California Family Code 721 is a unique law that declares spouses to be in a fiduciary relationship, like business partners. The requirement means that spouses must act in good faith towards one another with respect to their finances and property. The spouses must act with the highest degree of good faith, fair dealing, and in the other’s best interests. These duties limit each spouse’s ability to take advantage of the other financially.

The Stratte firm regularly helps family law clients understand their fiduciary duties toward their spouses or domestic partners. Reach out if you have any questions.

How Do Property Ownership and Control Work in a California Marriage?

When a couple marries or registers as domestic partners, most property that either spouse acquires from that point on is community property, including, for example:

  • Real estate,
  • Land,
  • Financial accounts,
  • Retirement benefits, and
  • Business interests.

Property is separate, or nonmarital, if a spouse obtains it before marriage, after separation, or through gift or inheritance. Spouses can also keep property separate as part of a written agreement, including through a valid and voluntary prenuptial or marital agreement. When a court divides property during divorce, it generally divides the couple’s community property equally.

Both spouses have an equal right to manage and control their community property. California Family Code (FAM) § 1100. That right may include the right to sell community property for fair market value, with limitations on the right to sell items of particular use or value to the other spouse

Yet, one spouse cannot transfer community property to someone else as a gift or for less than fair market value without the other’s written consent. A spouse is even more limited when it comes to property that the spouses use as their home or in their home, including:

  • Furniture,
  • Furnishings, and
  • Clothing of the spouse or minor children.

Without the other spouse’s written consent, a spouse cannot sell, convey (transfer as a gift or, for example, into a trust), or encumber (offer as collateral on a loan) these properties.

If one spouse primarily or exclusively operates a business that is community property, they do not need the other spouse’s written consent to ordinary transactions. However, the spouse must inform the other in writing if they intend to transfer all or substantially all of the business’s property.

What Is a Fiduciary Relationship?

A fiduciary relationship imposes fiduciary duties on the parties. Fiduciary relationships often exist in financial relationships where one party acts on behalf of another, such as:

  • Corporate directors to the board and the company,
  • Attorneys to their clients,
  • Executors or administrators of probate estates and beneficiaries,
  • Trustees to beneficiaries, and
  • Financial advisors to their clients.

In these circumstances, the person with authority to act on the other’s behalf is the fiduciary, while the person they can act on behalf of is the principal.

Why Make an Explicit Fiduciary Duty Between Spouses?

Since each spouse has legal authority over their shared property, each spouse may generally act on behalf of the other in financial matters. Because of this power, and the possibility of misuse, California law explicitly creates a fiduciary duty between spouses.

What Fiduciary Marital Duties Does Family Code 721 Create?

California Family Code 721 states that each spouse retains the right to use, transfer, or sell property when they marry on the same terms as if they were unmarried. That means each spouse can decide what happens to their community property, and the spouses also have overlapping powers with respect to that property.

California Family Code 721 explicitly imposes fiduciary, marital duties on both spouses to ensure neither spouse takes advantage of the other. Each spouse must act in good faith and fair dealing with the other. That obligation includes several duties that business partners owe one another, including duties of care, loyalty, and accounting.

These duties apply to transactions between spouses, such as:

  • A sale of one spouse’s separate property to the other,
  • A spouse transferring property to the other through a quitclaim deed, or
  • The transfer of community property into one spouse’s name so that it becomes separate property.

While Section 721’s duties generally apply to transactions between spouses, they combine with California Family Code 1100 to create fiduciary duties between spouses beyond those transactions.

Duty of Care

Between spouses, the duty of care requires spouses to refrain from:

  • Grossly negligent or reckless conduct,
  • Intentional misconduct, and
  • Knowingly violating the law.

California Corporations Code (CORP) § 16404.

For comparison purposes, this duty of care is significantly lower than the duties of trustees, who must act with:

  • Reasonable care, caution, and skill;
  • Based on the specific circumstances; and
  • As a prudent person with their characteristics would.

California Probate Code (PROB) § 16040. To meet their duty of care, trustees must consider:

  • Economic circumstances,
  • Inflation and deflation,
  • Tax consequences,
  • Role of each asset in the overall portfolio,
  • Expected total return from income and appreciation,
  • Other resources that beneficiaries own, and
  • Special relationships or value to certain assets.

