When does separate property become community property in California? When does community property become separate property? California community property law presumes that all property acquired during a marriage or registered domestic partnership (subject to limited exceptions)[1] belongs equally to both spouses (i.e., each spouse owns a 50% interest in community assets), but what happens when the way of holding title to property conflicts with the community property presumption? Does the title presumption (i.e., the presumption that property is held as it’s titled) supersede the community property presumption in California? What are the steps for converting community property to separate property?
The California Supreme Court case In re Brace, which is discussed in this 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 in question. 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 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. Estate of Wall highlighted why it’s so important for spouses to be careful how they hold title to property, as title will determine how the property can be disposed of upon one spouse’s death. While the Brace court stated that title alone would not determine a deceased spouse’s right to dispose of property, the Wall court reverted to a prior precedent in which title controlled at death under all circumstances. Keep reading to learn more about the background of In re Brace.
n its holding in In re Brace[2] (“Brace”), the California Supreme Court affirmed the state’s prioritization of community property rights by determining that the “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 property states otherwise.
TELL US WHAT HAPPENED. WE’LL BE IN TOUCH SOON.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 may conflict is when property is titled in the name of both spouses as joint tenants with a right of survivorship. With this way of holding title, the property at issue 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 of the asset would go to their surviving spouse.
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.
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 controlled was important here, because the answer determined how much property a bankruptcy trustee could reach to satisfy a spouse’s debts. If the property had been a separate asset, then the trustee could only reach the debtor spouse’s 50% share. If the property had been community asset, then the trustee could reach 100% 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?
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 only applies to marital dissolution proceedings, and that in a bankruptcy context, the title presumption applies 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 were claiming that because Ahn Brace had not joined in her husband’s bankruptcy petition, only Clifford Brace’s 50% property interest should become part of the bankruptcy estate.[7]
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.
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: “Septemberor 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 to the bankruptcy context, holding that the Braces’ real properties are community property in bankruptcy, even if it was only one spouse’s bankruptcy — as the properties were acquired during marriage, and there was no valid transmutation of community property that would alter the character of the properties.
The Court arrived at this holding following an analysis of California’s 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 had 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 so doing, 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 these presumptions are in conflict, not just in the marital dissolution or bankruptcy contexts.[14]
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 holding in Brace exemplifies the far-reaching significance of community property law in California. It highlights how crucial it is for couples in a marriage or registered domestic partnership to educate themselves on the implications that marriage/domestic partnership could have on their property ownership rights. If spouses understand their property ownership rights, they may be able to avoid property disputes down the road. The court’s ruling in Brace emphasizes 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 real property to someone other than their surviving spouse, but their surviving spouse retains a community property interest in the 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.