Pros and Cons of Transmutation Agreements

The term “transmutation” means “converts.” In the context of marriage, “transmutation” is a transaction between spouses by which the character of personal or real property is changed in one of three ways:

• Changed from separate to community
• Changed from community to separate
• Changed from the separate property of one spouse to the separate property of the other spouse

Community Property vs. Separate Property

There are two ways married couples can hold property in the United States. One is called “community property” or “marital property,” and the other is called “equitable property” or “separate property.”

Community property generally refers to any property or assets a couple obtains during their marriage and owns together. Community property includes:

• All income earned by either spouse during the marriage
• Real estate obtained during the marriage
• Money held in joint bank accounts
• Personal property obtained during the marriage, such as vehicles, furniture, jewelry, etc.
• All debts incurred during the marriage

In a community property state, all the money and property collected or generated during the marriage is owned by both parties and will be divided equally in a divorce. Nine states employ community property rules. These are:

• Arizona
• California
• Louisiana
• Nevada
• Idaho
• New Mexico
• Texas
• Washington
• Wisconsin

The remaining states are ”equitable property” or “separate property” states. Here, the court is not required to divide all property and debt equally between spouses. Rather, the court will divide any property in a manner that is fair to both parties. The court will consider each spouse’s age and standard of living.

Property that remains separate during a marriage includes:

• Property received as a gift or inheritance
• Property owned by a spouse before the marriage
• Property obtained by a spouse after a legal separation
• Debts incurred by one spouse before the marriage

How Is Transmutation of Property Accomplished?

There are five ways in which transmutation can occur:

• Property Instruments: Executing deeds or other acts that change property ownership are the most common forms of transmutation. An example would be transferring an automobile title, in whole or in part, to the other spouse
• 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. Both spouses must sign the document and should include a date upon which the transmutation becomes effective
• If the spouses use the separate property to support the marriage, it can become marital property. An example would be taking out a home equity loan to update the kitchen, using the separate property as collateral
• Commingling separate assets with community property, such that it is no longer recognizable as separate property. An example would be depositing non-marital paychecks into a marital bank account
• Theoretically, transmutation may be accomplished through an oral agreement. However, depending on the property’s value and the state’s laws, the agreement may have to be in writing to be enforceable. Courts are far more likely to enforce a written agreement than an oral one.

When transmutations involve one spouse obtaining a notable advantage at the expense of the economic interests of the other, there is a presumption that the transmutation resulted from undue influence. In such a case, the transmutation will be invalidated by a divorce judge.

Unintentional Transmutation

Most transmutations are inadvertent because parties never intended to relinquish an interest in the property they owned individually. In many common situations, that is what occurs.

For example, a wife bought a home before the marriage and took out a mortgage. The couple decides it makes sense to refinance that mortgage. The husband’s signature is needed on the loan documents to qualify for the new loan. Since the lender wants both of the spouses to be on the hook for the mortgage, at the close of the refinance, the title officer insists that among the many documents that have to be signed, the wife must sign an interspousal transfer deed, a quitclaim, or a grant deed, transferring the home from the wife alone to husband and wife, as joint tenants or as community property.

Another example: in estate planning, the couple wants to ensure the husband inherits the wife’s assets with minimum legal trouble or expense. So, they add the husband’s name to the house’s title. The wife may have no intention whatsoever to give up an interest in her separate property during the marriage (i.e., before death), yet transmutation has occurred, and if they divorce, he will have a legal interest in the property, and she will have to share it with him.

What Are the Pros and Cons of Transmutation?

Some of the advantages of transmutation include:

• Transmutation can assist in clarifying which properties are separate and which properties are shared
• Transmutation before 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
• Transmutation agreements can be used as legal evidence in property dispute cases. An example of this would be whether or not an item of property was gifted to a spouse. If that property is addressed in a transmutation agreement, it can assist the court in establishing who the couple believes the rightful owner is
• 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 include:

• Every state has different requirements for transmutation, and it can get complex if the two parties wind up living in separate states
• A common error occurs when one spouse takes a property title in their name, such as the deed for a house.
• Although the couple intended the property to be held jointly, it could be subject to transmutation principles. In turn, this could affect the division of property if the couple did not have a written agreement describing their full intentions

Knowing what will and won’t qualify as a transmutation is hard. If you want to avoid the transmutation of property, there are ways you can protect your assets; for example, through a pre or post-nuptial agreement.

Do I Need a Transmutation Agreement?

It may not be enough to simply deed property or change the title documents on the property or other assets. Doing so may not change ownership rights between married persons. The courts maintain specific rules that must be followed to change how the title is held after a transaction between spouses.

Transmutation takes a certain amount of foresight to avoid unwanted consequences. As such, a couple should not engage in acts that might lead to transmutation if that is not what they intended – that is, they should think through who gets ownership of what and make sure they don’t take any steps that would alter that.

Also, they should not create a transmutation agreement without first consulting with an attorney. There are too many ways that a non-professional can go wrong.

Do I Need a Lawyer for Issues Involving Transmutation?

A written transmutation agreement would provide a court with the “clear and convincing evidence” needed to prove how the couple really wanted the property to be treated. This document would be critically important if, at the time of divorce, a difference of opinion arises between the parties regarding whether particular assets are held jointly or individually.

A skilled and knowledgeable attorney can draft such a document, taking care to be precise and understandable. It is important to use a local lawyer since the rules can vary between jurisdictions. An experienced prenup lawyer can also represent you in court if needed.