PROB 16047.

Spouses are not held to the same standard as trustees, who we expect to have a reasonable ability to manage money. The law does not expect the average person to know investment principles and procedures like a trustee is expected to know.

Duty of Loyalty

The duty of loyalty does not relate to marital infidelity. Instead, the duty of loyalty means that each spouse must:

  • Account to the other about financial transactions;
  • Hold as trustee for the other spouse any profits, property, or other benefits they receive from community property without the other spouse’s consent;
  • Not act adversely to the interests of the other spouse and the marital estate; and
  • Refrain from financially competing with the other spouse.

In general, spouses should not avoid harming one another financially to avoid violating this duty.

Duty of Accounting (Right of Access)

In business partnerships, the partners must keep detailed records of financial dealings. Spouses do not have this obligation, but they must:

  • Allow each other to access information about any transactions at all times,
  • Provide complete and accurate information about things that affect community property, and
  • Account to each other for any benefit or profit from community property arising from a transaction the other did not consent to.

In other words, spouses must fully and candidly disclose all relevant information about their community property. Hiding property or debts violates the spouse’s fiduciary duties.

Marital Breach of Fiduciary Duty in California

Per the intersection of California Family Code 721 and 1100, spouses can have claims for marital breach of fiduciary duty in California. Generally, spouses raise issues related to violations of fiduciary duties during divorce or dissolution of marriage cases while resolving how to divide their property.

Breach of Fiduciary Duty Between Spouses

In typical breach of fiduciary duty cases, the person alleging the breach has to show that:

  • There was a fiduciary relationship between them and the alleged wrongdoer;
  • The fiduciary breached their obligations and violated one or more of their fiduciary duties; and
  • That breach caused harm to the principal.

The same basic structure applies in marital breach of fiduciary duty cases.

Proving that one spouse violated their duties is typically fact- and duty-specific. A spouse may breach their fiduciary duties by, for example:

  • Duty of care—gambling away the couple’s retirement savings;
  • Duty of loyalty—giving away the spouses’ second vehicle to a friend, leaving the other spouse without reliable transportation; or
  • Duty of accounting—refusing to allow the other spouse to have access to financial records related to community property.

Generally, the breach causes harm if it negatively impacts the community estate or the non-breaching spouse’s financial circumstances.

Undue Influence in Transactions Between Spouses

Crucially, if spouses engage in a transaction that benefits one spouse to the detriment of the other, the law presumes that it resulted from the advantaged spouse exercising undue influence over the other. In re Marriage of Haines, 33 Cal.App.4th 277, 301 (1995). Undue influence means using coercion, pressure, threats, or even violence to induce someone to consent to an agreement.

Under this rule, a spouse is advantaged if the transaction:

  • Improves their relative financial position;
  • Grants them a favorable opportunity; or
  • Allows them to otherwise gain, benefit, or profit.

In re Marriage of Matthews, 133 Cal.App.4th 624, 629 (2005). This presumption means that the spouse who suffered a detriment from the transaction only needs to show that the transaction occurred, harmed them, and benefited the other spouse as a result.

The advantaged spouse can rebut the presumption only if they can offer evidence that the other spouse:

  • Freely and voluntarily consented to the transaction,
  • Knew all relevant facts at the time, and
  • Completely understood what legal effects the transfer would have.

This presumption does not apply to at-death transfers from one spouse to the other through wills, trusts, or other transfer mechanisms. PROB § 21385.

Navigating Spousal Fiduciary Duties

Spouses owing one another fiduciary duties is a unique aspect of California law. It enables spouses and domestic partners to protect themselves from financial abuse during marriage and divorce more effectively. Spousal fiduciary duties also enable spouses to work with the equal division of community property required by California law.

If you have questions about spouses being fiduciaries or want to learn more, contact the Stratte Firm.

Resources:

California Corporations Code § 16403, link.

California Corporations Code § 16404, link.

California Family Code § 760, link.

California Family Code § 770, link.

California Family Code § 1100, link.

California Family Code § 1101, link.

California Family Code § 2550, link.

California Probate Code § 16040, link.

California Family Code § 16047, link.

In re Marriage of Haines, 33 Cal.App.4th 277, 301 (1995).

In re Marriage of Matthews, 133 Cal.App.4th 624, 629 (2005).