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When a married couple is planning for their estate, matters can become surprisingly complicated. This is especially true when the two had assets coming into the marriage, or separate property. Often, spouses mistakenly designate assets in their estate plans without ever realizing that the final distribution of their property will not end up as they intended. One way to avoid this problem is to effectively transmute or change the character of certain property. However, for this process to be legally effective, the parties must observe specific steps. Here is what you need to know about estate planning and transmutation of marital property:
In California, when a couple gets married, the property they owned before entering into the marriage is each person’s separate property. If one of them receives a non-marital gift or inherits an asset during the marriage, these are also separate property. After marriage, what the pair acquires and earns together is generally considered their shared, or community property. If the two were to divorce, each person would own his or her separate property, and they would divide their community property and debt equally. During the marriage, the two could decide to convert or transmute their separate property into community property so that each had an equal ownership interest. Conversely, the pair could decide to take community property and transmute it into one person’s separate property. They could also decide to take one person’s separate asset and make it the other spouse’s separate property.
The California Family Code requires that parties follow specific steps when transmuting separate property. Transmutation can be of real or personal property, but it will not be valid unless there is an express declaration that is made in writing, “joined in, consented to, or accepted by the spouse whose interest in the property is adversely affected.”
In some circumstances, transmutation will not apply to certain gifts between spouses that are not of substantial value. Further, when a spouse comingles or deliberately mixes his or her separate property with community assets, it can change the character from separate to community without requiring a formal transmutation. For example, if a spouse had a separate savings account before marriage, then took its funds and deposited them into the couple’s joint-checking account, they would now be co-mingled community assets.
Transmutation can be beneficial to those couples who want to ensure that separate assets are distributed to one another. Getting ownership sorted out in advance can help family members avoid complications and disagreements down the road. Further, changing the character of separate property to community can also help the surviving spouse manage capital gains tax issues and help with Medi-Cal planning.
The Family Code specifically states that a “statement in a will of the character of property is not admissible as evidence of a transmutation of the property in a proceeding commenced before the death of the person who made the will.” In other words, a mere statement of a property’s character in a will is not evidence of transmutation and will not be admitted as such.
When developing your estate plan, you may determine that you want to transmute separate to community property. However, there can be circumstances when agreeing to convert community to separate property is more beneficial or when separate property should exchange hands. When planning for your estate, it’s best to consult with an experienced California estate planning attorney so that you can determine the right course of action for your community and separate assets.
At the Law Offices of Alice A. Salvo, we have experienced attorneys who are here to discuss your estate planning needs and can help you evaluate whether transmutation of marital property may be beneficial for you. Contact us today to schedule your free consultation.