When a couple marries in California, their rights to income earned and assets and debts acquired during the marriage are impacted immediately by operation of law under the California Family Code. Since California is a community property state, couples married and living in California are considered to own all assets acquired during the marriage equally, regardless of who acquired the asset or incurred the debt.
At dissolution, the income earned and assets acquired during marriage are presumptively community property and will be divided equally absent an agreement otherwise. While these community property principles are the default rules that apply to property rights, California recognizes that a couple can enter an agreement to alter these property rights, including premarital agreements, post-marital agreements, and transmutation agreements.
Each of these agreements has specific requirements regarding the property rights that are being altered, the fiduciary obligations between spouses, the impact the agreement will have on property rights for the duration of the marriage, and to ensure enforceability. The focus of this blog is on marital contracts known as Transmutation Agreements.
What Is a Marital Transmutation Agreement?
A marital transmutation agreement is a contract that allows spouses to change, or “transmute,” the character of assets, debts, and even income earned during marriage. Unlike Premarital and Post-marital Agreements, which tend to focus on general rules that apply to how the entire community and separate property estate is treated throughout the marriage, transmutation agreements typically concentrate on changing the character of specific assets (i.e., from community property to separate property, from separate property to community property, or from one spouse’s separate property to the other spouse’s separate property). Therefore, when it comes to transmutation agreements, the initial consideration is: What is the underlying character of the property that will be changed under the terms of the agreement?
California Family Code § 760 provides, “Except as otherwise provided by statute, all property, real or personal, wherever situated, acquired by a married person during the marriage while domiciled in this state is community property.” California Family Code § 770 then provides the exceptions to the general community property rule where property is and remains separate property regardless of when it was acquired, including:
- All property owned prior to marriage
- All property acquired by gift or inheritance
- All income, rentals, issues, and profits generated from separate property
As discussed above, these are the default statutory rules that will apply to the characterization of all marital property absent a transmutation agreement that expressly alters the character of the property. Transmutation agreements are permitted by statute and will be enforced by California Courts, provided that the spouses have complied with the specific statutory requirements under the Family Code to effectuate a transmutation of property.
California Family Code § 852 provides the operative language setting forth the mandatory requirements for spouses to transmute property. Pursuant to § 852(a), “A transmutation of real or personal property is not valid unless 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.” Under this statutory framework, there are three (3) key components for property to have been validly transmuted:
- In Writing. To alter the character of the property, the agreement to transmute the property must be in writing. Oral agreements to change the character of property are no longer enforceable under the Family Code.
- By an Express Declaration. While the statutory language is somewhat ambiguous, Courts typically treat this section as requiring the written declaration/agreement to include clear and specific language that expressly evidences the intent to change the character of property, such as language identifying the underlying character (“community” or “separate” property), language identifying an intent to change the character (“transmute”) and language identifying the character that the property is being changed to (“separate” property if the initial character is community,” for example).
- Made, Consented To, or Accepted by Adversely Affected Spouse. The final requirement is that the written, express declaration under the first two prongs must be signed and understood by the spouse whose interest in the property is being “adversely affected.” Thus, for example, if Wendy is transmuting her premarital (separate) property to community property after she marries Harry, Wendy is the adversely affected spouse because her separate property (for which she initially had 100% ownership) is being changed to community property (Wendy and Harry will now each have an equal 50% ownership upon the transmutation). Wendy must understand, consent to, and sign a written document transmuting her premarital property to community property.
The only exception to these transmutation requirements under § 852 is for gifts of “tangible articles of a personal nature that is used solely or principally by the spouse to whom the gift is made and that is not substantial in value taking into account the circumstances of the marriage.”
In short, a transmutation agreement must be in writing, evidence of the change in character, and be understood by the spouses, except for explicit gifts that are of little value in the context of the couple’s finances.
California’s Family Code Section 2640 and Transmutation
Transmuting separate property into community property or vice versa can provide valuable benefits, such as protecting assets in case of a divorce or shielding them from tax penalties. However, these agreements must be carefully written to address California Family Code § 2640, which provides reimbursement to the separate property owner upon transmuting that property to the community.
This code states that a spouse who contributes separate assets to the purchase, maintenance, or improvement of a property is eligible for reimbursement from the marital estate in the case of a divorce or legal separation. For example, if one person provides the down payment for a home, they can request reimbursement for those funds in the divorce settlement. In this case, the transmutation agreement must address FAM § 2640, or the funding spouse may be eligible for reimbursement even if the agreement transmutes the home to community property.
Drafting Marital Transmutation Agreements
To ensure your property is properly transmuted, you should enlist the assistance of an experienced family law attorney to discuss whether a premarital, post-nuptial, and/or transmutation agreement is the most beneficial in your specific situation. Suppose a transmutation agreement is the most appropriate agreement. In that case, it is important that an experienced family law attorney prepares your transmutation agreement to ensure a valid transmutation occurs. The contract will be enforced in the event of a subsequent dissolution. Your attorney will guide you through the process by:
- Explaining the potential impact of declaring certain property to be separate or community;
- Clarifying whether certain community assets would be subject to reimbursement under Family Code § 2640 even after the asset is transmuted to community property;
- Ensuring you understand how the § 2640 reimbursement may affect a future divorce settlement under California law, as well as how the transmuted property will be divided once it is transmuted; and
- Preparing your financial disclosures and drafting a final contract that effectively transmutes the property as intended while accounting for these § 2640 reimbursements by explicitly permitting or waiving them according to your wishes.
If you are interested in transmuting property in your marriage, or if your spouse is requesting that you consent to a transmutation agreement, it is crucial to seek legal counsel. At Flicker, Kerin, Kruger & Bissada LLP, our expert attorneys are prepared to provide personalized support when drafting or challenging even the most complex transmutation agreements. Schedule your consultation today to discuss your marital contract needs with our firm.