Opinion
NOT TO BE PUBLISHED
APPEAL from a judgment of the Superior Court of San Diego County, Michael B. Orfield, Judge. Reversed., Super. Ct. No. GIN034007.
AARON, J.
I.
INTRODUCTION
Plaintiffs Eugene Salmonsen and Sharon Salmonsen, as Trustees (Trustees) of the Petta Family Trust (Trust), appeal from a judgment entered in favor of defendant Vicki Petta. The Trustees allege that Vicki, who was married to George Petta at the time of his death, improperly received and retained property that should have been distributed pursuant to the Trust, which George created. According to the Trustees, after George died, Vicki received a final balloon payment that was due under a contract for the sale of George's separate real property. The trial court concluded that the final payment under the contract was not an asset of the Trust, that it was community property, and that all "rights and interests" in the payment transferred to Vicki upon George's death, pursuant to the community property laws of California. The court further determined that Vicki should be "allowed to keep the balloon payment earlier transferred" to her.
We will refer to the Pettas by their first names, for clarity.
On appeal, the Trustees contend that the trial court erred in concluding that the balloon payment was community property and/or that Vicki had the right to possess the entire final payment due under the real property sale contract.
We conclude that the trial court erred in its determination that the balloon payment was community property and in its ruling that Vicki should be permitted to retain the balloon payment free of Trust administration. The balloon payment derived from the sale of George's separate property, and there is no evidence that George intended to transmute this separate property into community property. Thus, upon George's death, the anticipated balloon payment was an asset of George's estate and should have been disposed of according to George's estate plan, which included a "pour-over" will. Pursuant to George's will, the balloon payment should have been distributed through the Trust. We therefore reverse the judgment.
II.
FACTUAL AND PROCEDURAL BACKGROUND
A. Factual background
George and Vicki were married from June 1975 until George's death on December 30, 1997.
In 1985, George inherited a three-unit building from his mother. George used a portion of the proceeds he received from selling the inherited property to purchase a single family dwelling in Camas, Washington.
The time frame of these sales and purchases is unclear.
On October 21, 1993, George created the Trust ─ a revocable trust, with George as the settlor. The Trust also named George as sole trustee and beneficiary. Section VII of the Trust, entitled "Distribution on Death," provides in part that the trustee is to convey the Camas property to two of George's grandchildren, or to their survivor, upon George's death.
On the same date, George executed a "pour-over" will, which directed that any remaining assets of his estate not otherwise disposed of were to be placed in the Trust. The Trust contains a residual clause, which provides that Vicki is to receive "[a]ll other assets, including but not limited to savings and checking accounts, jewelry, motor vehicles," free of the Trust.
In November 1995, George, as trustee, sold the Camas property to David Lessley for $102,500. The sale contract identified the parties to the sale as "GEORGE R. PETTA, Trustee of the PETTA FAMILY TRUST" and "David J. Lessley, a single man." Lessley made a $30,000 down payment. The "contract for deed" provided that Lessley was to pay the remaining $72,500 in monthly installments of $608.42 to an escrow account at First American Title Company of Oregon (First American). The escrow instructions required First American to distribute the funds into a bank account held jointly by George and Vicki. The sales contract further required that any balance remaining under the contract be paid on or before November 16, 2000. Both the sales contract and the escrow instructions were silent as to how the final payment was to be distributed.
A "contract for deed" is defined as "a conditional sales contract for the sale of real property. Also termed installment land contract; land sales contract; land contract." (Black's Law Dict. (8th ed. 2004).)
In September 1997, George asked his daughter, Sharon Salmonsen, and her husband, Eugene Salmonsen, to be trustees of the Petta Family Trust. They agreed to do so. A document was subsequently executed effectuating the change of the trustee. George died on December 30, 1997. After George's death, First American continued to deposit Lessley's monthly payments into the same bank account identified in the escrow instructions as belonging to George and Vicki. At some point after George's death, Vicki opened a bank account in her own name. After Vicki opened this new account, First American began to send Lessley's monthly payments to the new account.
