The Pros & Cons of Transmutation Agreements in California

It is highly recommended to seek out a California family law attorney when evaluating both separate and community property in a divorce. This ensures all assets and property are considered and fairly divided between both parties.

Before discussing transmutation agreements in California, it is important to understand the difference between separate and community property.

Separate and Community Property

Generally, separate property is any asset or debt acquired before marriage and after your date of separation. Separate property can be acquired during the marriage by gift, bequest, or inheritance. All earnings and accumulations on separate assets as well as new assets acquired with separate property remain separate property following divorce.

For example, if you purchased a vehicle prior to getting married, that vehicle would be categorized as separate property. If the vehicle was sold during marriage and a new one was purchased with those separate funds alone, the new vehicle would also be separate property.

Community property is any property or debt acquired during marriage except by gift, devise, or bequest. This includes all earnings during marriage, contributions to retirement accounts, and entitlements to pension payments. California is a community property state, which means all community property must be split equally upon divorce. 

Gifts/inheritance, regardless of whether it was given/inherited prior to or during marriage, is considered separate property. For example, if during your marriage you inherit money from your parents, that money will be considered your separate property even though it was acquired during your marriage. 

For a more in-depth explanation of separate and community property, please review “Tracing: What is Community Property and What is Separate Property”.

What Is a Transmutation?

The term “transmutation” means “the action of changing or the state of being changed into another form.” In the context of a marriage, a transmutation is a transaction between spouses by which the character of property (real or personal) is changed in one of three ways: 

1. From separate property to community property,
2. From community property to separate property, or 
3. From separate property of one spouse to separate property of the other spouse. 

A transmutation agreement is a type of postnuptial agreement that purports to change the character of property. Absent a premarital agreement, the default community property laws briefly explained above will apply in the event of divorce in California. However, if either party wishes to contract out of those default laws during marriage, an enforceable transmutation agreement is necessary.

A valid transmutation requires a writing, contained in an express declaration made, joined in, consented to, or accepted by the spouse whose interest is adversely affected. (Family Code section 852(a)). For example, if you own a home prior to marriage (separate property) and you would like to make the home community property after you are married, you could execute a grant deed from yourself to you and your spouse, and this may be considered a transmutation. (Estate of Bibb (2001) 87 Cal.App.4th 461). 

Top Pros & Cons of Transmutation Agreements for Your California Marriage

Provide Definitive Clarity on Separate vs. Community Property 

During the dissolution process, amongst other things, you and your spouse will need to divide all your assets and debts. This means you and your spouse will determine who is keeping various assets/properties and who is responsible for certain debts. A San Diego family law attorney can assist you in examining your assets and properties to reach a fair agreement.

If a transmutation agreement is made while you are married, it can help simplify the divorce process as your  property will already be categorized (as separate or community), and there will be minimal to no issues in determining what is separate vs. community property.  This “pro” is caveated; however and assumes the parties do not litigate the validity/enforceability of the transmutation agreement.

Can Be Used as Legal Evidence 

A transmutation agreement would be documented evidence regarding the categorization of property during the divorce process. For example, say your spouse has a home prior to your marriage, but as soon as you get married, they sign a grant deed adding you to the title.

When you get divorced, your spouse claims the house is entirely their separate property, as it was purchased prior to the marriage. By having the transmutation agreement (ex: the grant deed), you will be able to show the court your spouse intended for the home to be your community property, and it should be divided as such. 

If your spouse never executed any deeds, but rather verbally told you the house would be half yours, such verbal promises could not be proved or enforced during the divorce process. A written transmutation agreement would provide the court with the clear and convincing evidence needed to prove how you and your spouse really intended the property to be characterized.

Offer Some Tax Advantages 

Transmutations can provide certain tax advantages, especially those associated with inheritance and death taxes. Separate property can be transmuted to community property, so instead of characterizing that property as a “gift” (which would trigger a gift tax) or triggering capital gains taxation, a transmutation agreement can turn the property into a part of the estate that passes on to the surviving spouse.

Transmutation agreements can also help to avoid double taxation when a property is distributed to heirs. Speak with your Certified Public Accountant to determine any tax benefits that may be applicable to you.

Can Become Complicated with Multi-State Residency 

Each state has different requirements for transmutation agreements, and dissolution proceedings/characterization of assets can get complex if you and your spouse end up living in separate states. For example, as stated above California is a community property state; however, it is one of nine community property states in the United States.

If your spouse resides in a non-community property state, and if the divorce is filed in one of those other forty-one states, a transmutation agreement may be difficult to untangle due to different sets of state laws. For those in need of guidance through this process, consulting a California family law attorney is encouraged.

