Changing Separate Property to Community Property for Estate Planning Purposes, and It's Consequences Upon Divorce

CHANGING SEPARATE PROPERTY TO COMMUNITY PROPERTY FOR ESTATE PLANNING PURPOSES, AND ITS CONSEQUENCES UPON DIVORCE

Spouses during both before and during marriage may agree to change the character of any of their property—from separate property to community property, from community property to separate property, and from separate property of one spouse to separate property of the other. When spouses agree to change the character of property, it is commonly referred to as “transmutation.” Transmutations of real or personal property must be “in writing by an express declaration that is made, joined in, consented to, or accepted by the spouse whose interest is adversely affected.” Family Code Sec. 852(a),(e); Estate of MacDonald (1990) 51 C3d 262, 267–268, 272 CR 153, 157. Further, the writing must contain language which expressly states that the characterization of property is being changed. Estate of MacDonald, supra, 51 C3d at 264, 272, 272 CR at 155, 160.

Often, spouses change the character of separate property to community property for estate planning purposes (i.e. to avoid probate and estate taxes upon one of the spouse’s death). A typical transmutation for estate planning purposes is one which involves the transfer of property into a revocable living trust. At first glance, the transmutation for estate planning purposes appears to be a good idea. Typically, when the character of property is changed from separate to community property for estate planning purposes, the spouses are on good terms and the marriage is contemplated to last until the death of one of the spouses. However, what happens if the spouses decide to divorce, and the underlying estate planning purpose of the transmutation no longer exists? Does the character of the property revert to separate property?

The Court of Appeals entertained this issue recently in Marriage of Holtemann (2008) Cal.App.4th (No. B203089. Second Dist., Div. Six, 5/12/2008). In Marriage of Holtemann, the spouses signed a transmutation agreement in which the husband agreed to change the character of his separate property to community property. The transmutation agreement contained an express declaration by the husband that his separate property was to become community property. Also, the transmutation agreement stated that the agreement was specifically made for the purpose of interpreting how the property would be disposed upon death of one of the spouses. Shortly after the agreement was executed, the wife petitioned for divorce, and the husband maintained that the character of his separate property did not change to community property despite the transmutation agreement. The husband reasoned that there was no express declaration as required by Family Code Sec.852 in that the agreement provided that the change in character of the property was for estate planning purposes only. The Appellate Court disagreed with the husband, and ruled that the character of the property had been changed to community property.

The Appellate Court’s opinion in Marriage of Holtemann is further evidence of the necessity of competent representation when the issue of changing the character of property arises. The change in the character of property often brings with it unintended consequences. Accordingly, if you are married and are contemplating changing the character of your property for estate planning purposes, or for any other purpose, it is advised that you consult with an experienced attorney.


Please note that this article is not legal advice and is not intended as legal advice. The article is intended to provide only general, non-specific legal information. This article is not intended to cover all the issues related to the topic discussed. The specific facts that apply to your matter may make the outcome different than would be anticipated by you. This article does not create any attorney-client relationship between you and the Law Offices of Kenneth U. Reyes, P.C. This article is not a solicitation.

Attorney Kenneth Ursua Reyes was President of the Philippine American Bar Association for 2005. He is a member of both the Family law section and Immigration law section of the Los Angeles County Bar Association. Mr. Reyes is a Certified Family Law Specialist. He is a graduate of Southwestern University Law School in Los Angeles and California State University, San Bernardino School of Business Administration. He has extensive CPA experience prior to law practice. LAW OFFICES OF KENNETH REYES, P.C. is located at 3699 Wilshire Blvd., Suite 700, Los Angeles, CA, 90010. Tel. (213) 388-1611 or e-mail kureyeslaw@gmail.com; visit at www.kenreyeslaw.com

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