The record is unclear as to the specific dates on which certain events transpired after George's death.
When the balance on the contract came due, Lessley requested a two-year extension. The Trustees apparently granted the extension, and agreed that the final balloon payment would be due in November 2002.
Although Eugene Salmonsen referred in his testimony to a court exhibit that was a document he signed granting Lessley an extension on the balloon payment, this exhibit was not included in the record on appeal.
Approximately a year after Lessley received the extension, but before the extension had expired, he paid the full balance due on the property, which was $66,985.87. First American subsequently deposited that amount into Vicki's bank account.
B. Procedural background
The Trustees brought an action against Vicki asserting, among other things, that the balloon payment from the sale of the Camas property was an asset of the Trust and should have gone into the Trust for distribution. Specifically, the complaint alleges that Vicki unjustly "received $66,985.87 representing the net proceeds received from the sale of the Plaintiff's property . . . ." The Trustees seek recovery of $66,985.87 plus interest, from Vicki.
The case was tried before the court on August 16 and 17, 2005. The trial court issued a tentative statement of decision on August 25, 2005. The Trustees filed an objection to the tentative statement of decision and requested further factual findings and conclusions of law from the court on September 12, 2005. The trial court issued a final statement of decision on October 12, 2005, and entered judgment on December 12, 2005.
III.
DISCUSSION
In the statement of decision, the trial court concluded that once George sold the Camas property, that property was no longer an asset of the Trust. "The Camas property was taken out of the Petta Family Trust . . . and sold by the trustee of the Trust, George Petta. Once sold, that property no longer existed in the Trust. It was converted into a note." Without explaining its analysis, the court further concluded that after George sold the Camas property and received a "note" in exchange, the "note was now a community property asset, and upon George Petta's death, should have been handled under the community property laws of the State of California. . . . The note and its distribution are not PETTA FAMILY TRUST assets."
There was no promissory note involved in the real property transaction at issue. We presume that the trial court was referring to the sale contract, entitled "Real Estate Contract," when it referred to a "note." Although the transaction did not involve a promissory note, the contract did include Lessley's promise to make future payments in exchange for the property.
The Trustees contend that the trial court erred in allowing Vicki to retain the entirety of what they refer to as the "residue amount" paid for the Camas property. The Trustees make two arguments as to why the balloon payment Vicki received after George's death should have gone to the Trust. The Trustees first argue that the Camas property was George's separate property, and that the proceeds from its sale were therefore separate property and belonged to George's estate after his death. The Trustees argue in the alternative that even if the payments due under the sale contract for the Camas property were community property, Vicki should have received only half of the final payment, and that the other half should have been considered an asset of George's estate.
The parties dispute ownership of the final balloon payment of $66,985.87. For ease of discussion we will refer to the final payment Lessley made as the "balloon payment" or "final payment."
We conclude that the balloon payment should not have gone to Vicki directly, but, rather, should have been distributed according to George's will, which required that the final payment be given to the Trustees to be distributed according to the provisions of the Trust.
A. The property in question derived from a separate property source and remained separate property
As an initial matter, we address whether the balloon payment was separate or community property. Although property acquired during a marriage is generally presumed to be community property (Fam. Code, § 760), the parties do not dispute that the Camas property was George's separate property, despite the fact that the property was acquired during George and Vicki's marriage. George used a separate property source, i.e., the cash he received from selling property he inherited from his mother (§ 770, subd. (a)(2) [property acquired by married person by "gift, bequest, devise, or descent" is separate property]), to purchase the Camas property. Because the Camas property was derived from a separate property source, it was presumptively George's separate property. The trial court implicitly found that the Camas property was George's separate property.
Further statutory references are to the Family Code unless otherwise indicated.
