Converting Community Property and Separate Property: Community Property Presumption in California Prevails Over Title Presumption
When does separate property become community property in California, and vice versa? California community property law presumes that all property acquired during a marriage is the community property (i.e., co-owned property) of both spouses, subject to several limited exceptions,[1] but what happens when the way of holding title to a property conflicts with this law? Does the title presumption (i.e., the presumption that property is held as it is titled) supersede the community property presumption in California? What steps are involved in converting community property to separate property?
IMPORTANT NOTE: ESTATE OF WALL CHANGES HOLDING OF BRACE COURT
The California Supreme Court case In re Brace, which is discussed in the following article, affirms the primacy of the community property presumption in actions between spouses and expands it to include actions involving third parties, such as bankruptcy creditors. However, the Brace court opined that its ruling may not apply to post-death proceedings, because when spouses hold title as joint tenants with a right of survivorship, for example, the title presumption would control at death, allowing the surviving spouse to take full ownership of the property. Still, the Brace court stated that it will not merely rely on an asset’s title to determine whether a decedent has a right to dispose of it at death; it will also consider whether the surviving spouse has a community property interest in the asset, regardless of its title.
A subsequent Supreme Court case, Estate of Wall, slightly modified the ruling of the Brace court by holding that the title presumption controls in all probate contexts. This means that if the deceased spouse held title to a property as a sole owner because they purchased it with their separate assets, then even if the property was acquired during marriage, the deceased spouse would be entitled to dispose of it in its entirety at death. Conversely, if a spouse wishes to have sole ownership of a property but will be purchasing it with community funds or if community contributions will be made to it, then the adversely affected spouse will need to waive their rights to the property in writing for its title to be valid.
As a result of Estate of Wall, it is important for spouses to be careful about how they hold title to property, because it will determine how the property can be disposed of upon one spouse’s death. While the Brace court had stated that title alone will not determine a deceased spouse’s right to dispose of property, the Wall court reverts to a prior precedent in which title controls at death under all circumstances.
Keep reading to learn more about the background of In re Brace.
Quick Summary: California Supreme Court Affirms Primacy of Community Property Presumption in California
In its holding in In re Brace[2] (“Brace”), the California Supreme Court affirmed California’s prioritization of community property rights by determining that this “community property presumption” (which is enumerated in California Family Code section 760) overrides a separate “title presumption,” which states that “the owner of the legal title to property is presumed to be the owner of the full beneficial title.”[3]
Put simply, unless the proper steps are taken for converting community property to separate property—which are outlined in California Family Code section 852—property acquired over the course of a marriage is considered community property, even if title to the property states otherwise.
What Are Examples of a Title Presumption Conflicting With a Community Property Presumption in California?
The title presumption and community property presumption in California may conflict when property acquired during marriage, which should have been community property, is titled in the name of only one spouse. Another instance in which the two presumptions might conflict is when property is titled in the name of both spouses as joint tenants with a right of survivorship. Here, the property in question would be considered community property while the spouses are alive, but once one spouse dies, the law of joint tenancy would apply, and the decedent’s entire share would go to their surviving spouse.
California Family Code Section 852: Converting Community Property to Separate Property
The Brace holding demonstrates that a change in legal title alone cannot alter the community property vs. separate property character of an asset acquired by spouses during marriage. Instead, the California Supreme Court reiterated the necessity of careful compliance with the transmutation of community property requirements prescribed by California Family Code section 852 when converting community property to separate property, and vice versa. To alter the character of a property, the California Family Code requires that a community property transmutation agreement be enacted in writing and signed by both spouses.
Community Property in Bankruptcy: An In-Depth Look Into Brace
Brace examined this potential conflict between the title and community property presumptions in California in the context of a bankruptcy proceeding.[4]
Which of these two presumptions was controlling was important here, because the answer determined how much property a bankruptcy trustee could reach to satisfy a spouse’s debts. If the property at issue is separate, then the trustee can only reach the debtor spouse’s 50% share. If the property is community, then the trustee can reach all of the property, including the non-debtor spouse’s share. In this instance, would the community property presumption in California still supersede the title presumption?
Background
As background, Clifford and Ahn Brace married in 1972 and took title to two separate real properties acquired during their marriage as “husband and wife as joint tenants.”[5] Clifford filed for Chapter 7 Bankruptcy in 2011. The Braces argued that the community property presumption in California governing property ownership only applies to marital dissolution proceedings, and that in the bankruptcy context, the title presumption applied to their real properties; therefore, since they took title to their properties as joint tenants, each spouse held a present one-half separate property interest in the properties for the purpose of property characterization in a bankruptcy.[6] The Braces argued that because Ahn Brace had not joined in her husband’s bankruptcy petition, only Clifford Brace’s one-half property interest should become part of the bankruptcy estate.[7]
Requirement of Community Property Transmutation Agreement When Converting Community Property to Separate Property
The Bankruptcy Court, the 9th Circuit Bankruptcy Panel, and ultimately the California Supreme Court disagreed, citing the holding in In re Marriage of Valli[8] (“Valli”), which states that “property acquired during marriage from a third party with community funds is community property upon divorce unless the statutory transmutation requirements have been met”[9] that are outlined in California Family Code section 852. In other words, for the properties in question to have been considered separate property, both spouses would have had to sign a community property transmutation agreement.
