While individuals within a marriage may not put much thought into whether a property is legally classified as separate, or community, the distinction between the two can have huge consequences in regards to estate planning, and instances of divorce. Hence, it is important for couples to consider who owns what, and whether they need to legally change the characterization of a certain asset.
Separate property is that which is owned by one spouse, whereas, community property is that which is owned jointly by spouses. A transmutation, is a change in the characterization of a property. It can legally modify the title of an asset, and reflect a couple’s true belief regarding the characterization of a property.
There are three kinds of transmutations:
- A transmutation of community property to separate property.
- A transmutation of separate property to community property.
- A transmutation of the separate property of one spouse to that of another spouse.
One common way to establish a transmutation is through a written agreement. The agreement should specify what item is being transmuted and when it is to become effective. Furthermore, it should be signed by both spouses. However, it is important to keep in mind that transmutations of property can also be unintentional. For example, when funds that belong to either spouse, but not both, are deposited into a joint bank account, this may make it difficult to differentiate whether such money is actually separate or community property.
Transmutations can also offer an individual, or couple, several benefits. Here are a few scenarios in which a couple may want to consider a transmutation:
- Jordan and Elizabeth are seeking to buy a home. However, Elizabeth’s credit is much stronger than that of Josh. The couple wants to receive the most favorable financing rates accessible to them. In order to do so, Elizabeth must choose to put the title of the home in her own name. However, since the couple considers the home to be a community asset, that can establish a transmutation by way of written agreement, to change the asset from Elizabeth’s separate property, to the couple’s community property.
- Mike and Nancy are currently engaging in estate planning, and want to take full advantage of the estate tax exemption. As of 2018, the exemption sits at $5.6 million, which means that an individual may leave their heirs up to that amount, without paying federal taxes. Mike’s individual estate currently sits at $7 million, whereas Nancy’s is only $2 million. If Mike transmutes, $1.4 million of his estate to Nancy, to become her separate property, they will both be able to take advantage of the exemption, and avoid unnecessary taxes.
In sum, transmutations are a useful legal tool that can be used to change the ownership of an asset. A property may be treated as community, but under the eyes of the law this may not necessarily be so. While we all hope for forever lasting marriages, it’s important to be prepared for the worst. Otherwise, you may find yourself in a lengthy and expensive court proceeding. On a brighter note, changing the characterization of a property can also give a couple a number of tax advantages. Each state has their own rules and regulations regarding what qualify as a legitimate transmutation of property, so find an attorney who is licensed to practice in your state, and can help you carry out your objectives. Preparation today, can leave you prepared for whatever may happen in the future, and save you thousands of dollars, if not more. If you or a loved one are looking to transmute an asset, we highly recommend you seek a licensed estate planning attorney who can guide you through the process.