Life Insurance Purchased During Marriage in One Party’s Name is Community Property in a Divorce

California is a community property state. That means that all property acquired during a marriage is presumed to be community property. Cal. Fam. Code § 760. Separate property, on the other hand, is property acquired before marriage, after separation, or property acquired by gift or inheritance during marriage. Cal Fam. Code §770. The character of property (whether separate or community) can be changed, however, through the legal doctrine of transmutation. Through a transfer or agreement, married people can change separate property to community property, community property to separate property, or the separate property of one spouse to the separate property of the other spouse. Cal. Fam. Code § 850. To do this, they must have a signed writing which expressly states that the ownership of the property is being changed. Cal. Fam. Code § 852.

In one of the most important family law cases in 2014, the California Supreme Court ruled that an insurance policy purchased by husband during marriage, naming his wife as the policy’s only owner and beneficiary, was community property upon the couple’s divorce.

Frankie (Husband) and Randy (Wife) Valli were married for twenty years. During the marriage, Frankie was forced to go to the hospital for “heart problems”. While there, he discussed with Randy his desire to buy a life insurance policy to insure his own life. During this conversation, Frankie stated that he would make Randy the owner of the policy. Before the couple separated in 2003, Frankie used community property funds from a joint bank account to purchase a $3.75 million life insurance policy on his own life. In this policy he named his wife as the sole owner and beneficiary. Frankie later testified he figured Randy would take care of the children and would make sure they got the support they needed. He also stated that when he purchased the policy he had no intention of divorcing Randy. Up until the date of separation, Frankie used community property funds from a joint bank account to pay the insurance premiums.

At the time of the divorce trial, the insurance policy had a cash value of $365,000.

The issue the divorce court had to decide was whether this policy was community property or whether it was the wife’s separate property. The divorce court ruled that the policy was community property because it was acquired with community funds during the marriage. The divorce court ruled in favor of husband’s divorce lawyer and awarded the policy to husband and ordered him to pay wife $182,500, which equates to one-half of the value of the policy.

Wife’s divorce lawyer appealed and the California Court of Appeals reversed the divorce court stating that the policy was wife’s separate property. Husband’s divorce lawyer then appealed the Court of Appeals’ decision to the California Supreme Court.

Arguments Before California Supreme Court:

Randy’s divorce attorney’s argument, before the California Supreme Court, that the policy was her separate property was based on the fact that the policy was purchased for her and she was the sole owner of the property. Her divorce lawyer argued that when her husband put the policy into her name, he changed the policy’s character from community property to separate property. The divorce attorney asserted that transmutation requirements, of a signed change of ownership, only apply to transactions between spouses and not to one spouse’s acquisition of property from a third party. Her divorce lawyer argued that when her husband purchased the policy from the insurance company and put the policy in her name, it was a purchase from a third party. Her divorce lawyer asserted that because there was no interspousal transaction, the transmutation requirements did not apply. Randy’s divorce lawyer also made the argument that the policy was her separate property under the title presumption of Evidence Code § 662. That code states, “the owner of the legal title to property is presumed to be the owner of the full beneficial title.” Randy’s divorce lawyer claimed that because she was the owner, it was her separate property.

Frankie’s divorce attorney, on the other hand, argued that the policy was community property because it was purchased during the marriage with community funds. With regards to transmutation, his divorce lawyer argued that the requirement that a change in ownership be in writing was not satisfied and that no transmutation occurred. He stated that the mere act of putting the policy in his wife’s name did not make the property his wife’s separate property.

California Supreme Court Decision:

The California Supreme court sided with the husband’s divorce lawyer and reversed the decision of the Court of Appeals. In deciding that the life insurance policy was community property, the California Supreme Court considered whether or not the transmutation statutes applied to cases where purchases were made from third parties, the legislative objectives of the transmutation statutes, and whether Evidence Code §662’s title presumption doctrine applied in these circumstances.

