Understanding Property Classification and Transmutation Agreements
In a California marriage, property may be classified as either community property or separate property. When you decide to get a divorce the classification of property you own is very important. Community property is generally divided between the divorcing spouses 50/50.
Separate property, on the other hand, remains the sole property of the spouse to whom it belongs. These classifications are typically assigned based on when the property is acquired. However, spouses can alter the classification of property by executing transmutation agreements.
Community Property vs. Separate Property
Before we can understand the importance of a transmutation agreement – and altering the classification of property ownership – it is important to understand the difference between community and separate property.
Community property is defined in California Family Code Section 760 as “all property, real or personal, wherever situated, acquired by a married person during the marriage.” Essentially all property acquired during a marriage – unless specifically intended to be the property of a particular spouse – is community property. Absent a prenuptial or postnuptial agreement, community property is divided 50/50 when spouses divorce.
Separate property of a married person is defined in California Family Code Section 770 and includes “(1) all property owned by the person before the marriage; (2) all property acquired by the person after marriage by gift, bequest, devise, or descent; [and] (3) the rents, issues, and profits of [this] property.”
There are two major differences between community and separate properties, and both have to do with the ability to control the property. First, a spouse may unilaterally (without the consent or knowledge of the other spouse) dispose of or convey separate property. On the other hand, disposing of community property requires the consent of both spouses. Second, separate property held during a marriage remains the sole property of a spouse in the event of a divorce. Community property will be divided.
What is a Transmutation Agreement?
We’re mostly familiar with the term “prenuptial agreement.” These are basically contracts executed before a couple is married. Did you know that you may also execute a “postnuptial agreement” after you get married? A transmutation agreement is a type of postnuptial agreement. It is essentially an agreement by both spouses to alter the status of a particular and specific piece of property.
A transmutation agreement can cause the classification of property to shift in one of three directions. First, a spouse may convert separate property into community property. Second, spouses may convert community property to separate property. Finally, a spouse may convert one’s own separate property into the separate property of the other spouse. (For example, spouse A transfers his ownership of property X to spouse B.)
Transmutation agreements may be created incidentally or intentionally. In some cases, spouses may be unaware that they are shifting the legal ownership status of property. For example, let’s say that A and B get married. A owns a car and decides, after the wedding, that B should be on the title, too. One of the many forms that A and B will sign to add B’s name to the title is a transmutation agreement. A’s car, which was separate property when they got married, is now community property of the marriage. If A and B divorce the car will no longer be considered to be A’s car. Instead, it will be subject to community property division laws.
Creating a Transmutation Agreement
A few years ago transmutation agreements could be executed orally. Unfortunately, this led a to a lot of confusion and fraud. Divorcing couples would get caught up in “he said” “she said” arguments about the ownership of property. In an effort to clarify ownership – and transfers of ownership – California created specific requirements for transmutation agreements.
- Is a written agreement;
- Contains an express declaration; and
- Is “joined in, consented to, or accepted by the spouse” who is giving away his or her interest.
Basically, a transmutation agreement must be a signed, written agreement that clearly states the intention of both spouses to transfer the status of property ownership. A valid transmutation agreement should clearly express that the spouses are aware of the effect of the change.
Setting Aside a Transmutation Agreement in California
California requires transmutation agreements to be clearly stated written agreements so that all parties are aware of the consequences of the transfer. In some cases, one spouse may exercise undue influence or take advantage of the other spouse – either through deceit, fraud, coercion, force. This subverts the purpose of the written document.
Transmutation agreements are binding and generally followed during divorce proceedings. However, California may permit a spouse to object to an agreement’s enforcement in some situations. A transmutation agreement may be set aside or voided if it appears as though one spouse gains a clear advantage at the expense of the other spouse.
If a transmutation agreement is challenged by the spouse whose interests were disadvantaged, the spouse gaining the interest must be able to prove the following:
- The transmutation agreement was made by both spouses willfully and free from undue influence;
- Both parties had a full understanding of all relevant facts when they signed the agreement; and
- Both parties were fully aware of the effect of the transfer triggered by the agreement.
Contact an Experienced California Family Law Attorney to Learn More
Do you and your spouse think that you may want to create and sign a transmutation agreement? Do you believe that you were wrongfully duped into signing away your legal rights to certain property? Are you considering a divorce and want to learn more about how certain property may categorized by the courts? For the answer to these (and many other) questions, contact our experienced California family law attorneys today for a free case evaluation.
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Beverly Hills, CA 90211