Marital Agreements Articles
All community property of spouses and registered domestic partners is subject to creditor claims for community debts. Fam C §§297.5, 910. These debts include business or professional endeavors undertaken to earn community property. Brunvold v Victor Johnson & Co. (1943) 59 CA2d 75. These activities are often the ones from which liability will arise.
Separate property is subject to creditor claims only of the owner of the separate property. Fam C §913. Accordingly, one asset-protection tool is to abandon the community property system and to hold all property as separate property
Types of Marital Property
Each spouse or registered domestic partner owns a present vested one-half interest in community property. Fam C §§297.5, 751. Absent an agreement, all property acquired during marriage or domestic partnership is rebuttably presumed to be community property. Fam C §§297.5, 760, 803(c).
Separate property is all property owned before marriage or acquired thereafter by gift or inheritance and the income therefrom. Fam C §§297.5, 770.
Quasi-community property is separate property that would be community property except for the fact that it was acquired in a common law jurisdiction and is generally treated as community property. Fam C §§63, 125.
Earnings during the marriage or domestic partnership are community property; consequently, if the value of separate property increases as a result of a spouse’s or partner’s efforts, the increase in value can constitute community property to the extent it is attributable to those efforts. See, e.g., Beam v Bank of America (1971) 6 C3d 12, 17. See also 11 Witkin, Summary of California Law, Community Property §§124–131 (11th ed 2017).
Liability of Community Property
Community property can be seized to satisfy a liability arising from death or injury to person or damages to property if the loss was incurred while performing activities for the community. Fam C §1000(b).
If the liability arose from noncommunity activities, separate property of the tortfeasor is subject to seizure first in satisfaction of the claim, then community property. Fam C §1000(b)(2).
Community property can be seized to satisfy debts incurred by either spouse or registered domestic partner before or during marriage or domestic partnership, regardless of who has management and control of the property and regardless of whether one or both spouses or partners are parties to the debt or to a judgment for the debt. Fam C §§297.5, 910. For this purpose, quasi-community property is treated the same as community property. Fam C §912.
There is an exception for earnings under certain circumstances; during marriage or domestic partnership, a person’s earnings can be exempt from the premarital or prepartnership debts of his or her spouse or partner provided that earnings are not commingled with other community property and are held in an account on which the person’s spouse or partner has no right to withdraw. Fam C §§297.5, 911.
Notwithstanding the exemption provided for nontortious liabilities, a spouse’s or partner’s earnings and other community property are generally subject to federal or state tax liens arising from nonpayment of taxes by the other spouse or partner. State Bd. of Equalization v Woo (2000) 82 CA4th 481 (wife’s future earnings were subject to husband’s sales tax debt). Earnings are community property in which a delinquent taxpayer has a one-half interest. Any state exemptions arising from the ability of a spouse to manage property, or otherwise, are not effective as to federal tax liability. Medaris v U.S. (5th Cir 1989) 884 F2d 832, 833.
In bankruptcy, all community property is property of the bankruptcy estate. 11 USC §541(a)(2). The nondebtor spouse or domestic partner loses whatever right they had to manage and control the community property in the bankrupt’s estate, because this right passes to the bankruptcy trustee or the debtor in possession. 5 Collier on Bankruptcy ¶541.11 (16th ed 2009). In In re Brace (2020) 9 C5th 903, the California Supreme Court held that the community property presumption applies to a dispute between one or both spouses and a bankruptcy trustee, and that the community property presumption prevailed over the record title presumption because Fam C §2581 does not limit the community property presumption. Accordingly, property acquired on or after January 1, 1975, with community funds, but held in joint tenancy, is presumptively community property for bankruptcy purposes. Moreover, a joint tenancy deed alone is insufficient to effect a transmutation to separate property on or after January 1, 1985, as it does not satisfy Fam C §852. See also In re Brace (9th Cir 2020) 979 F3d 1228 (court did not clearly err in finding oral transmutation ineffective under California law and did not prevent trustee from fully administering property acquired with community funds on or after January 1, 1975; however, matter remanded to determine when another property was acquired for purposes of applying community property presumption).
The unified treatment of community property also applies to community liabilities. Thus, when spouses file a joint petition for bankruptcy, but one of them is denied discharge, all subsequently acquired community property can be seized to satisfy the nondischarged debts, including the community property interest of the spouse whose debts were discharged. Valley Nat’l Bank v LeSueur (In re LeSueur) (Bankr D Ariz 1985) 53 BR 414, 416; see also In re Soderling (9th Cir 1993) 998 F2d 730 (federal court criminal restitution order that was nondischargeable for husband’s separate property was also nondischargeable for community property when all community property was potentially liable for the debt represented by the claim); 5 Collier on Bankruptcy ¶524.02.