The trial court determined that once the Camas property was taken out of the Trust and converted into a note, the monthly payments of which were to be distributed to a joint account, "[t]he note was now a community property asset." (Italics added.)
When George sold the Camas property to Lessley, George received in exchange a down payment of cash, and the promise of monthly payments, including interest, as well as the promise of a balloon payment at the conclusion of the time period specified in the contract. In determining whether the payments George received, or was to receive, for the real property were separate or community property, the pertinent inquiry is whether George altered the character of his separate property ─ essentially gifting it to the community ─ when he sold the Camas property in exchange for cash and the promise of future payments. The trial court concluded that what had been George's separate property became community property after the sale, apparently based on the fact that in the escrow instructions provided to First American, George requested that future payments be deposited into an account he held jointly with Vicki.
Married individuals may alter their property rights and change the character of property from separate to community, or community to separate. (§§ 850, 1500.) However, the statutory scheme that governs transactions between spouses who "transmute" or change the character of property during an ongoing marriage imposes strict requirements in order for a transmutation to be effective. (§§ 850–853; see also In re Marriage of Benson (2005) 36 Cal.4th 1096, 1103 (Benson).) Specifically, section 852, subdivision (a) provides that "[a] transmutation of real or personal property 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."
The record contains no evidence of a writing that would establish that George transmuted his separate property—the right to future payments under the contract, including the balloon payment—into community property. The contract for the sale of the Camas property identified the parties to that agreement as George, as trustee, and Lessley. The real property sales contract does not mention Vicki. The contract for the sale of the property thus clearly does not demonstrate an intention by George to transmute his separate property into community property.
Further, the fact that the escrow instructions required First American to distribute the monthly payments into an account that was held jointly by George and Vicki did not alter the character of George's separate property. George's decision to allow the payments to be distributed to a joint account does not constitute a sufficient written declaration of his intention to transmute his separate property into community property. "Section 852(a) states that an agreement to change the character of marital property 'is not valid unless' it (1) is 'in writing,' (2) contains an 'express declaration' by which the 'transmutation' is made, and (3) is 'accepted' in some fashion by the 'adversely affected' spouse. This multipronged rule is framed in the negative, as though all intendments weigh against finding compliance in the usual case." (Benson, supra, 36 Cal.4th at p. 1104.)
There is simply no "express declaration" that George intended to transmute his separate property into community property. The Supreme Court considered the meaning of the "express declaration" requirement under the predecessor statute to section 852 in In re Estate of MacDonald (1990) 51 Cal.3d 262 (MacDonald). In MacDonald, the court determined that a wife's signature on an IRA agreement establishing her consent to the designation of the husband's trust as sole beneficiary of the accounts was not an "express declaration" that the wife intended to transmute her community share of the funds in the accounts into the husband's separate property. The court reached this conclusion despite the existence of a great deal of extrinsic evidence that the spouses intended to divide all of their community property into separate property after learning that the wife was terminally ill. (MacDonald, supra, 51 Cal.3d at pp. 267–268.)
In interpreting the phrase "express declaration," the MacDonald court held that in order to constitute such a declaration, the IRA documents would have had to include language "expressly stating that [the wife] was effecting a change in the character or ownership" of community property. (McDonald, supra, 51 Cal.3d at p. 273.) Because there was nothing that indicated that the wife knew "the legal effect of her signature might be to alter the character or ownership of her interest in the pension funds," her signature consenting to the designation of her husband's trust as the sole beneficiary was insufficient to alter the character of the property. (Id. at pp. 272–273.) The court stated,
“[W]e conclude that a writing signed by the adversely affected spouse is not an 'express declaration' for the purposes of section 5110.730 (a) unless it contains language which expressly states that the characterization or ownership of the property is being changed." (MacDonald, supra, 51 Cal.3d at p. 272.)
There is no writing in which George expressly states that he was changing the characterization of his separate property. George's signature on the escrow instructions directing that his separate property be placed in an account that he held jointly with Vicki is not an "express declaration" that the ownership of the property was being changed. The anticipated balloon payment was thus George's separate property.
