Pros and Cons of Transmutation Agreements
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What Is a Transmutation Agreement?
A transmutation is a legal doctrine that allows separate property to be changed into community property, or vice versa. Transmutation can have several major consequences on the property interests of a couple or the individual spouses. They are most common in instances of divorce where property is distributed according to whether it is classified as separate or community property.
During marriage it is common that spouses transfer property to one another and the title or character of property to change. Spouses may transmute by agreement or transfer property with or without consideration: (1) community property to the separate property of either spouse, (2) the separate property of either spouse to community property, or (3) the separate property of one spouse to the separate property of the other spouse.
How Is Transmutation of Property Accomplished?
Transmutation can occur in two ways:
- Property Instruments: Commonly, deeds or other acts done by the couple or an individual spouse that change the character of property are the most common forms of transmutation. An example of this is when an item of separate property becomes so commingled with community property that it is no longer recognizable as separate property.
- Agreement: Transmutation also occurs through a specific marital agreement known as a “Transmutation Agreement.” This is a written document describing an item of property and stating that it is to be transmuted. The document must be signed by both spouses and should include a date when the transmutation becomes effective.
Alternatively, transmutation can be accomplished through an oral agreement. However, depending on the value of the property and the laws of the state, the agreement may have to be in writing.
What Are Pros and Cons of Transmutation?
Some advantages of transmutation include:
- Clearer identification of property: Transmutation can help make it more clear which properties are separate and which are shared. Transmutation prior to separation or filing for divorce can make the divorce hearings run more smoothly. This is important in cases where one spouse is much more wealthy than the other.
- Evidence: Transmutation agreements can be used as legal evidence in the case of a property dispute. For example, a common dispute is whether an item of property was given to a spouse as a gift or not. If the property is addressed in a transmutation agreement, it can help prove who the rightful owner is.
- Tax consequences: Transmutation can help provide certain tax advantages, especially those associated with inheritance and death taxes. Transmutation agreements can often help avoid double taxation when the property is distributed to heirs.
Some of the disadvantages of transmutation include:
- Limited availability: Every state has different requirements for transmutation. Also, transmutation cannot be done solely for the purpose of estate planning. In fact, transmutation agreements can only be used in connection with divorce.
- Potential for error: A common error occurs where one spouse takes a property title in their own name, such as the deed for a house. Though the couple intended it to be a joint ownership, it could possibly be subject to transmutation principles in the future. In turn this could effect the division of property if the couple did not have a written agreement describing their full intentions
Do I Need a Transmutation Agreement?
Simply deeding property or changing the documents of title on property or other assets may not change ownership rights between married persons. The courts have set out specific rules that must be followed to change how title is held after a transaction between spouses. Transmutation can be beneficial for both persons, but it does take a certain amount of foresight in order to avoid any unwanted consequences. Thus, a couple should not engage in acts that might lead to transmutation, nor should they create a transmutation agreement, without first consulting with an attorney.
Transmutation is a very common and very important aspect of a divorce because if a valid transmutation occurred during marriage, it can affect who has an interest in the property that was transferred. In other words, who owns the property.
Do I Need a Lawyer for Disputes over Transmutation?
The best way to avoid errors when dealing with marital property is to have a written transmutation agreement. The written document would provide a court with the “clear and convincing evidence” that is needed to prove what the couple truly intended. An attorney can help draft such a document so that it clearly reflects the couple’s aims. Also, in the event that a lawsuit becomes necessary, a family lawyer can help you resolve any significant property disputes.
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Last Modified: 06-10-2016 02:22 PM PDT
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