent, the wife passed away. The executrix of her estate filed a petition to determine ownership of the retirement accounts. The trial court denied the petition, stating that the wife had waived or transmuted her interest in the pension funds.

The California Supreme Court reversed the judge’s order, holding that the adoption agreements did not qualify as successful transmutations because a valid transmutation requires an express declaration in writing which states “that the characterization or ownership of the property is being changed.” Id. The word “transmutation” is not required in every transmutation agreement. What is required is an express declaration evidencing an intent to change the character of the property.

In re Marriage of Barneson, 69 Cal. App. 4th 583 (1999) also addressed the language required in a transfer document. In Barneson, the husband placed his wife’s name on his separate property stocks. The documents used the word “transfer” rather than sell, give, or gift. The trial court ruled that the word transfer was effective, and awarded the stocks to the wife. The appellate court held that there was no effective transmutation even though the form stated that “‘the undersigned does (do) hereby sell, assign and transfer [ ]’ . . . unspecified stock.” Id. at 590. The appellate court stated that it was unclear from the face of the document that the spouse intended to change the character of the property. The court held that the word “transfer” is inadequate for a transmutation because it is capable of several meanings.

Although Estate of Bibb, 87 Cal. App. 4th 461 (2001) is not a dissolution case, the case revisits the necessary verbiage required for a proper transmutation. In Bibb, the court reviewed two documents that transferred property from a husband to himself and to his wife. The first piece of property was an apartment complex. The second was a Rolls Royce. When Mr. Bibb passed away, the wife transferred title of the real property and the Rolls Royce to herself. Mr. Bibb’s son from a previous relationship challenged both transfers.

During the marriage, Mr. Bibb had transferred ownership of the apartment complex to himself and his wife because he needed funds to renovate it. He had signed a grant deed putting his second wife’s name to the title as a joint tenant in order to qualify for a loan. With respect to the Rolls Royce, his second wife’s name had been put on the title through a DMV registration document.

The appellate court held that in order to determine whether a valid transmutation occurred, the court must look to the document itself to determine if a clear and unambiguous change in title was intended. The language must expressly state that the characterization or the ownership of the property was being changed. Because the deed used the word “grant” to transfer title, and “grant” is the language used to transfer title, the apartment complex was properly transferred to the wife. It was confirmed as her property.

The Rolls Royce had a different outcome. Although the title was changed to both spouses’ names, there was no signature on the vehicle registration, there was no express declaration to support the change in character of the vehicle, and there was no document to show that Mr. Bibb joined in the transfer of the vehicle. The Rolls Royce was not properly transmuted and was therefore part of Mr. Bibb’s estate.

Exclusion of Extrinsic Evidence
Appellate courts have refused to allow extrinsic evidence to prove the existence of a transmutation. In In re Marriage of Campbell, 74 Cal. App. 4th 1058 (1999), the husband owned property before the marriage. The wife used her separate property income to remodel the husband’s property because the husband promised that he would place her name on the deed. The wife’s name was never placed on the title. At trial, the wife argued that the home was transmuted into community property based upon the doctrine of equitable estoppel. The trial court awarded the real property to the husband as his separate property because there was no written transmutation.

The First District upheld the trial court’s order, stating that extrinsic evidence may not be considered as proof of a transmutation. The statute of frauds exception of equitable estoppel is not applicable to family law transmutation cases, because it would require extrinsic evidence to prove a transmutation. The purpose of the transmutation statute is to avoid contentious litigation based upon oral agreements. Id. at 1063-64; see also In re Marriage of Benson, 36 Cal. 4th 1096 (2005) (part performance will not support a transmutation agreement).

Transmutations Are Valid for All Purposes
The purpose of a transmutation is irrelevant. In In re Marriage of Holtemann, 166 Cal. App. 4th 1166 (2008), the husband entered into the marriage with substantial assets. An attorney prepared estate-planning documents that stated, “Transmutation of Husband’s Separate Property to Community Property. Husband agrees that the character of the property . . . is hereby transmuted from his separate property to the community property of both parties.” Id. at 1172. The trust also stated that the purpose of the transmutation was solely to determine how property would be transferred upon death, and not for a divorce.

Subsequently, after a divorce was filed, the husband argued that the transmutation agreement was solely for estate-planning purposes. The court of appeals held that notwithstanding the limitation in the trust agreement, the transmutation was valid for all purposes including divorce.

