A transmutation is a transfer of property between spouses whereby the characterization of the property changes as a result of the transfer.
The Problem: Either 1) estate planners in pursuit of a significant tax benefit applicable to the transfer of community property to a surviving spouse cross the line by accidentally transmuting separate property to community property upon funding a joint marital revocable living trust or 2) clients who once held a generous intention borne of marital happiness lose or forget that objective at the time of divorce.
The Impact: Separate property is viewed as community property when the couple divorce.
The Estate Planner’s Job: Cautiously draft revocable trusts, community property declarations and trust transfer deeds so as to avoid accidental transmutation.
The Family Law Attorney’s Job: Review revocable trusts, community property declarations and trust transfer deeds in order to rule in or rule out intentional or accidental transmutations.
Accidental transmutations are easy to avoid when funding a marital revocable trust. That said, there many marital revocable trusts in place that crossed the line into transmutation of separate property to community property due to imprecise funding language.
A transmutation is a transfer of property between spouses whereby the characterization of the property changes as a result of the transfer. Property is transmuted from community property to separate property or from separate property to community property by a writing that expressly confirms that the characterization of the property is being changed by the instrument. Cal. Fam. Code §852(a); Estate of MacDonald, (1990) 51 Cal.3d 262. There are no specific words of conveyance required by the writing. The word transmutation need not be used in the writing. The operative concept is that of change; the writing will serve to transmute property if it clearly establishes intent to change the characterization of property.
The History of Transmutation
Before 1983, title documents, which then and now carry a presumption of accuracy, could wipe out a spouse’s separate property interest without the spouse intending to make a gift of the property. Marriage of Lucas, (1980) 27 Cal.3d 808. (Separate property down-payment used to acquire family residence lost to the community when title to the home taken as “joint tenants” in compliance with a realtor’s advice.) Moreover, prior to 1984, written and oral evidence could be used to rebut title.
In other words, separate property could be lost in divorce as a consequence of trial testimony that proved that the spouse treated separate property as if it were community property by uttering words that a led a spouse to believe a transfer had occurred.
A common evidentiary theme of dissolution trials prior to January 1, 1984 involved casual conversation between spouses or third parties wherein separate property was referred to or treated by the parties as “our property.” Prior to 1984, spouses could not be certain that clearly-titled separate property (or separate property that was mistakenly titled otherwise such as joint tenancy or co-tenancy as property frequently is titled upon the advice of realtors, title officers, bankers or financial advisors) would not be lost to an unintentional transmutation or that oral or written extrinsic evidence would not be used to rebut the presumption of title upon dissolution.
In 1983 the legislature responded to the uncertainty of the 1980 Lucas decision and to the general uncertainty suffered by spouses due to the admissibility of oral extrinsic title rebuttal evidence by enacting Cal. Code of Civ. Proc. 4800.2 (since recodified as Cal, Fam. Code 2640.) Cal, Fam. Code §2640 confirmed the date-of-transfer value of separate property to a spouse who contributed that property to the acquisition of community property. The legislature followed in 1984 with Cal. Code of Civ. Proc. §5110.710 et, seq. (since recodified at Cal. Fam. Code §850 et. seq.) which codified the existing rule that spouses can transmute property between themselves but which overruled case law that permitted oral transmutation agreements and allowed extrinsic written and oral evidence of title rebuttal.
The combination of Cal. Fam. Code §852(a) (requiring transmutations to be in the form of a written “express declaration”) and Estate of MacDonald, 261 Cal.Rptr. 653 (defining “express declaration” as a clear showing of a party’s intent to change the affected property interests) made it clear that transmutations must be the product of unambiguously intentional conduct.