Community Property Division and Life Insurance

Posted on January 5th, 2015

Community Property and Title Presumptions – Recent CA Supreme Court Decision re: Life Insurance

The California Supreme Court heard one family law case in 2014, In Re Marriage of Valli (“Valli”), which required the Court to determine whether a life insurance policy purchased during marriage, but titled in one spouse’s name alone should be classified as community or separate property. This question is important because in a dissolution proceeding, the characterization of the parties’ property determines the division of property between the spouses.  Generally, property that a spouse acquires before marriage or by gift, bequest or devise is separate property and property that a spouse acquires during the marriage is community property, with a few exceptions.

One of these exceptions is when there is transmutation of property.  Transmutation occurs when through a transfer or agreement between the parties, the character of the property changes from community to separate, separate to community, or from one spouse’s separate to the other spouse’s separate property. (Family Code §850). In order to be valid, a transmutation requires there to be an express declaration, made in writing. (Family Code §852).

In Valli, the parties were married for 20 years before separating in September 2004. Shortly before their separation, Husband used community property funds from a joint bank account to buy a life insurance policy on his life.  He named Wife as the sole owner and beneficiary.  The policy premiums were paid out of community property funds from the time the policy was purchased until the parties separated.  The parties did not dispute that the policy was purchased with community property funds, but rather disputed the policy’s characterization.  Husband argued that it was community property because it was purchased with community property funds during the marriage. Wife argued it was her separate property because Husband put the policy in her name. The trial court held the insurance policy was community property due to the fact it was acquired during the marriage with community property.  Therefore, Husband was awarded the policy and was ordered to pay out Wife’s one-half community interest.  The Court of Appeal reversed this decision, and held the insurance policy was Wife’s separate property.

The California Supreme Court reversed the Court of Appeal decision and held that the life insurance policy is community property unless the statutory transmutation requirements have been met.  The Court did not find these requirements to have been met because there was no express agreement between the parties. The Court also rejected Wife’s arguments that the transmutation rule does not apply to transactions between a spouse and third party (here, Husband and the insurance company), and that the policy is Wife’s separate property under the Evidence Code §662 title presumption.  The Court specifically held that the §662 title presumption does not apply when it conflicts with the transmutation statutes.

Therefore, based on Valli,  in both interspousal transactions and transactions between a spouse and a third party, the statutory transmutation requirements must be met for there to be a valid transmutation of property from community to separate property.

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