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Big girls do cry.

Insight: A celebrity divorce clarifies California's community property laws regarding life insurance.

During a marriage the husband used community property funds to purchase an insurance policy on his life, naming his wife as the policy's only owner and beneficiary. But what happens to the policy upon dissolution of the marriage? Is the life insurance policy community property or the wife's separate property?

Recently, in Valli v. Valli, the California Supreme Court addressed this issue and determined that, unless the statutory transmutation requirements had been met, the life insurance policy was community property.

In Valli, after a 20-year marriage, husband Frankie (yes, that Frankie Valli) and wife Randy separated in September 2004. Before the separation, in March 2003, the husband used community property funds from a joint bank account to buy a $3.73 million insurance policy on his life, naming his wife as the sole owner and beneficiary. Until the parties separated, the policy premiums were likewise paid with community property funds from a joint bank account.

During the divorce proceedings, the husband contended that the policy was community property because it was purchased during the marriage with community funds. The wife contended that the policy was her separate property because the husband arranged for the policy to be put solely in her name, thereby changing the policy's character from community property to separate property.

The trial court ruled that the insurance policy was community property because it was acquired during the marriage with community funds. The Court of Appeal reversed, holding that the insurance policy was the wife's separate property. The matter was taken to the Supreme Court.

In California, a community property state, property that a spouse acquired before the marriage is that spouse's separate property, while property a spouse acquired during the marriage is community property. Married persons may, through a transfer or an agreement, transmute--change--the character of property from community to separate or from separate to community. A transmutation of property, however, "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." To satisfy the requirement of an "express declaration," a writing signed by the adversely affected spouse must expressly state that the character or ownership of the property at issue is being changed.

Frankie argued that because the express written declaration requirement was not satisfied, placing the policy in Randy's name did not transmute the policy into her separate property. Randy argued that the transmutation requirements apply only to transactions between spouses, and not to one spouse's acquisition of property from a third party, since the only transaction was between Frankie and the insurance company. The high court looked at the legislative purpose of the transmutation requirements and rejected the purported exemption for spousal purchases from third parties. The Court agreed with the trial court: the policy was community property. It ruled the transmutation requirement of an express written declaration applied to Randy's claim, and Frankie never expressly declared in writing that he gave up his community interest in the policy bought with community funds.

Audio:

Listen to an interview with Lissa A. Martinez at www.bestreview.com/audio

Best's Review columnist Lissa A. Martinez is an attorney with DarrasLaw in Ontario, Calif. She is a plaintiff's lawyer representing disabled insureds and can be reached at lmartinez@darraslaw.com
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Article Details
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Title Annotation:Regulatory/Law
Author:Martinez, Lissa A.
Publication:Best's Review
Geographic Code:1U9CA
Date:Jul 1, 2014
Words:565
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