In their wedding vows, couples commonly swear to stay married to each other “for better or worse, for richer or poorer, in sickness and in health, until death do us part.” Despite these idealistic intentions, it’s a sad fact of life that many marriages end in divorce, not death. And who gets property that was jointly owned by both spouses when a marriage ends?
The California Supreme Court recently held that the real estate partnership interest acquired during marriage as husband and wife is husband’s separate property. The Court explained that the partnership modification agreement did not meet the requirements of a valid transformation because it did not contain the required express declaration that the characterization or ownership of the property was being changed.
In 1971, John Lafkas bought a one-third stake in a property. In 1990 he married his second wife, Jean, and in 1995 they acquired more property through a tax-deferred exchange that required a bank loan with Jean as co-signer. They revised the partnership agreement to make themselves joint owners of the property to satisfy the bank. The couple then separated the following year and officially divorced in 2000. In 2003 they sold the properties, effectively dissolving the partnership, with each of them taking their share of the profits.
Initially, a judge ruled that Jean was owed a portion of any rent and financial appreciation of the properties that had accrued after they signed the revised partnership agreement. But the appeals court reversed that decision, claiming that the language in the agreement didn’t specifically indicate such a “transmutation” of John’s separate property into a community interest with Jean. The California Supreme Court subsequently agreed with the appeals court.
Remember that a valid transmutation of separate property to community property requires more than simply adding a spouse to a title document. Consult a qualified lawyer to ensure that your wishes are made legally binding. Marriage of Lafkas, 237 Cal.App. 4th (2015).
About the author
John O‘Grady, O’Grady Law Group, was the 2012 chair of BASF’s Estate Planning, Trust & Probate Section.