In determining if transmutation statutes apply when community funds are used to purchase property from a third party the Court illustrated that if the purchase is of a personal nature and not of substantial value, given the couple’s financial situation, then the giving of the property would be a gift and would not be subject to transmutation statutes. But, if the purchase is of substantial value given the couple’s financial situation, the giving of property to your spouse would be an interspousal transaction and would be subject to the transmutation statutes. Without a written declaration from the giver of the property, specifically changing the character of the property, the property would remain community property even after the gift was given. The Court rejected the idea that spousal purchases from third parties did not require a valid transmutation when the purchase was of substantial value given the couple’s financial situation.

If, as Randy’s divorce lawyer claimed, the intent of the parties was to convert community property funds into separate property, then the transaction had to involve a gift from husband to wife as nothing was ever given to husband for his community interest in the asset. If the policy was a gift, it would be an interspousal transaction and transmutation statutes would apply in a divorce.

The Court, through illustration, showed that husband and wife in this case could have very different viewpoints with regards to why the policy was purchased. The husband’s divorce attorney could claim the policy was purchased as an investment or that it was purchased for the benefit of the couple’s children. He could claim there was an understanding between himself and his wife that the policy was to remain community property. The wife’s divorce attorney, on the other hand, could claim there was never a conversation about using the policy as an investment or to pass on to their children. Her divorce lawyer could present evidence that the policy was meant to be hers alone. This back and forth argument would force the divorce court to assess the credibility of the parties with respect to the intent of the purchase of the life insurance policy. The divorce court would have to decide whether to believe husband or wife with regards to why the policy was purchased. The Court explained that the transmutation statutes were designed to prevent putting the divorce court in this type of position, to reduce excessive litigation, and to prevent the introduction of unreliable evidence. Transmutation statutes were designed to give the divorce court clarity with regards to the parties’ intent.

In addressing wife’s claim that the life insurance policy was her separate property, as a result of Evidence Code §662’s presumption (that the owner of legal title is presumed to be the owner of full beneficial title), the California Supreme Court explained it did not need to determine if §662 ever applied to divorce proceedings. In assuming that Evidence Code §662 may sometimes apply, the Court determined that §662 does not apply to the extent that it conflicts with the transmutation statutes.

The California Supreme Court summarized itself by declaring, “For the reasons we have given, the transmutation requirement of an express written declaration applies to Wife’s claim in this marital dissolution proceeding, that the life insurance policy Husband purchased during the marriage with community funds is her separate property. Wife does not contend that she presented evidence at trial sufficient to satisfy the express declaration requirement, nor does our examination of the record disclose such evidence. Husband never expressly declared in writing that he gave up his community interest in the policy bought with community funds. Accordingly, we agree with the trial court’s characterization of the insurance policy as community funds.” In Re Marriage of Valli, (2014) 58 Cal.4th 1396.

Valli Extended Forward:

The California Supreme Court’s decision in In re Marriage of Valli will, no doubt, have application to future cases dealing with property characterization issues. This family law decision will not be limited to the narrow scope of purchasing insurance policies. It will be instructive on how we should characterize other assets in divorce such as copyrights and patents, stock options, screenplays to production, derivative projects, annuities, royalties, and debt and other obligations. (2015 California Family Law Report, Refresher Course Presentation Workbook, page 148-149).

In this divorce decision the Court was clear that purchases made during marriage, even from third parties, are community property and subject to transmutation statutes if the purchases are of a personal nature or if the value of the purchases are substantial given the couple’s financial position. Small gifts from one spouse to another will still be presumptively the separate property of the receiving spouse once the gift is given, as long as the value of the gift is not substantial given the couple’s financial position. If the gift is substantial, it will require an express declaration, signed by the giver, to transmute the property and make it the sole property of the receiving spouse.

Marriage of Valli was a landmark 2014 family law case and will likely be a part of many future property characterization discussion or analysis in divorce matters.

In Re Marriage of Valli (2014) 58 Cal.4th 1396