Can Create an Unfair Economic Advantage for One Spouse 

Many couples don’t enter their marriages considering divorce may be in their future. It may be easy to agree with things if you do not fully understand them, trust your partner has your best interest in mind, and assume you will never be in a position where you will need to divide assets.

By executing transmutation agreements, parties may knowingly or unknowingly create an unfair economic advantage for one spouse. For example, if the parties transmute the family home to the separate property of one spouse, upon divorce the other may be left with no significant assets. 

Further, as explained in detail below, a court may strike a transmutation agreement if it appears one spouse exerted undue influence over the other to gain an unfair advantage. This means if the court determines there was undue influence, duress, or coercion in the signing of a transmutation agreement, the court could deem the agreement invalid, and the assets would all need to be characterized. This could significantly increase the cost and length of litigation. 

Presumptive Joint Properties May Not Be Implicitly Covered 

Although you may have intended for a property to be held jointly, it could be subject to transmutation principles, which could affect the division of property if you do not have a written agreement describing your full intentions. For example, assume you and your spouse intend to purchase a home together while you are married and for the house to be community property, but you agree it is more advantageous if one spouse purchases the home and takes out a loan in their name alone.

While you and your spouse intended for the house to be community property, all the documents could indicate a transmutation agreement was made, and the house was transmuted to be held as one spouse’s separate property.  Although this was not the intention, the documentation may prove otherwise. It is always best to consult a California family law attorney to ensure all assets/properties that should be covered under the transmutation agreement are legally included. 

Abuse of Transmutation Agreements

Although transmutation agreements have generally helped reduce the number of disputes over the characterization of property, there are times when a transmutation agreement may be set aside by the court. A spouse may contest the validity and enforceability of a transmutation agreement if he or she believes that the agreement was obtained through undue influence, coercion, duress, or deceit. It is important to understand how a transmutation may be challenged prior to executing such an agreement. 

Undue influence is the excessive persuasion that causes another person to act or refrain from acting by overcoming that person’s free will and results in inequity. To determine if an agreement was signed/made by undue influence, the court will consider: 

1. The vulnerability of the victim, e.g. incapacity, illness, disability, injury, age, education, impaired cognitive function, emotional distress, isolation, or dependency where the influencer knew of, or should have known of, the alleged victim’s vulnerability.
2. The influencer’s apparent authority, e.g. status as fiduciary
3. The actions or tactics used by the influencer, e.g. controlling the necessaries of life, medication, interactions with others, access to information or sleep, the use of affection or intimidation, or the use of secrecy or haste in enacting changes in property rights.
4. The equity of the result, e.g. the economic consequences, the relationship of the value conveyed to the value of any services or consideration received, or the appropriateness of the change in light of the length and nature of the relationship.

Coercion is the use of force or the threat of force to get someone to do something that he or she would not otherwise do. 

Duress refers to a situation where one party uses acts of force, false imprisonment, coercion, threats, or psychological pressure to compel someone to act contrary to how they ordinarily would perform. 

Deceit is the suppression of a fact, by one who is bound to disclose it, or who gives information of other facts which are likely to mislead for want of communication of that fact. 

Further, a court may strike a transmutation agreement if it appears one spouse gained an economic advantage at the expense of the other spouse. If this occurs, the spouse who is perceived to be receiving the economic advantage must overcome the presumption that the transmutation agreement was the result of undue influence (as defined above). If the spouse fails to overcome this presumption (prove the agreement was not made as the result of undue influence), the transmutation agreement may be set aside. 

The spouse fighting this presumption must show that (1) the transfer was made freely and voluntarily by the spouse reducing their economic advantage; (2) the transfer was made with full knowledge of all relevant factors; and (3) the transfer was made with a complete understanding of the effect and purpose of the transfer. 

Protect Your Assets With a Transmutation Agreement 

If done correctly, a transmutation agreement can be vital to characterizing your property. It can help simplify the divorce process (as the assets will already be characterized), can be used as legal evidence (which will assist in the divorce proceedings to identify the true owner of the property), and can offer some tax advantages (such as avoiding double taxation, death taxes, and inheritance taxes).

While there are some definite pros to transmutation agreements, there are also some potential cons. Some potential downfalls to a transmutation agreement would include complications with multi-state residency, the creation of an unfair economic advantage for one spouse, and/or the presumptive joint properties may not be implicitly covered. 

Careful wording is essential when creating a transmutation agreement. It is important to seek legal assistance to determine if a transmutation agreement is best for your situation, and if an agreement needs to be prepared to ensure any agreement has the correct language so you and your spouse are protected. 

Consult With A Divorce Attorney at Cage & Miles

Not every case involving transmutation is the same, that is why it is imperative to have a legal professional on your side. Set up a 30-minute consultation with a San Diego family law attorney at Cage & Miles to better understand the legal implications of transmutation in the state of California. Call today for more information and to discuss your options.