California Supreme Court Unanimously Holds Life Insurance Policy is “Community Property”

per-cent-1-1110305-m.jpgWhen a couple decides to divorce, they will have to address many difficult issues, including the identification of marital or community property. In California, property may be identified as community, quasi-community, separate or something called “mixed community and separate property.” The nature of the characterization will determine whether, and to what extent the asset will be divided between the parties. Identifying and characterizing marital property can be a fairly complicated process, the result of which may impact each spouse’s future financial position. A local family law attorney with extensive experience in the San Diego court system can help to navigate the process and protect a party’s rights along the way.

Under California law, community property is typically everything that spouses own together, including items bought or acquired during the marriage, but excluding gifts or inheritances. Questions often arise as to whether certain assets may be deemed community property, subject to division, or separate property belonging only to one spouse. The highest court in the state was recently asked to determine whether a life insurance policy, purchased during the marriage, with community property funds, is separate or community property subject to division upon divorce.

The parties had been married for 20 years when they decided to separate in 2004. In 2003, the husband used community property funds from a joint bank account to buy a life insurance policy in the amount of $3.75 million, identifying his wife as the sole owner and beneficiary. There is no question that the policy premiums had been also paid with community property funds. The trial court ruled that the insurance policy was community property, as it was acquired during the marriage with community funds. The court of appeals reversed, finding that the insurance policy was the wife’s separate property.

The husband appealed, arguing that the policy is community property because it was purchased during the marriage. The wife claimed it was her separate property because her husband had arranged for the policy to be placed solely in her name, in effect, changing the policy’s character from community to separate property. Under the state family code, a spouse may “transmute” or change the character of property through a transfer or an agreement. The law requires, however, that there be an “express declaration” by the spouse whose interest in the property is adversely affected.

The husband claimed that the express declaration requirement was not fulfilled in this case. The wife argued that such transmutation requirements apply only to a transaction between spouses and not between one spouse and a third party (here, the insurance company). The California Supreme Court reversed and agreed with the trial court’s decision citing, among other things, the legislature’s intent in enacting the family code provision, namely to reduce 1) excessive litigation, 2) the introduction of unreliable evidence and 3) incentives for perjury in divorce proceedings involving disputes over the characterization of property. The court rejected the wife’s claim of an exemption for spousal purchases from third parties. The court found that the transmutation requirement of an express declaration applies to the wife’s claim in this divorce proceeding – that the insurance policy purchased by the husband during the marriage with community funds is her separate property.

This is an important decision that strengthens the notion of community property rights in California. If you are considering divorce and want to assess the extent of your marital property, the best course of action is to contact an experienced family law attorney from the San Diego area.

Mr. Doppelt is an experienced divorce attorney representing families for more than 20 years in Southern California. Doppelt & Forney serves clients in Linda Vista, Encinitas, Scripps Ranch, San Diego, and throughout Southern California. For a free consultation with a dedicated and experienced family lawyer, contact Doppelt & Forney through the law firm’s website or give us a call toll-free at (800) ROY IS IT (769-4748).

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