Division of Joint Bank Accounts: Application of Probate Code § 5305

Where a spouse contributes separate property toward the acquisition of community property, that spouse has a right, in an action for dissolution of marriage or legal separation, to be reimbursed for his or her separate contribution, limited to the equity in the property, and without interest or adjustment for change in monetary values. Family Code § 2640. Nothing on the face of Section 2640, or in reported decisions applying the statute, appears to limit the types of assets to which it applies.

However, pursuant to Probate Code § 5305, community bank accounts containing traceable separate funds may be treated differently from other assets, not only on death but also on dissolution of marriage or legal separation. Application of the Probate Code would result in the “separatizer” being entitled to interest or dividends accruing to his or her pro tanto separate share of the account. Some family law treatises suggest that it is unclear whether Probate Code § 5305 or Family Code § 2640 governs division of bank accounts in dissolution of marriage proceedings. See, e.g., Hogoboom & King, California Practice Guide, Family Law (1999) §§ 8:384, 8:428; Kirkland, Lurvey & Richmond, California Family Law (2d Ed. 1999) § 21.10.

In determining the respective rights of spouses to a joint bank account into which funds traceable to one party’s separate property have been deposited, analysis under one of these provisions rather than the other can make a substantial difference. Unfortunately, no appellate court has directly considered the issue, but the legislative history of section 5303 provides some guidance.

In 1983, the Legislature enacted former Probate Code § 5305. That statute applied to ownership of bank accounts, and provided at that time, in relevant part:

(a) Notwithstanding Sections 5301 to 5303, inclusive, if parties to an account are married to each other, … their net contribution to the account is presumed to be and remain their community property.

(b) The presumption established by this section is a presumption affecting the burden of proof and may be rebutted by proof of either of the following:

(1) The sums on deposit that are claimed to be separate property can be traced from separate property unless it is proved that the married persons made a written agreement that expressed their clear intent that such sums be their community property. …

In 1989, however, subsequent to the enactment of Civil Code §§ 4800.1 and 4800.2 (the predecessors to Family Code §§ 2581 and 2640, respectively), the Legislature added an introductory clause to subsection (b), so that the statute, as amended, provided:

(b) Notwithstanding Sections 4800.1 and 4800.2 of the Civil Code, the presumption established by this section is a presumption affecting the burden of proof and may be rebutted by proof of either of the following: …

Subsequently, the entire Probate Code was repealed, but new Section 5305 replaced the former statute without substantive change. The only amendments of consequence since that time were to replace the references to former Civil Code §§ 4800.1 and 4800.2 with references to Family Code §§ 2581 and 2640.

Subsection (d) of Probate Code § 5305 reiterates the effect of that section on community property law:

Except as provided in subdivisions (b) and (c), a multiple-party account created with community property funds does not in any way alter community property rights.

It should be noted that Probate Code §5305 applies only to funds in banks, savings and loans, credit union and other similar accounts, and not to other types of accounts, such as brokerage accounts (Probate Code §§ 40 and 5128), nor does it apply to business bank accounts (Probate Code § 5122).

The 1990 Law Revision Commission Comment to Probate Code § 5305 further clarifies that the Legislature intended this subsection (b) to prevail over Family Code § 2640 as applied to funds on deposit in financial institutions:

The introductory clause of subdivision (b) makes clear that the rule stated in subdivision (b) prevails over the rules stated in Civil Code Sections 4800.1 and 4800.2 with respect to the division of a joint account upon dissolution of marriage or legal separation as well as for all other purposes.

It would appear, then, that only a few years after the 1983 enactment of Civil Code §§ 4800.1 and 4800.2, the Legislature expressly chose to mandate that bank accounts be treated differently from all other types of community assets.

Under Probate Code § 5305, a spouse contributing separate funds to an account retains a separate interest in the funds, and not just a right of reimbursement; therefore, that spouse would be entitled to interest and accumulations to the separate money, not merely return of the funds themselves. In contrast, by way of example, when a spouse contributes separate funds to the acquisition of a residence, he or she retains only a right to reimbursement, and not a separate property interest, in the absence of “evidence either by way of the form of title or written agreement to show that the parties intended to maintain [the] investment as ’separate property and not community property.’” In re Marriage of Braud (1996) 45 Cal.App.4th 797, 820 n.23, 53 Cal.Rptr.2d 179, 193 n.23.

