Non probate property transfers outside of the trust context: Spousal consent, waiver and transmutation

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Most families are well aware that probate can be best avoided by setting up a living trust. However, there are other procedures that can transfer property bypassing the probate process. Chief among them are life insurance policies, pay-on-death accounts, and retirement plans (e.g., IRAs, 401ks, etc.).

Unintended Consequences of Non-Probate Transfers to Non-Spouses

If these life insurances policies, IRAs and other accounts were established during marriage in California, they typically are community property. This opens up the possibility for unintended consequences if the named beneficiary is not the spouse of the account owner.

For example, imagine that the beneficiary for a life insurance policy funded during marriage is a special needs child from a former marriage. If the spouse has not given written consent, the provision for the nonprobate transfer of community property on death is ineffective as to the nonconsenting spouse’s or partner’s interest in the property. The current spouse could petition the court to restore one half of the funds to her or him.

This unwanted outcome could be prevented by the mentioned written consent of the spouse or a written waiver of that spouse or partner’s community property rights in the assets subject to the transfer.

Consent to non-probate transfer of assets is not a transmutation

A consent to her nonprobate transfer of community property on death by the spouse of the transferor is not a transmutation of the consenting spouse or partner’s interest in the property unless the spouse or partner also expresses a clear intent to transmit property. Specifically, with spousal consent the life insurance proceeds would be paid in full to the beneficiary and there is no opportunity to later claim half of it back, however, the character of the property has not changed from community property to separate property of the decedent spouse who owned the life insurance policy. A  so-called transmutation, i.e., the agreement to change community property to separate appropriately or vice versa, must meet the express declaration requirements of Family Code section 852.

Transmutation agreements can be a valuable estate planning tool to manage capital gains taxes and other purposes such as Medi-Cal long-term care planning.

Non-Probate Non-Trust Transfer of Property to the Surviving Spouse in California

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