Liability of Separate Property
Separate property can be seized to satisfy the debts of the owner of that property. Fam C §913(a). Separate property is not subject to seizure to satisfy debts incurred by the person’s spouse or registered domestic partner before or during marriage or domestic partnership. Fam C §§297.5, 913(b). For this purpose, child or spousal or partner support in connection with a prior marriage or domestic partnership is a debt incurred before marriage or domestic partnership. Fam C §§297.5, 915(a). Separate property can be seized to satisfy liability for injury or damage caused by the other spouse or domestic partner if they would otherwise be liable if the marriage or domestic partnership did not exist, such as under agency principles. Fam C §1000(a).
In the dissolution context, separate property can be used to satisfy community debts when the debts exceed the community and quasi-community property. Fam C §2622(b).
In addition, the separate property of each spouse or registered domestic partner is liable for family necessaries. Fam C §§297.5, 914(b). See Direct Capital Corp. v Brooks (2017) 14 CA5th 1168, in which the court questionably concluded that computer equipment used in the other spouse’s law practice was a necessary of life because the household was supported by income from the practice.
Marital/Spousal Property Agreements
There are several kinds of marital agreements, such as a premarital or a postnuptial agreement.
An agreement to transmute the character of property can also be characterized as a type of marital agreement, although a transmutation agreement is narrower in scope than most other kinds of marital agreements.
While most marital agreements deal with a broad range of issues, a transmutation agreement simply changes the character of a spouse’s property from community to separate, from separate to community, or from the separate property of one spouse to the separate property of the other spouse. Fam C §§850–853.
Other marital agreements can also change the character of property, but they may potentially be able to do things that a transmutation agreement cannot, e.g., waive or limit spousal support.
A transmutation of real or personal property must be in writing and made or accepted by the spouse whose interest in the property is adversely affected. Fam C §852(a). A transmutation of real property must be recorded to be effective. Fam C §852(b). Articles of a personal nature that are not substantial in light of all the circumstances of the marriage are exempted from this requirement. Fam C §852(c). These rules also apply to real or personal property of registered domestic partners. Fam C §297.5.
In Marriage of Kushesh (2018) 27 CA5th 449, the court held that the interspousal grant deed at issue satisfied the transmutation requirements, given that the “interspousal” deed “grant[ed]” or conveyed to Wife an interest in the condominium “as her sole and separate property” in writing. On remand, the trial court must determine whether the transfer gave Wife an unfair advantage, and if so, whether she can rebut the presumption of undue influence. In Herrara v Pons (SD Cal, May 16, 2018, No. 17-cv-2392-GPC-NLS) 2018 US Dist Lexis 83556, the district court held that the express declaration requirement was met when interspousal deed granted Husband property as “separate property,” but the transaction created an unfair advantage because there was a lack of disclosure and a failure of adequate consideration and Husband did not adequately rebut the presumption of undue influence. Accordingly, the district court affirmed the bankruptcy court’s finding that property at issue was community property.
In Hanf v Summers (In re Summers) (9th Cir 2003) 332 F3d 1240, the court held that real property acquired by spouses taking title as joint tenants using community property funds was separate property of the spouses rather than community property. The court held that the usual statutory requirements for transmutation of community property into separate property did not apply because the acquisition of property is not a transmutation. Although Summers was effectively overruled by Marriage of Valli (2014) 58 C4th 1396, the decision may still be good law on its own terms. It is not apparent that the interest of either party is adversely affected when community property is used to purchase joint tenancy property. However, the question whether the title presumption in Evid C §662 overcomes the community property presumption in Fam C §760 in a bankruptcy case when the spouses acquire property from a third party as joint tenants has been certified by the Ninth Circuit to the California Supreme Court in Brace v Speier (In re Brace) (9th Cir 2018) 908 F3d 531.
An agreement characterizing property as separate will be effective for creditor avoidance and bankruptcy purposes unless it is fraudulent (Fam C §851; State Bd. of Equalization v Woo (2000) 82 CA4th 481) or undertaken under an arrangement or understanding in which the debtor is intended to be the beneficial owner of the property held by the debtor’s spouse. See Abbey v Deyo (1871) 44 NY 343, 347 (transfer from husband to wife (or others) will be ineffective when transferee acts as mere agent for transferor).
