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Lack of an Express Declaration

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A lack of express language in a family trust that transmutes property, it is argued, would also bar a transmutation. In the case of In re Marriage of Starkman, the Court of Appeals of California held that husband's separate property placed into a family trust established by the parties did not become community property simply because it was labeled as "community property" in the trust.8

Rather, the court reasoned that due to the considerable consequences of transmuting the nature of property, there must be an express declaration that "A change in the characterization or ownership of property is being made."9 As stated in the case of In re Marriage of Koester, one simply does not "... slip into a transmutation by accident."10 A similar analysis was conducted by the California Court of Appeals for the Second Appellate District in Barker v. Barker when it found that the mere listing of separate property in a joint tax return as community property did not amount to an express declaration of transmutation.11 Also, if not all of the trust documents (i.e. the trust agreement, the trust asset schedules, deed of trusts, a certification of trust, amendments to the trust, etc.) evidence that a transmutation has taken place, or better yet take a contradictory position, it would be hard to show the intent was clear and convincing.

This need for an express, clear declaration is in line with the Sprenger court's requirement of clear and convincing evidence of a transmutation. In Sprenger, the court found that the wife's mere signature on a stock transfer restriction certificate was not clear and convincing evidence of a transmutation of her husband's separate stock into community property, especially since the stocks were never issued in her name.

Transmutations Cannot be Conditional

Another contention against transmutation through revocable trusts is that a transmutation cannot be contingent. If an asset can at any time be transferred back into separate property, how can it be said to truly have been indefinitely converted to community property? Further, if the transmutation of separate property to community property is essentially a gift conditioned upon one party's death, such a conditional interest does not arise to the level of an express delivery of same. This was the Court of Appeals of Tennessee's reasoning in Burns v. Burns when it held that the placing of a certificate of deposit into both parties' names for estate planning purposes, but not payable to the husband's spouse until his death, did not transmute the certificate of deposit into marital property.12

No Reference to Specific Property

There is also an argument that property being transmuted must be specifically set forth in a family trust. Quite often, parties forget or do not get around to actually attaching a schedule that lists what assets are being changed from separate to community. They sometimes rely on broad provisions stating "... all property owned or acquired by the parties ..." or similar language. Since clear and convincing evidence is needed to demonstrate that an asset is becoming community property, it is logical to conclude that the specific assets must be inventoried or set forth in the trust. A mere representation that "all of the parties' assets" are being converted into community property via the trust may be insufficient to meet the burden.

Equitable Relief

Finally, additional equitable arguments exist in opposition to the transmutation of assets through a revocable family trust. One is that most spouses entering into a trust do so through the assistance of just one attorney who "represents" both spouses. Many times, spouses sign off on these documents with little thought of or explanation by the attorney of the adverse effects. If the spouses later divorce, the spouse whose separate assets were supposedly gifted may allege that he or she believed that the parties were qualifying for a double step-up in basis only when characterizing the property as community. As a result, the legal and economic consequences in the event of a divorce were not adequately explained to them. Such a spouse would allege they entered into the trust blindly and without a real understanding of his or her actions - i.e., without the requisite intent.14 This could also make the trust itself susceptible to an attack similar to an attack on a prenuptial or postnuptial agreement for the same grounds. Another assertion is that a policy in favor of transmutation would be detrimental to married couples obtaining estate planning since a spouse's attempt to permit the orderly transfer of assets to and best provide for the care of the other spouse could be undermined.

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The Abrams Law Firm LLC
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Phone: (702) 222-4021
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