(Editor’s Note: The Court of Appeal granted rehearing on December 2, 2019 and later depublished the portion of its opinion discussed below such that it is no longer citable authority in California courts.)
It is widely understood in California that inherited assets, unlike assets earned from labor, are the separate property of the receiving spouse. But what if the assets do not come directly from a parent and instead pass from one sibling to another?
Inheritance for separate property purposes generally means direct inheritance, says the California Court of Appeal. That’s the lesson of In re Marriage of Deluca (2019) 41 Cal.App.5th 598.
How Did George Get the Apartment Complex?
George Deluca’s father died in 1990. George then litigated with his two siblings (Rosalie and Sylvester) for over four years regarding the trusts in which their father held real estate.
Eventually, in 1996, as commonly occurs in such California trust litigation, the siblings hashed out an allocation of their father’s assets. Under the settlement agreement, George received title to three properties. He relinquished any right to receive or claim an interest in any of the other properties.
A year later, George and Rosalie signed an “Amendment to Settlement Agreement,” under which Rosalie agreed to transfer the Florida Street property (an apartment complex) that had been allocated to her to George in exchange for cash and a promissory note. Sylvester did not sign the “amendment” as it did not affect him.
Meanwhile, before the original settlement agreement was signed, George married Rosalinda. They lived together for 15 years and had two children together before they separated in 2011.
In the marital dissolution action that followed, a San Diego Superior Court judge heard evidence on whether George inherited the Florida Street property such that it was George’s separate property. The judge ruled in George’s favor and Rosalinda appealed.
When Is Property Received by “Bequest, Devise or Descent”?
California Family Code section 760 creates a presumption that property acquired during marriage is community in nature. However, under Family Code section 770, “separate property” of a married person includes “all property acquired by the person after marriage by gift, bequest, devise, or descent” as well as the “rents, issues, and profits” of such property.
While George and Rosalie chose to characterize his acquisition of the Florida Street property as an “amendment” to their trust litigation settlement, the Court of Appeal looked through that description. The court found that George purchased the Florida Street property from Rosalie at a time when she had sole ownership of it. Hence, George’s acquisition could not be deemed an “inheritance or devise” and instead the general community property presumption controlled.
The appellate court rejected George’s argument that the equitable theory of “inception of title” applied, noting a lack of evidence that he had an unperfected equitable right to acquire the Florida Street property as its sole owner before he was married.
Further, while wife Rosalinda executed a quitclaim deed in favor of George with respect to the Florida Street property, the appellate court found that the deed fell to the presumption of undue influence under Family Code section 721(b). The court quoted from Lintz v. Lintz (2014) 222 Cal.App.4th 1346, discussed in an earlier blog post.
The undue influence presumption arose because George sought to obtain an advantage from the deed. The evidence showed that Rosalinda signed the deed under a mistaken view of her rights, having accepted George’s erroneous interpretation that the property was part of his inheritance and thus was his sole and separate property. Rosalinda did not freely act with full knowledge of all the facts and with a complete understanding of the effect of the transaction.
Accordingly, the appellate court ruled that the Florida Street property should have been characterized as a community asset, a win for Rosalinda. George, however, was entitled to seek reimbursement for any separate property cash that he used to pay for the Florida Street property.
You May Have to Share that Second Piece of Pizza
In re Marriage of Deluca teaches that the inheritance exception to the community property presumption is finite in scope.
A negotiated allocation of assets from a trust or estate is like slicing up a pizza. As a beneficiary, you bargain for and get to keep as your separate property the particular slice you agree to receive. However, if you later acquire another person’s slice of the same pizza, it presumptively will be one that you must share as community property with your spouse.
Jeffrey Galvin is an attorney with Downey Brand LLP, based in Sacramento. He litigates trust and estate cases in Northern California, including disputes involving trust and probate administration, contests of trusts and wills, and financial elder abuse claims.