It is good practice to record a marital or partnership property agreement to place the world on constructive notice of the parties’ agreement. See Fam C §1502. However, even if the creditor is unaware of the agreement, the creditor will be prevented from recovering against assets changed into the separate property of the noncontracting spouse or partner because the creditor could have easily avoided the risk of unknown interspousal transfers by obtaining both spouses’ or partners’ signatures on the contracts or notes. Leasefirst v Borrelli (1993) 13 CA4th Supp 28 (creditor is bound by undisclosed prenuptial agreement classifying nonliable spouse’s earnings as separate property); American Olean Tile Co. v Schultze (1985) 169 CA3d 359, 364 (marital settlement agreement); Wolf v Chenich (In re Chenich) (BAP 9th Cir 1988) 87 BR 101.
Once community property is changed into separate property, it generally remains the separate property of the spouse or registered domestic partner, even if the marriage or domestic partnership is later dissolved. See Fam C §§297.5, 2550; Marriage of Hillerman (1980) 109 CA3d 334 (only community property and not separate property may be divided by court on dissolution). This fact may suggest protective devices for the at-risk transferor spouse or domestic partner, such as retention of a limited power of appointment over gifted property or, for a spouse, a use of a qualified terminable interest property (QTIP) trust, as discussed in chap 17.
Limitations to Marital and Partnership Property Agreements
a. Employee Retirement Benefits
A nonparticipating spouse has no rights in a qualified pension plan or profit-sharing plan, regardless of state law, and such rights cannot be assigned to the nonparticipating spouse except in a divorce. 29 USC §1056(d); Boggs v Boggs (1997) 520 US 833, 117 S Ct 1754; Ablamis v Roper (9th Cir 1991) 937 F2d 1450 (federal law preempts community property law so that nonparticipating spouse cannot bequeath one-half interest). But see Fam C §853(b) (waiver of joint and survivor rights under Employee Retirement Income Security Act of 1974 (ERISA) is not waiver of community property interest). Accordingly, a marital agreement that purports to assign an interest in an ERISA-qualified plan to a nonparticipating spouse is invalid. However, these rules may not apply to California registered domestic partners, because they are not treated as spouses under federal law. Social Security and other federal retirement benefits cannot be offset against community property.
b. Prospective Application Only
Marital and partnership agreements generally apply prospectively only. The parties cannot ordinarily alter the nature and extent of pre-agreement liability attributable to community property. Transfers between spouses or registered domestic partners (see Fam C §297.5) are usually ineffective to eliminate the rights of preexisting creditors to reach property transferred. Frankel v Boyd (1895) 106 C 608; Vest v Superior Court (1956) 140 CA2d 91, 95; Wikes v Smith (9th Cir 1972) 465 F2d 1142; In re Hough (Bankr SD Cal 1980) 4 BR 217 (liquor license transferred to wife’s separate property corporation was held to be community property because trade creditors were in existence before the transfers).
c. Transmutation of Future Earnings
A spouse or registered domestic partner (see Fam C §297.5) has a present interest in the other spouse’s or partner’s future earnings; consequently, any agreement that purports to give up the right to earnings can be attacked as a fraudulent transfer. State Bd. of Equalization v Woo (2000) 82 CA4th 481 (marital agreement that spouse’s earnings were separate property was fraudulent transfer; under California law, debtor spouse had an existing interest in spouse’s future earnings; the agreement constituted a transfer for this purpose, and because spouses entered into the agreement to prevent creditor from attaching future earnings, the transfer was made with actual fraudulent intent); Moen v Hull (In re Hull) (BAP 9th Cir 2000) 251 BR 726 (any agreement purporting to declare debtor’s spouse’s income separate could be attacked as a fraudulent transfer regarding claims existing at the time of the agreement, because under Washington law the debtor has a present interest in the spouse’s future earnings).
Premarital Versus Postnuptial Agreements
A premarital agreement is an agreement between prospective spouses or partners that is made in contemplation of marriage or domestic partnership and is intended to be effective on marriage or registration of domestic partnership. Fam C §§297.5, 1610(a).
A postnuptial agreement is an agreement between spouses or partners, executed during a marriage or domestic partnership, that affects marital or partnership rights and obligations.
Family Code §1500 provides that the property rights of husband and wife or registered domestic partners prescribed by statute may be altered by a premarital agreement or another marital or partnership property agreement. Although case law on waivers of spousal or partner support has generally involved premarital agreements, and the case law has been modified by statute, the same results may apply to marital and partnership agreements. See Marriage of Pendleton & Fireman (2000) 24 C4th 39 (premarital waivers of spousal support not per se unenforceable, and in circumstances presented in that case, can be enforced without violating any public policy);
TIP: When effecting a transmutation of community property, the parties’ legal counsel should discuss, among other things, the tax consequences, e.g., loss of step-up in tax basis at death, and the consequences of dissolution, e.g., that separate property is not divided on dissolution. Such discussions should be documented in writing.
a. Requirements for Premarital Agreements
California has adopted the Uniform Premarital Agreement Act (Fam C §§1600–1620). Notable features include (1) the agreement is enforceable without consideration (Fam C §1611), and (2) the agreement is not valid if it is unconscionable when executed and certain conditions are present (Fam C §1615(a)(2)). The Act applies to agreements entered into by registered domestic partners before the date of registration. Fam C §297.5(k)(1).