Transmutation Statutes and Other Title Statutes
In re Marriage of Lafkas, 237 Cal. App. 4th 921 (2015) involved a husband’s partnership interest. During the marriage, the partnership applied for a loan. The husband believed that his wife should be added to the partnership agreement because her name was on the loan application. A modification of the partnership agreement was entered into and stated the following: “John and Jean Lafkas, husband and wife, as to 1/3 interest.” Id. at 927. The parties then signed the agreement.

In trial, the court applied Family Code Section 2581, which states that property acquired during the marriage in joint form is presumed to be community property. The husband argued that the agreement signed by the parties was insufficient to transmute the property from community to separate property.

The court of appeal found that the partnership agreement was not a transmutation. It did not contain an express declaration that the characterization or ownership of the property was being changed. In order to qualify as a valid transmutation, a writing must contain language that shows the affected party understands the fact that the character of the property is being changed. Id. at 940. The court further held that when Family Code Sections 2581 and 852 conflict, the requirements of a valid transmutation must be proven before the joint title presumption applies. Id.; see also In Re Marriage of Weaver, 224 Cal. App. 3d 478 (1990) (holding the title presumption statute, Evidence Code Section 662, applies to family law cases in which transmutation is at issue).

Presumption of Undue Influence, Even With a Valid Writing
Once a court finds a valid transmutation, it must determine if the agreement was voluntarily entered into by the adversely affected spouse. There is a presumption of undue influence in transmutations. In re Marriage of Fossum, 192 Cal. App 4th 336 (2011). The parties in Fossum purchased a home together. Throughout the marriage, title was transferred between community property and the husband’s separate property. The last deed stated that the husband was the owner of the property; however, the trial court held that the property was community property.

The husband appealed, because title was in his name. The appellate court held that the husband failed to overcome the presumption of undue influence. He was required to show by a preponderance of the evidence that he did not gain ownership of the property in violation of any fiduciary duties. Although spouses have a right to enter into agreements with each other, they “occupy a confidential and fiduciary relationship with each other.” This relationship “imposes a duty of the highest good faith and fair dealing” on each spouse to any interpersonal transaction. Id. at 343-44. When one spouse gains an unfair advantage, a presumption arises under Family Code Section 721 that the advantage was gained by undue influence or coercion. The appellate court in Fossum did not focus on the reason for the transfer; rather, it focused on the fact that the husband did not meet his burden of proof. Id. at 346; see also In re Marriage of Delaney, 111 Cal. App. 4th 992 (2003). Even though a valid writing existed, married persons “are in a fiduciary relation to one another . . . so that whenever the parties enter into an agreement . . . the advantaged party bears the burden of demonstrating that the agreement was not obtained through undue influence.” Fossum, 192 Cal. App 4th at 382 (quoting In re Marriage of Bonds, 24 Cal. 4th 1, 27 (2000)).

Presumptions of Undue Influence and Title
One final case discusses the presumption of undue influence and Evidence Code Section 662. In Re Marriage of Haines, 33 Cal. App. 4th 277 (1995) involved the separate real property of a husband who had placed title in his wife’s name in order to refinance his home. Four years later, the wife transferred title back into her husband’s name. During trial, the wife argued that the transfer of the home into the husband’s name was the product of undue influence. The trial court found that the wife had proved by a preponderance of evidence that she was forced to sign the deed. However, it stated that the property was the separate property of the husband because Evidence Code Section 662 requires clear and convincing evidence to overcome a title presumption.

The Fourth Appellate District disagreed, stating that the more specific presumption based upon a confidential relationship would yield to the title presumption. The Haines court would not hold that Evidence Code Section 662 did not apply in family law cases; it held that when there is a conflict between Family Code Section 721 and Evidence Code Section 662, the Family Code would prevail. Id. at 302. See also Delaney, 111 Cal. App. 4th at 1000 (finding when Family Code Section 721 conflicts with Evidence Code Sections 662 and 2581, the Family Code prevails).

In conclusion, when a spouse asserts that transmutation of property occurred during the marriage, that party must have a writing that, based upon the language found in the four corners of the document, shows the adversely affected party understood the character of the property was being changed. No exact language is required. However, the language must evidence a clear intent to change the character of the property. The purpose of the transmutation is irrelevant, and extrinsic evidence cannot be used to prove a valid transmutation. When the court finds a valid transmutation, there is a presumption that the advantaged spouse obtained the asset by undue influence. The advantaged spouse must prove by a preponderance of evidence that there has been compliance with the fiduciary duties owed between spouses.

Denise Trevino is a family law lawyer with Trevino Law, Inc. She can be reached at dtrevino@LawintheOC.com.