B. The final payment should be administered pursuant to George's will, but should not be substituted for the Camas property in the Trust
Because the interest in the anticipated balloon payment was George's separate property, when he died, this interest became an asset of George's estate, to be disposed of pursuant to his estate plan. It is clear that this asset was not part of the Trust corpus, since George removed the Camas property from the Trust corpus when he sold it to Lessley, and George did not amend the Trust to include as a Trust asset the money he received and would receive in the future under the Camas property sale contract. The balloon payment thus was not an asset of the Trust at the time of George's death, but, rather, was subject to the provisions of his will.
The balloon payment was not separately identified in George's will. It therefore falls within the pour-over provision of the will, which provides that the residual property of his estate go to the Trustee, to be administered as part of the Trust. Specifically, George's will provides:
"I give the residue of my estate to the Trustee then in office under the aforesaid 'PETTA FAMILY TRUST'. I direct that the residue of my estate shall be added to, administered, and distributed as part of that Trust, according to its terms and of any amendment made to it before my death."
Thus, under George's estate plan, the proceeds from the balloon payment should have been given to the Trustees to be distributed pursuant to the terms of the Trust.
As part of their argument that Vicki should not have received the balloon payment, the Trustees assert that all of the proceeds from the sale of the Camas property, including the balloon payment, should replace the Camas property, as identified in the Trust document, and should therefore be distributed pursuant to the Trust provision regarding disposal of the Camas property. The record does not support this conclusion.
The Trust document describes the Camas property as consisting of "real estate and a mobile home." As the trial court correctly noted, George removed the Camas property from the Trust when he sold it. The money George received in exchange for the property is a different asset from the property itself, and the Trust makes no mention of either the down payment George received ─ or the payments he was to receive in the future ─ from the sale of the Camas property. It is thus clear that the balloon payment is not an identified Trust asset, and therefore does not fall under any of the specific Trust provisions that direct the distribution of particular assets. Rather, as we discuss in section III.C., post, the final payment due under the contract falls within the provision of the Trust that provides for the disposal of "other assets," including but not limited to "savings and checking accounts, jewelry, [and] motor vehicles." The payment should be distributed according to the provisions of that paragraph of the Trust, not the paragraph that provides for distribution of the Camas property.
C. It was error to allow Vicki to retain the final payment without it being distributed pursuant to the Trust
Vicki contends that even if the Trustees are correct that the final payment due under the contract should have distributed pursuant to the Trust, she was the proper recipient of the final payment because it fell within the residuary clause of the trust, which provides that "[a]ll other assets" be distributed to her.
We agree that the balloon payment falls within the residuary clause of the Trust. Pursuant to the residuary clause of the Trust, "[a]ll other assets, including but not limited to savings and check accounts, jewelry and motor vehicles shall be distributed free of trust to VICKI PETTA." As discussed earlier, George removed the Camas property from the Trust when he sold the property. As the trial court found, there was no written amendment to the Trust that placed the balloon payment into the Trust or otherwise directed distribution of the balloon payment. However, George's pour-over will distributed the final payment due under the contract into the Trust. The payment became one of the "other assets" described in the residuary clause of the Trust. Pursuant to this clause, the proceeds from the final payment should be distributed to Vicki.
We disagree, however, with Vicki's assertion that this court should affirm the trial court's decision to allow her to retain the final payment, free from Trust administration, because the final payment is to be distributed to her anyway, pursuant to the terms of the Trust. The fact that Vicki may ultimately receive some, or all, of the money from the balloon payment by way of the residuary clause of the Trust does not obviate the need for the property to be distributed by way of the Trust instrument, rather than by a direct distribution to Vicki. There remain a number of issues regarding administration of the Trust that are not before us, but may have to be addressed, prior to any disbursement of the balloon payment funds.
