Many couples go about their married lives in peace, with the belief that all their assets are shared as equals. Other couples rest in the idea that they are aware of what belongs to whom in every respect and have made amicable agreements about future distribution of properties.
In either of these situations, partners may be in for an unpleasant surprise in the event of death or divorce. Ensuring that the property of each partner is properly ascribed is best suited to the official establishment of a transmutation, well before the occurrence of an event which necessitates disbursement.
What Does “Transmutation” Refer To?
After couples get married, California law considers that most property obtained belongs to both parties. This is community property law. Except for inheritances, only what was obtained before – or is obtained after – the marriage, belongs to the individual.
In some cases, even what each individual owned before the marriage can become community property. The specifications for the establishment of community property are in California Family Code 2581.
The laws for community property are there to protect partners from both oversight and fraud. One example of oversight might occur when one partner agrees to finance a home purchase using his/her own credit, with the intention of adding the second partner to the property deed following the financing.
As time goes on, the reminders to take this extra step of adding the other person fade, and the task is never completed. In the case of death or divorce, and without these laws, the unlisted spouse may not have the intended rights to the property.
An example of fraud would be the case where a spouse had been amassing assets during the course of the marriage in secret, or where the spouse has undervalued an asset on purpose to take advantage of a partner during a division.
Fraud surrounding the application of transmutation laws most often come up during divorce proceedings. They can also become problematic for the person who is end-of-life planning and is desiring to bequeath assets to someone other than a spouse.
In California, the length of the marriage does not matter when it comes to the equal ownership of property. The only way that a spouse can exempt his or her partner from receiving the default benefit of community property is through the completion of precise documents.
In this documentation, the intentions of ownership are clearly stated, and the spouse who is giving up the rights to the property has attested – under no duress – to the agreement. Once the documentation is complete, and the authenticity of stated value is verified, the courts will consider the property to be transmuted – or changed into – property that is owned by the individual.
The process also works in reverse. If one partner comes into the marriage with property, or receives an inheritance during the marriage, a transmutation document can be filed to establish that both partners have equal rights to the asset.
Without such a document – or without the ability to establish that the second partner has developed an invested interest over time – such property will remain individually owned.
Planning Aspects to Consider
For a transmutation to be valid, it must be in writing. Verbal agreements about what will become of property are not enough. While the agreement which is drafted does not have to include the term, “transmutation,” it must state the intentions of both affected parties in clear language, and both parties must sign the document in front of a notary.
The language used must include the fact that the transfer has occurred of his or her own free will, and that the partner who is giving up the rights to the property is in possession of full knowledge of the consequences of doing such. It should be noted that, while the transmutation process cannot be utilized for the specific purpose of end-of-life planning, the documents can still be helpful in guiding procedures during final distribution of assets.
Even with this documentation firmly in place, there is a caveat to the process. As previously mentioned, there is a possibility that the partner who is surrendering rights to the property has been misled – either by mistake or with intent – into believing that the property is worth less than the actual value.
These specifications for transparency in recognizing the true value of what is being transmuted are fiduciary standards. Failing to include the accurate value of the property in question within the documentation will render the transmutation process invalid, and the partner who claims to not have known the full details or outcome of the agreement can negate the process due to this.
There are also exceptions to the idea that anything which one spouse brought into the marriage is the sole property of the individual. In cases where the partner has made good use of the property over the course of the marriage, the courts may find that such partner has earned practical rights toward ownership.
A common example of this is when one partner enters the marriage having already purchased a home. The married partner may not ever be added to the deed, but, having lived in the home for many years, such person may have a claim to the property.
If the home has increased in value, or if the non-listed partner has applied funds toward the home, the courts may consider it to fall under community property laws. If one wishes to avoid this scenario, a valid transmutation document must be in place.
Without a clear transmutation document in place, a surviving or former spouse who is seeking to establish rights to assets which are separate – from a legal standpoint – must undergo a process of tracing. Tracing means creating a trail of evidence that such partner should have a right to the property.
This process is not a legal remedy and can involve extensive expense and footwork. Because this undertaking can become tedious and convoluted, the best chance of success for someone in this situation would be to use the services of an experienced attorney.