What is Transmutation of Property in Divorce?
California is a community property state. As such, there is a presumption that any property acquired by married couples or domestic partners during the marriage or domestic partnership, and while they are residents of California, is community property.
However, the legal presumption is rebuttable. There are some instances when property is not necessarily considered community property. One such instance arises in the “transmutation of property.”
Transmutation, like the term implies, is a means of interspousal transfer of property that changes the characterization of a property to something else.
So, community property can become separate property; separate property can become community property, or the separate property of one spouse can become the separate property of the other spouse.
In general, transmutation of property is done through a formal written agreement. There should be a clear intent on the face of such a written agreement of the intent to transfer.
Obviously, however, this is a pretty contentious part of the law, particularly when the parties end up separating or getting a divorce. Was there really a transfer? Was the transfer valid and intended? And then there is the logic of it: why would a wife, for instance, who owned a house before she got married, want to transfer all rights of ownership to the house she owned to her husband, thereby relinquishing all her rights to a property she previously owned?
Courts are not disposed to liberally interpret transmutation of property documents or agreements, but instead construe them strictly to determine whether the legal formalities have been met to declare such transmutation valid. Where one spouse gains an economic advantage at the expense of the economic interests of the other, there is a presumption that the transmutation was the result of the exercise of undue influence. This presumption will need to be overcome in order to show the transmutation to be valid.
Some instances when transmutation of property can validly take place between the parties is during the division of property as a result of a divorce, in order to equitably divide the community property between them. For instance, one party decides to take the car and the other party decides to take the house. One party relinquishes his undivided right to these properties, and the house and the car are then transmuted from community property to separate property. Another example is the transmutation of separate property purchased on loan from one spouse to the separate property of the other spouse in order to take advantage of a more favorable credit score.
When is a Transmutation Valid?
Under Section 852 of the California Family Code, a transmutation must be 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.
This requirement for a written transmutation is a sharp contrast to the oral transmutation of property which were considered valid prior to 1985. One can probably imagine the chaos that resulted from this kind of “he said/she said” oral transmutations of property during that time.
Such transmutation can cover both real and personal property, but unless transmutation of real property is recorded, it will not be valid and binding upon third parties. The same applies to other types of titled properties such as bank accounts, retirement accounts, and investments.
Aside from real property, even non-titled properties can be transmuted, and the requirements for a written express declaration also applies. Courts will decide as to whether or not certain personal property should be covered by the requirements of a transmutation based on the value of the property and taking into account the circumstances of the marriage, including the financial valuation of the community estate and the party’s other assets and earnings.