NOTE: The Act also applies to agreements entered into by registered domestic partners after the date of registration if they registered with the state before January 1, 2005, and the agreement was fully executed and in force as of June 30, 2005. Fam C §297.5(k)(2). Partnership agreements entered into after the date of registration would otherwise need to satisfy the requirements for postnuptial agreements discussed in §26.54.
California law generally requires representation by counsel and sufficient time to contemplate the agreement. Specifically, a premarital agreement is not enforceable against a party unless that party (Fam C §1615(c))
- Was represented by independent legal counsel or, after being advised to seek independent legal counsel, expressly waived such representation in a separate writing;
- Had not less than 7 days to review the agreement and seek legal counsel before signing the agreement;
- If unrepresented by legal counsel, was fully informed of the terms and basic effect of the agreement as well as the rights and obligations the party was giving up by signing the agreement. The explanation must be in writing.**Note, however, that Fam C §1615(c) does not apply to postnuptial agreements.
In addition, a waiver of spousal or partner support is not enforceable against a party if that party was not represented by independent legal counsel at the time the agreement was signed, or if the waiver is unconscionable at the time of enforcement. A party may not waive representation by independent legal counsel with respect to an agreement regarding spousal or partner support, and an otherwise unenforceable agreement does not become enforceable against a party solely because that party was represented by independent counsel. Fam C §§297.5, 1612(c).
b. Requirements for Postnuptial Agreements
Postnuptial agreements must adhere to the standard for enforcement of contracts generally. Marriage of Dawley (1976) 17 C3d 342.
To be valid, a contract must be the product of the free, mutual consent of the parties communicated by each to the other. CC §§1550(2), 1565. An apparent consent is invalid when obtained through fraud, duress, menace, undue influence, or mistake. CC §1567; Marriage of Saslow (1985) 40 C3d 848, disapproved on other grounds in Conservatorship of O.B. (2020) 9 C5th 989.
Because the parties are spouses or registered domestic partners, they owe each other a fiduciary duty. Fam C §§297.5, 721(b). This requires each party to act with a high degree of good faith. If the parties enter into an agreement “in which one party gains an advantage, the advantaged party bears the burden of demonstrating that the agreement was not obtained through undue influence.” Marriage of Bonds (2000) 24 C4th 1, 27, citing Marriage of Haines (1995) 33 CA4th 277, 297 (transmutation agreement). In Marriage of Delaney (2003) 111 CA4th 991, the court of appeal held that the trial court properly applied the presumption of undue influence, in finding that one spouse used undue influence to acquire a joint tenancy interest in a residence originally purchased by the other spouse.
In Marriage of Mathews (2005) 133 CA4th 624, the court held that the husband successfully rebutted the presumption of undue influence when the wife quitclaimed her interest in a residence because the husband could obtain a better home loan interest rate if he purchased the property alone. The Mathews court found that the quitclaim deed was freely and voluntarily made, with full knowledge of all of the facts and with a complete understanding of the effect of the quitclaim deed, citing Marriage of Haines (1995) 33 CA4th 277, 296. Thus, a postnuptial agreement probably is subject to a higher degree of scrutiny than a premarital agreement.
Marital and partnership agreements enable spouses and registered domestic partners to structure their relationship—during marriage or domestic partnership, on dissolution, and on death—in ways different from those otherwise provided by law. The validity of various provisions, however, depends to a significant extent on the specific subjects addressed. Courts will not enforce provisions that (1) purport to waive statutory child support obligations or to bind the court regarding child custody or visitation or (2) violate public policy requirements. Certain rights arising at death can be waived only if a fair and reasonable disclosure of property was provided to the surviving spouse or domestic partner who was represented by independent legal counsel. Prob C §§140–147; Fam C §297.5(c).
Postnuptial agreements must also be supported by adequate consideration. The consideration is present by virtue of rights that are waived and obligations that are assumed. See Messenger v Messenger (1956) 46 C2d 619; Helvern v Helvern (1956) 139 CA2d 819 (both cases dealing with property settlement agreements). A transmutation agreement alone, however, may occur with or without consideration. Fam C §850.