The 1990 Law Revision Commission Comment to section 5305 also clarifies that when funds are withdrawn from an account, the respective separate and community ownership interests in the funds are preserved:

[F]or example, if the funds in a joint account of a married couple have their source in the separate property of the wife, the husband can eliminate survivorship rights by closing out the account and opening another account in his own name, but absent an agreement of the husband and wife this would not change the ownership interest of the wife in the funds withdrawn.

This feature is significant when tracing contributions to the acquisition of property other than bank and savings accounts.

To understand the significance of the 1989 amendment to section 5305, a review of the legislative history of Civil Code § 4800.2 is in order. As the Supreme Court explained in In re Marriage of Walrath (1998) 17 Cal.4th 907, 72 Cal.Rptr.2d 856, that statute was enacted to reverse the rule of In re Marriage of Lucas (1980) 27 Cal.3d 808, 166 Cal.Rptr. 853, which precluded recognition of the separate property contribution of a spouse to a community acquisition, absent an agreement between the spouses that the contribution was not intended as a gift. The Legislature made it clear that under Civil Code § 4800.2 (now Family Code § 2640), “if the property has since appreciated in value, the community is entitled to the appreciation. Walrath, supra, 17 Cal.4th at 915.

In Walrath, the California Supreme Court delineated the correct method and formula for determining the extent, if any, to which a spouse who contributes separate property to acquisition of a community asset is entitled to a return of that contribution, and applied that discussion to several different assets, including specifically a joint bank account. The Walrath court stated:

… Having concluded that Gilbert is entitled to reimbursement of his separate property contribution from those assets to which the contribution may be traced, we now delineate the method by which such tracing is performed.[17 Cal.4th at 921]

….. Thus, Gilbert may trace 81 percent of the amount of the loan proceeds spent on the Lucerne, Utah, and Nevada properties, and the joint bank account. For example, Gilbert is entitled to 81 percent of the $40,500 spent from the loan proceeds on the Utah property. While this property has apparently increased in value since the loan proceeds were paid into it, Gilbert is limited to the amount of his separate property contribution that can be traced to that particular asset. It would be unfair to allow a contributing spouse to seek greater reimbursement from a particular community property asset than the amount that he or she contributed to that asset…[17 Cal.4th at 922] emphasis added

…. Gladys, whose appeal is not before us, contributed $20,000 of her separate property to a hypothetical equity of $180,000, or 11 percent, and therefore could trace 11 percent of the loan proceeds spent on the Lucerne, Utah, and Nevada properties, and the joint bank account. The community is entitled to any appreciation in these assets above the amount necessary to reimburse the parties for their separate property contributions to the Lucerne, Utah, and Nevada properties, and the joint bank account.”[17 Cal.4th at 922] emphasis added

However, neither Walrath nor Braud, supra (which also involved separate contributions to a community bank account, discussed or referred to Probate Code § 5305. Both courts confined their analyses to Family Code § 2640.

Interestingly, the Walrath court engaged in a lengthy discussion of the importance of the reimbursement right created by that statute

[A] contributing spouse has a vested property right in his or her right to reimbursement for separate property contributions to community property under the post-1984 law, or section 2640. [17 Cal.4th at 919]

Further, earlier Supreme Court cases analyzing Civil Code § 4800.2, have observed that there is a “public interest in establishing uniform, predictable rules for the division of marital property.” In re Marriage of Heikes (1995) 10 Cal.4th 1211, 1224, and cases cited therein.

Despite the Supreme Court’s directive of uniformity, in 1992, when the Legislature enacted the Family Code, it adopted the language of Civil Code § 4800.2 into Family Code § 2640 without substantive change. At that time, the Legislature could have inserted language clarifying that section 2640 was intended to apply to all property including bank accounts. However, no reference to bank accounts was added. The only statement of any possible relevance is found in the Law Revision Commission Comment to section 2640, that the statute “is intended to apply to all community estate property regardless of the date of acquisition.”

Had the Walrath Court discussed Probate Code § 5305, and its legislative history and commentary, the opinion would perforce have given direction to family law practitioners and forensic accountants. However, as of this writing there is no reported case which attempts to resolve or elucidate the conflict between the two statutes.

When faced with division of joint or multiple party bank accounts which may contain traceable separate property funds, therefore, counsel may wish to argue that the court should apply Probate Code § 5305 rather than Family Code § 2640. While family law attorneys and courts are obviously much more familiar with the principles of community property law found in the Family Code, in this instance the family law practitioner should neither forget nor ignore the Probate Code.

Since such joint bank accounts are a factor in a high percentage of dissolution of marriage actions, these authors are hopeful that the courts and/or the Legislature will soon provide direction to practitioners faced with this issue.

Contact Us for a consultation