Estate planning for California registered domestic partners can become quite complicated. The complexity arises as a result of how these unions are treated for California law purposes and how they are treated for federal law purposes. Namely, registered domestic partners (RDPs) are generally considered spouses for purposes of California law, but are not considered spouses for purposes of federal law. 

As a result, an estate planning lawyer must carefully consider each component of the registered domestic partners' estate plan to understand the ramifications that the interplay of federal and state law have on how to transfer assets.

Some practitioners believe registered domestic partners, who for all practical purposes behave and have expectations of those who are married, might be better served by simply getting married. In some sense, registered domestic partnerships already have many of the restrictions imposed on married couples (e.g., restrictions on the transfer of community property, family allowance, probate homestead, transmutation requirements, etc.) but few of the benefits provided to married couples (e.g., unlimited marital deduction for estate tax purposes, filing of joint tax returns, etc.).

The various moving parts of the law surrounding registered domestic partnerships makes it difficult to provide generalizations that are broadly applicable. Every RDP couples' estate plan must be analyzed in the context of the assets they own and how they wish to dispose of them. For this reason, it is important for RDPs to consult an experienced estate planning lawyer.

A valid transmutation must be in the correct form and must not violate the rules regarding the fiduciary relationship between spouses.

Express Declaration

To unpack that statement a bit, we first look to the "express declaration" requirement as alluded to California Family Code Section 852, which states the following:

(a) A transmutation of real or personal property is not valid unless made in writing by an express declaration that is made, joined in, consented to, or accepted by the spouse whose interest in the property is adversely affected.

(b) A transmutation of real property is not effective as to third parties without notice thereof unless recorded.

(c) This section does not apply to a gift between the spouses of clothing, wearing apparel, jewelry, or other tangible articles of a personal nature that is used solely or principally by the spouse to whom the gift is made and that is not substantial in value taking into account the circumstances of the marriage.

(d) Nothing in this section affects the law governing characterization of property in which separate property and community property are commingled or otherwise combined.

(e) This section does not apply to or affect a transmutation of property made before January 1, 1985, and the law that would otherwise be applicable to that transmutation shall continue to apply.

There's a fair amount of uncertainty as to how a court will interpret the "express declaration" used in a transmutation agreement between spouses. Because of this, practitioners often advise incorporating the word "transmute" or "transmutation" into the agreement (or some other wording that indicates the parties understand that the character of the property is being changed).

The statute above also clearly indicates that any such agreement must be in writing (with some exceptions as a result of case law) and the person who is  negatively affected must accept or agree to the transmutation.

Fiduciary Relationship

Though not directly mentioned in the statute above, a transmutation of property will not be upheld if a court determines that one spouse unduly influenced the other spouse. As a starting point, under California law, spouses are presumed to be in a confidential relationship with each other.

Section 1100(e) of the California Family Code states:

Each spouse shall act with respect to the other spouse in the management and control of the community assets and liabilities in accordance with the general rules governing fiduciary relationships which control the actions of persons having relationships of personal confidence as specified in Section 721, until such time as the assets and liabilities have been divided by the parties or by a court. This duty includes the obligation to make full disclosure to the other spouse of all material facts and information regarding the existence, characterization, and valuation of all assets in which the community has or may have an interest and debts for which the community is or may be liable, and to provide equal access to all information, records, and books that pertain to the value and character of those assets and debts, upon request.

If one spouse gains an advantage as a result of the transmutation, there's a rebuttable presumption that the transmutation was a result of undue influence. Once the presumption exists, it is up to the spouse with the advantage to rebut it. If he or she is unable to rebut the presumption, then the transmutation will be considered invalid.

Two areas that are not clear under the law involve (a) the degree of advantage one spouse must have before the presumption is invoked and (b) whether this fiduciary duty can be waived. Both of these are beyond the scope of this post, but should be noted when dealing with the subject of transmutation agreements.

Transmutation is the process whereby spouses in California can change the community or separate property nature of the assets that they own. Thus for example:

1. The separate property of one spouse can be "transmuted" into the separate property of the other spouse or the community property of both spouses.
2. The community property of a couple can be "transmuted" into the separate property of one of the spouses.

Some Reasons for Transmutation

Here are some ways that transmutation can be used to a couples benefit:

1. Transmuting property into community property may allow a full step-up in cost basis of the asset upon one spouse's death. This may allow the surviving spouse to sell the property with no or substantially less capital gains tax.
2. For Medi-Cal planning purposes, transmuting the family home may provide a family substantial savings.
3. Properly written transmutation agreements can reduce the likelihood of litigation regarding the character of property after the death of either or both spouses.
4. Transmuting property allows parties to have legal title to assets that properly reflect their true beliefs about the character of the property. For example, only one spouse may have taken title to a home in order to receive favorable financing rates even though it was the clear intention of the couple that the home be their community property.

Applicable to Divorce

Keep in mind that transmutation agreements also affect the division of assets for purposes of divorce. Thus, it is always important to understand the ramifications of how your assets are characterized.

California has a strong public policy towards protecting spouses who are left out of his or her partner's Will or Trust. The so-called "omitted spouse" generally refers to someone who marries his or her spouse after his or her spouse creates a Will or Trust.

A quick example: Susan creates a Will for the benefit of her mother on January 1, 2018. On December 1, 2018, Susan marries Bill. On January 1, 2019, Susan dies. Bill is an "omitted spouse".

The "Statutory Share"

A surviving spouse who marries the deceased spouse after the deceased spouse executes his or her "testamentary instrument" (i.e., a Will or Trust) is entitled to a "statutory share" of the deceased spouse's probate or trust estate.

But what is the "statutory share" and how do you calculate it? California Probate Code Section 21610 states as follows:

Except as provided in Section 21611, if a decedent fails to provide in a testamentary instrument for the decedent’s surviving spouse who married the decedent after the execution of all of the decedent’s testamentary instruments, the omitted spouse shall receive a share in the decedent’s estate, consisting of the following property in said estate:

(a) The one-half of the community property that belongs to the decedent under Section 100.

(b) The one-half of the quasi-community property that belongs to the decedent under Section 101.

(c) A share of the separate property of the decedent equal in value to that which the spouse would have received if the decedent had died without having executed a testamentary instrument, but in no event is the share to be more than one-half the value of the separate property in the estate.

Exceptions

A rule wouldn't be a rule without exceptions. California Probate Code Section 21611, provides 3 such exceptions to the statutory share rule. It states that:

The spouse shall not receive a share of the estate under Section 21610 if any of the following is established:

(a) The decedent’s failure to provide for the spouse in the decedent’s testamentary instruments was intentional and that intention appears from the testamentary instruments.

(b) The decedent provided for the spouse by transfer outside of the estate passing by the decedent’s testamentary instruments and the intention that the transfer be in lieu of a provision in said instruments is shown by statements of the decedent or from the amount of the transfer or by other evidence.

(c) The spouse made a valid agreement waiving the right to share in the decedent’s estate. 

If you are anticipating marrying someone and have already created your Will or Trust, it is important to consult an estate planning lawyer to ensure that your wishes are properly carried out. If you would like dispose of your property in the same manner as you had specified prior to your marriage, you may need to include a provision to that effect in your Will or Trust.