For example, the Trust permits the Trustees to use the assets of the Trust to pay the settlor's outstanding debts and other expenses. Specifically, the Trust provides:
"A. On the SETTLOR'S death, the TRUSTEE may in the TRUSTEE'S discretion pay out of the principal of the trust estate the following: [¶] 1. SETTLOR'S debts outstanding at the time of his death and not barred by the statute of limitations, statute of frauds, or any other provision of law; [¶] 2. Last illness and funeral expenses; [¶] 3. Costs of trust administration including attorney's fees; [¶] 4. Estate and inheritance taxes, if any."
Only after the Trustees pay these obligations are the Trustees to distribute the remaining assets of the Trust:
B. Following the SETTLOR'S death and after payment of his obligation described above (or setting aside a sufficient reserve therefore), the TRUSTEE shall distribute and/or administer the assets remaining in his or her possession as follows: . . . ."
The Trust does not describe the manner by which the Trustees are to utilize the assets of the Trust to pay these debts, but, rather, appears to leave those determinations to the discretion of the Trustee(s). The Trustees should have access to all of the assets of the Trust when deciding how to pay the settlor's debts, last illness and funeral expenses, costs of trust administration, and estate and inheritance taxes. Further, there may be additional complications regarding distribution of the balloon payment that necessitate allowing the Trustees the opportunity to control and distribute the payment. The balloon payment must therefore be given to the Trustees and administered according to the Trust provisions.
D. Vicki was not entitled to the entire balloon payment, even if that payment was community property
Contrary to the trial court's decision, there is no scenario under which Vicki could have properly directly received the entire balloon payment. Even if we were to agree with the trial court that the payments due under the contract were community property, Vicki still would not be entitled to a direct distribution of the full payment. Rather, half of the payment would have been Vicki's portion of the community property; the other half would have been George's share of the community property. (See Prob. Code, § 100, subd. (a) ["Upon the death of a married person, one-half of the community property belongs to the surviving spouse and the other half belongs to the decedent"].) George's portion of the community property would have then been administered according to his estate plan, which, pursuant to the pour-over provision of his will, required that his share of the final payment be placed in the Trust and distributed pursuant to the Trust. Thus, the trial court's ultimate conclusion—i.e., that Vicki be "allowed to keep the balloon payment earlier transferred to her account"—was erroneous, even under the trial court's own legal analysis. The error is apparent in the court's statement of decision:
"The note was a community property asset along with its balloon payment. All rights and interests in the note and balloon payment must be decided under the community property law of the State of California. Assuming that the community property laws transferred all rights and interests to VICKI PETTA upon George Petta's death, it is the conclusion of this Court that she is allowed to keep the balloon payment earlier transferred to her account." (Italics added.)
The assumption on which the trial court relied is incorrect, since Vicki was not legally entitled to full possession of all community property upon George's death. Rather, she was entitled to her half of the community property. Even if George had died intestate, Vicki would have been entitled to only one-half of George's half of the community property, in addition to her half of the community property. (Prob. Code, § 6401, subd. (a) ["As to community property, the intestate share of the surviving spouse is the one-half of the community property that belongs to the decedent under Section 100."].) Under no scenario would Vicki have been entitled to direct disbursement of the entire balloon payment. Thus, even if the trial court had been correct when it determined that the balloon payment was community property, the trial court nevertheless erred in concluding that it was appropriate that the entire balloon payment be paid directly to Vicki, free of Trust administration.
IV.
DISPOSITION
The judgment of the trial court is reversed insofar as it allows Vicki to retain the final payment made pursuant to the sale contract for the Camas property. The trial court is directed to enter a new judgment ordering Vicki to pay the proceeds of the balloon payment to the Trustees, as representatives of the Trust, so that those funds may be distributed according to the terms of the Trust. The parties are to bear their own costs on appeal.
WE CONCUR: McCONNELL, P. J., O'ROURKE, J.