- Dennis Fordham
- Posted On
Estate Planning: Fair dealing and married persons
In California married persons owe each other, “a duty of the highest good faith and fair dealing” (section 721 of California’s Family Code).
This duty of “good faith and fair dealing” is likened to a trustee’s duty to a beneficiary. How does that lofty duty apply to the conduct of married persons?
It applies to both interspousal transactions (i.e., transfers) and to the management of community property.
Specifically, “each spouse must provide the other spouse access to books at all times regarding any inter spousal transaction,” and “upon request provide true and full information of all things affecting any transaction which concerns the community property.”
The duty is most commonly relevant in the context of community property assets. “… [A]ll property, real or personal, wherever situated, acquired by a married person during the marriage while domiciled in this state which is [presumed to be] community property.” Marital earnings and anything purchased with marital earnings is community property.
Thus, a participant spouse’s retirement account, to the extent of contributions from marital earnings, is community property, even though the account is titled solely in the name of the participant spouse.
Any change of death beneficiaries requires the written consent of the non participant spouse in order to be effective with respect to one hundred percent of the community property retirement account.
Accordingly, if a participant spouse withdraws money from his or her 401(k) retirement account, which included marital earnings, for his or her sole pleasure or benefit and without the non-participant spouse’s knowledge and consent then such conduct would likely violate the duty.
Next, the duty also applies to transactions between spouses, such as when one spouse transfers his or her one-half interest in a community property – like the family home – to the other spouse to make the asset the other spouse’s sole and separate property.
A statutory presumption then applies that that the recipient spouse used undue influence over the transferring spouse to make the other spouse transfer title. An interspousal transfer of a family residence can be set aside by a court unless the presumption is overcome.
What happens when the duty is violated? A claim arises and, “a court may order an accounting of the property and obligations of the parties to a marriage and may determine the rights of ownership in, the beneficial enjoyment of, or access to, community property, and the classification of all property of the parties to a marriage.”
Moreover, even if the spouse who breached the duty subsequently files for bankruptcy the aggrieved innocent spouse’s claim against the bankruptcy estate over the violation may not be discharged.
This is because California’s inter spousal duty of fair dealing creates a trustee relationship between the spouses and a violation of such as duty is non dischargeable if the spouse has, “a culpable state of mind involving knowledge of, or gross recklessness” regarding such duty.
In sum, spouses are each other’s trustees when it comes to how they conduct themselves with respect to any dealings between themselves and the management of community property assets.
Anyone seeking guidance with respect to particular facts should consult an attorney.
Dennis A. Fordham, attorney (LL.M. tax studies), is a State Bar Certified Specialist in Estate Planning, Probate and Trust Law. His office is at 870 S. Main St., Lakeport, California. Fordham can be reached by e-mail at This email address is being protected from spambots. You need JavaScript enabled to view it. or by phone at 707-263-3235. Visit his Web site at www.dennisfordhamlaw.com .