PITFALLS OF TRANSMUTATION OR INTRA-SPOUSAL TRANSFER OF PROPERTY
By: Roman P. Mosqueda, Esq.
Whether in a divorce, estate, or setting aside of transfer proceedings, the transmutation, or change in character, of a property transferred by one spouse to another presents pitfalls that should be avoided.
The interspousal transfer of property may be from separate property acquired before the marriage to community property; or conversely, community property to separate property.
A presumption of undue influence for breach of a fiduciary duty and the taking of any unfair advantage may arise from the interspousal transfer, which, if not overcome by clear and convincing evidence, would invalidate the transfer to the other spouse, under Family Code Section 721(b) and case law.
First Scenario: Refinancing With
Transfer In Joint Tenancy:
A wife inherited a separate property from her parents or prior spouses before her marriage to her present spouse. She now has bad credit or is disabled. As part of the refinancing, she transfers her one-half interest in the separate property to her present spouse in joint tenancy.
Her husband, who has good credit and good employment history, cosigns the promissory note and deed of trust of the refinancing. He also agrees to pay the monthly amortization on the new loan from his salary.
There is transmutation because the character of the subject property was changed from separate property to community property as husband and wife in joint tenancy, with right of survivorship, under Section 750 of the Family Code.
The wife or her estate may raise the presumption of undue influence enunciated in Estate of Cover, 188 Cal. 133, 142, 143, 204 p. 583 (1922), which renders the transfer of property presumptively invalid, if the wife or her estate can make a prima facie case of undue influence.
This Author has presently a pending estate case with similar fact pattern in the Superior Court in Compton, wherein the administrator-adopted daughter is questioning the validity of the transfer of her mother’s separate property to her step-father.
Second Scenario: Gift
Through Quitclaim Deed:
A spouse may quitclaim her one-half community interest in a property to her husband as a gift, without any consideration.
For the case-law presumption of undue influence to arise in either or both scenarios, “the evidence, in addition to a showing of marriage relationship, must also show such unfairness of the transaction as will tend to establish that the wrongful spouse made use of the confidence reposed for the purpose of gaining an unreasonable advantage over the mate.” See Snyder vs. Snyder, 102 Cal. App. 2d 489, 227 P. 2d 847 (1951).
Indeed, for a prima facie case for the presumption of undue influence to arise, the following elements must be present: (1) the existence of a confidential relationship between the husband and wife, (2) a transaction between the husband and wife arising out of the confidential relationship, and (3) either an advantage by one spouse over the other, or unfairness of the transaction.
In both scenarios, there are the existence of a confidential relationship and a transaction between spouses arising out of the relationship. And there is at the very least an advantage by one spouse over the other, that is, the position of one spouse is improved, or he or she gains or profits from the transaction.
But in a gift through quitclaim deed, there is the issue of whether the “wrongful spouse”-donee had participation in the transaction. If it were a pure gift at arm’s length without participation by the donee-spouse, the presumption of undue influence may not arise.
Overcoming The Presumption
Of Undue Influence:
In Marriage of Delaney, 111 Cal. App. 4th 991, 4 Cal. Rptr. 3d 378 (2003), the First District set aside a deed, whereby the husband transferred his separate property residence into joint names with his wife during the marriage, because the wife was not able to overcome the presumption of undue influence.
Because she was not able to prove: (1) that she had not procured the interest in his separate property by undue influence; and (2) that she had given him sufficient consideration for the transfer, the Court set aside the transmutation.
Indeed, the Delaney Court held that: “When any interspousal transaction advantages one spouse to the disadvantage of the other, the presumption arises that such transaction was the result of undue influence.”
And it concluded that: “Consequently, it was Wife’s burden to establish that Husband’s transmutation of the Property to joint tenancy was freely and voluntarily made, with full knowledge of all the facts, and with a complete understanding of the effect of a transfer from his unencumbered separate property interest.…”
The laws on transmutation and presumption of undue influence are complex, and spouses require the assistance of knowledgeable counsel, to avoid the setting aside of transfers to each other.
(The Author, Roman P. Mosqueda, a family law, probate, and real estate attorney, has personally handled numerous transfers or transmutations of properties between spouses.)