Transmutation refers to a legal doctrine which allows for separate property to be changed into community property, or vice versa. Community property generally refers to any property or assets that a couple obtains during their marriage, and owns together.
Community property generally includes:
- All income earned by either spouse during the marriage;
- All debts incurred during the marriage;
- Real estate obtained during the marriage;
- Money held in joint bank accounts; and
- Personal property obtained during the marriage, such as vehicles, furniture, jewelry, etc.
Alternatively, separate property refers to property that is owned by an individual spouse. Property that remains separate during a marriage usually includes:
- Property owned by a spouse prior to the marriage;
- Property obtained by a spouse after a legal separation;
- Property received as a gift or inheritance; and
- Debts incurred by one spouse before the marriage.
Transmutation can have several major consequences in terms of property interests of a couple, or the individual spouses. These consequences are most common in instances of divorce in which property is distributed according to whether it is classified as separate or community property.
During the course of a marriage, it is common for spouses to transfer property to one another, as well as for the title or character of property to change. Spouses may transmute by agreement, or transfer property with or without consideration:
- Community property to the separate property of either spouse;
- The separate property of either spouse to community property; or
- The separate property of one spouse to the separate property of the other spouse.
How Is Transmutation of Property Accomplished? What Are Pros and Cons of Transmutation?
There are two ways in which transmutation can occur:
- Property Instruments: Generally speaking, deeds or other acts done by the couple or an individual spouse which change the character of property are the most common forms of transmutation. An example of this would be when an item of separate property becomes so commingled with community property that it is no longer recognizable as separate property; or
- Agreement: Transmutation may also occur through a specific marital agreement. This is known as a “Transmutation Agreement.” A Transmutation Agreement is a written document used to describe an item of property and state that it is to be transmuted. The document must be signed by both spouses, and should include a date upon which the transmutation becomes effective.
Alternatively, transmutation may 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. In general, courts are far more likely to enforce a written agreement than they are to enforce an oral agreement.
Some of the advantages of transmutation could include:
- Clearer Identification of Property: Transmutation can assist in clarifying which properties are separate, and which properties are shared. Transmutation prior to separation or filing for divorce can help the divorce hearings run more smoothly, which is especially important in cases involving one spouse who is much more wealthy than the other;
- Evidence: Transmutation agreements can be used as legal evidence in cases involving a property dispute. An example of this would be the common dispute regarding whether an item of property was gifted to a spouse, or not. If that property is addressed in a transmutation agreement, it can assist in proving who the rightful owner is; and
- Tax Consequences: Transmutation can provide certain tax advantages, especially those associated with inheritance and death taxes. Transmutation agreements often help avoid double taxation when the property is distributed to heirs.
Some of the disadvantages of transmutation could include:
- Limited Availability: It is important to remember that every state has different requirements for transmutation. And, transmutation cannot be done solely for the purpose of estate planning; transmutation agreements can only be used in connection with divorce; and
- 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. Although the couple intended the property to be a joint ownership, it could possibly be subject to transmutation principles in the future. In turn this could affect the division of property if the couple did not have a written agreement describing their full intentions for that property.
Do I Need a Transmutation Agreement?
It may not be enough to simply deed property or change the documents of title on property or other assets. Doing so may not change ownership rights between married persons. The courts maintain specific rules that must be followed in order to change how title is held after a transaction between spouses. Transmutation can be beneficial for both persons.
However, transmutation does take a certain amount of foresight in order to avoid any unwanted consequences. As such, a couple should not engage in acts that might lead to transmutation. They should not create a transmutation agreement without first consulting with an attorney.
Do I Need a Lawyer for Disputes over Transmutation?
Having a written transmutation agreement would provide a court with the “clear and convincing evidence” that is needed to prove what the couple truly intended. A skilled and knowledgeable attorney can help initially draft such a document. Additionally, should any disputes arise, an experienced and local family lawyer can also represent you in court as needed.