Did the Letter of Intent and Declaration of Gift Constitute a Valid Transmutation Agreement?
The Letter of Intent our client’s mother and stepfather signed when executing their joint trust constituted a valid transmutation agreement in the eyes of the court. To transmute property, agreements need not use specific terminology, such as “community property,” “separate property” or “transmutation” for the document to be regarded as a valid transmutation agreement. Rather, according to California Court of Appeal case Safarian v. Govgassian, “the writing must reflect a transmutation on its face, and must eliminate the need to consider other evidence in divining its intent.”
In other words, because the spouses in this case both signed the Letter of Intent and Declaration of Gift and demonstrated their intent to transmute any property titled in the name of the trust to community property (except for the property both trustors designated in writing to be separate property), the document served as a valid agreement between the spouses to establish community ownership of all the assets in their joint trust — and it’s worth noting the spouses transferred title to all their assets into their joint trust, including the stepfather’s residence owned before marriage.
Could Each Spouse’s Separate Property Be Traced?
Even though the spouses expressed a clear desire to keep certain property separate in the Letter of Intent they signed, the spouses had been too vague in specifying which assets constituted their separate property for them to truly have any separate property interests.
Namely, in a document listing the alleged separate property, the stepfather had named “stocks and cash” as his separate property without identifying which stocks and how much cash he was referring to. A forensic accountant hired by Keystone’s client could not trace the stepfather’s separate property based on this document.
When it’s virtually impossible to distinguish between a spouse’s community and separate assets, the assets in question generally will be considered the spouses’ community property unless evidence can be provided to the contrary.
Did the Stepfather’s Trust Contain Any Separate Property?
As discussed extensively above, because the spouses had placed all their assets in the joint trust, and because their separate assets could not be traced, all their assets were considered community property. By extension, so were the assets in the stepfather’s trust, since they originated from the assets in the joint trust.
That, however, is not all. While the stepfather’s misappropriation of trust assets from the joint trust was in itself unlawful, he also, in so doing, breached his fiduciary duties to both his spouse and the beneficiaries of the joint trust by robbing them of assets they were entitled to.
While most people are aware of the fact trustees owe fiduciary duties to beneficiaries, few are aware of the fact that spouses may also owe fiduciary duties, particularly if a decision they are making regarding community property could adversely affect their spouse.
When the stepfather went behind his wife’s back to transfer their community assets into his separate property trust (at a time when she was mentally incapacitated no less), he breached his fiduciary duties to his wife and created a presumption of undue influence in his acts.
In the same vein, the stepfather had breached his duties to the beneficiaries of the joint trust. The joint trust should have been funded with 50% of the community assets upon the death of our client’s mother; however, nearly all of the assets of that trust, which had a seven-figure value, had already been transferred to the stepfather’s separate trust.
