Characterizing and dividing Real Property in Divorce

This is the fourth in a series of blogs in which I address both common and unique issues parties can face when dividing the marital residence.  The focus of this blog is on the effects of transfers of title during marriage.  There are numerous possible scenarios involving transfer of title during marriage, and the unique facts of each case can produce different results.  In this blog I will focus on three common occurrences involving transfer of title to real property during marriage.

Example One: One party acquires a residence prior to marriage and later transfers title to husband and wife as joint tenants during marriage.

Wanda purchases a home prior to marriage.    Several years later Wanda marries Harry and the couple live in Wanda’s residence.  At the date of marriage, the house is worth $200,000.  Five years later Wanda refinances the house and adds Harry to the title as joint tenants.  The loan is a community obligation.  At the time Harry is added to title, the house is worth $300,000 and the loan balance is $150,000. Five years after Harry is added to title, Wanda files for divorce.  At this time, the property is worth $350,00 and has a balance on the mortgage in the amount of $130,000.

How is the property divided upon divorce?

The loan proceeds in the amount of $150,000 would be characterized as community property, whether the bank is relying on the credit of one or both parties as loan proceeds acquired during marriage on either party’s credit are deemed community.  However, Wanda would have a separate property interest in the residence  under Family Code section 2640 which would be the equity in the home at the time Harry is added to title, $150,000 less the Moore/Marsden community interest (see Blog #2 in this series posted March 3, 2017).

Wanda would have her separate property interest in the amount of $150,000 (offset by any Moore/Marsden community interest).  Wanda would also have one-half of the community interest ($20,000 pay down on the mortgage after Harry was added to title plus $50,000 in appreciation)

Harry would receive one half of the community interest as set forth above.

Example Two: Wanda owns the house with her parents prior to marriage.

In this example,  Wanda owns a house as joint tenants with her parents Frank and Mary.  Harry signs a quitclaim deed waiving any interest in the property.  After Frank dies, Mary changes title to Mary, Wanda and Harry as joint tenants.  Five years later Wanda files for divorce.  Mary claims that she added Harry’s name to title erroneously, and that she never intended Harry to have an interest in the residence.

Upon divorce, How will the equity in the property be divided?

Marriage of Weaver, held that under Family Code Section 2581 spouses cannot hold property in joint title while preserving the property’s separate property characterization through oral or implied agreements.  Mary’s intention that her son-in-law not have an interest is insufficient to overcome record title.  As such, Mary would have a one-third interest in the property, and Wanda and Harry would have a two-thirds community property, joint tenancy interest in the residence.  However, Wanda would be entitled to reimbursement for her separate property interest in the residence on the date Harry’s name was placed on title.

Example Three:  Transfer of title for estate planning purposes.

In this example, Wanda owns a house prior to marriage.  Some time after the parties marry, they meet with an estate planning attorney to draft a trust.  In order to avoid probate and to minimize taxes in the event of Wanda’s death (i.e. receive the full step up in cost basis), the attorney prepares a document entitled  “Spousal Property Transmutation Agreement.”

The Agreement stated “it is not made in contemplation of a separation or marital dissolution and is made solely for the purpose of interpreting how property shall be disposed of on the death of the parties.”  The Agreement provided that Wanda’s house was “hereby transmuted from her separate property to the community property of both parties.”  The Agreement further attempted to qualify, limit or condition the transfer and provided that the trust could be revoked.  Five years after execution of the trust Agreement, Wanda filed for divorce and revoked the trust.

How will the Court characterize the property?

Under Marriage of Holtemann, by the express terms of the Transmutation Agreement, Wanda had transmuted her separate property house to community property, notwithstanding language that purported to quality, limit or condition the transfer.

If Wanda argues that the trust documents were executed soley for estate planning puroses, her argument would fail.  Regardless of motivation, the trust documents contained the requisite express, unequivocal declarations of transmutation.

Therefore, the residence would be characterized as community property.  However, Wanda would be entitled to reimbursement for the value of the property on the date of the transmutation under Family Code section 2640(b).

If you have questions or would like to speak with Family Law Attorney Robert A. Kochis, please contact our office to schedule a consultation by emailing officestaff@richardbawdenlaw.comor calling 909.792.0222. The Law Office of Bawden & Kochis also handles legal issues regarding adoption, annulment, mediation, domestic violence, child custody, child and spousal support as well as pre-marital and post-marital agreements. Learn more by visiting www.richardbawdenlaw.com.

When he is not practicing law, Robert enjoys traveling, especially to the Caribbean and to Hawaii. He also claims the Lakers as his favorite sports team, loves Italian food, and often relaxes with a guitar.