Court Extends Valli Outside Marital Dissolution Context to Apply to the Braces’ Bankruptcy Proceeding
Valli stands for the proposition that, in the context of a marital dissolution proceeding, property acquired during marriage with community funds is community property—regardless of how that property is titled—unless it has been expressly transmuted into separate property pursuant to California Family Code section 852, which states: “[F]or property acquired on or after January 1, 1985, a transmutation 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 . . . [a] joint tenancy deed alone [is not] sufficient to transmute the community character of the property into the separate property of the spouses.”[10]
In Brace, the California Supreme Court explicitly extended Valli’s holding outside of the marital dissolution context and into the bankruptcy context, holding that the Braces’ real properties are community property in bankruptcy, even if it was only one spouse’s bankruptcy, as they were acquired during marriage and there was no valid transmutation of community property that would alter the character of the properties.
Court Expands the Community Property Presumption in California to Apply in All Contexts
The Court arrived at this holding following an analysis of California legal history and the continuing impact of the obsolete and now-repealed married woman’s title presumption in California jurisprudence.[11] The Court opined that this defunct presumption and the case law interpreting it had influenced its prior decision in In re Marriage of Lucas[12] (“Lucas”), which held that a motor home acquired in part with community property but titled in the wife’s name alone was entirely the wife’s separate property—thereby implying that the title presumption trumped the community property presumption in California.
But here, the Court in Brace explicitly disapproved of its holding in Lucas 40 years prior, and in doing so clarified the supremacy of community property rights and the community property presumption in California law. The Court reasoned that “[i]t would carve a major hole in the community property system to hold that the title presumption of Evidence Code section 662, a general statute that addresses the importance of legal title—and not Family Code section 760, a statute that specifically addresses the characterization of property acquired during marriage—governs the characterization of property acquired during marriage for all purposes other than divorce.”[13] Thus, the Brace Court’s ultimate holding is that the community property presumption in California supersedes the title presumption for all purposes when those presumptions are in conflict, not just in the marital dissolution or bankruptcy contexts.[14]
How Does the Community Property Presumption in California Apply to Property Held in Joint Tenancy?
The Court sought to provide additional clarity and guidance as to the impact of its holding. For example, the Court reiterated that under California law, though community property held in joint tenancy retains its community character during the lifetimes of both spouses, upon death, the property is transferred entirely to the surviving joint tenant as it would under a joint tenancy outside of marriage.[15] Further, the Court explained that the joint tenancy deeds to the Braces’ real properties themselves did not constitute valid community property transmutations of those properties, as they did not meet the express written declaration requirement necessary to effectuate transmutations pursuant to California Family Code section 852(a).[16]
The Takeaway: The Community Property Presumption in California Reigns Supreme
The holding in Brace exemplifies the far-reaching significance of community property law in California. It is important for all married people (and those in registered domestic partnerships in California) to be aware of the implications that marriage/domestic partnership may have on their property ownership rights, so disputes over property don’t result. The Court’s ruling in Brace emphasizes that the adage “what’s mine is yours” applies in contexts outside of the relationship itself, potentially impacting third-party property rights as well (i.e., as in one spouse’s bankruptcy creditors).
The Court confirmed the importance of strict compliance with the community property transmutation requirements codified in California Family Code sections 850 through 853 for spouses and partners seeking to create separate property ownership rights in their property. It decisively ruled that explicit transmutation of community property is the only way to change the character of property. Such a holding affirms California’s public policy desire to protect spousal rights to community property from any inadvertent change in that property’s character, whether by conduct or by other operation of law.
The holding in Brace is certain to have a significant impact on the field of probate litigation. Indeed, many post-death trust and will disputes revolve around a decedent’s estate plan being inconsistent with their surviving spouse’s rights after death, which include community property rights. For instance, when a decedent’s trust seeks to dispose of the entirety of a piece of real property to someone other than their surviving spouse, but their surviving spouse retains a community property interest in this asset, trust litigation is sure to follow. Because of the holding in Brace, the Probate Court will not simply rely upon the title of the asset to determine whether the decedent was entitled to dispose of it at death. Instead, the Probate Court will examine whether the surviving spouse has a community property interest in the asset, regardless of its title.
Given the complexity of these issues, it is imperative for all surviving spouses who believe their community property rights have been adversely affected by their deceased spouse’s estate plan to seek out a trust and estate lawyer who specializes in this practice area.
- [1] For example, property acquired during a marriage as one spouse’s gift or inheritance is presumed to be the separate property of that spouse. See Fam. C. § 770.
- [2] (2020) 9 Cal.5th 903.
- [3] Evid. C. §662.
- [4] The United States Court of Appeals for the Ninth Circuit requested for the California Supreme Court to resolve the conflict between Family Code section 760 and Evidence Code section 662 as these statutes applied to the dispute between Clifford and Ahn Brace on one side and the bankruptcy trustee for Clifford on the other side. The California Supreme Court exercised its jurisdiction to do so pursuant to California Rules of Court, Rule 8.548(a).
- [5] Brace at 913.
- [6] Id. at 916, 929.
- [7] Id. at 913.
- [8] (2014) 58 Cal.4th 1396.
- [9] Brace at 913.
- [10] Id. at 912 (internal citations omitted). For joint tenancy property acquired between January 1, 1975, and December 31, 1984, the act of taking title as joint tenants is, in itself, insufficient to prove a transmutation; however, a court may consider the manner of taking title in determining whether the spouses had an oral agreement or common understanding. However, joint tenancy property acquired with community funds before January 1, 1975, is presumptively separate property.
- [11] The married woman’s presumption, codified in 1889 under former Civil Code section 164, stated that: “All other property acquired after marriage by either husband or wife, or both, is community property; but whenever any property is conveyed to a married woman by an instrument in writing, the presumption is, that the title is thereby vested in her as her separate property.”
- [12] (1980) 27 Cal.3d 808.
- [13] Brace at 928.
- [14] Id. at 938.
- [15] Id. at 931-932.
- [16] Id. at 938.
