How to Transform Community Property into Separate Property
A significant issue that must be resolved in a divorce involves dividing property and assets between the parties. Property division issues can go beyond hashing out who gets the nicer car, a vacation home, or possession of the family cat. The parties’ respective ownership interest in assets such as retirement benefits, insurance proceeds, and investment accounts can depend on if they are characterized as community or separate property.
The Community Property System
California courts determine property division issues according to the community property system. According to California community property principles, each spouse has an equal ownership interest in assets and property that are part of the marital community estate.
Under California law, all assets and property acquired during the marriage are considered to be community property unless it otherwise qualifies as a spouse’s separate property. All property a party acquires before marriage or after the date of the parties’ permanent separation is considered their separate property. Additionally, property acquired a party acquires in their sole name during marriage through gift, bequest, or devise qualifies as their separate property.
However, all property a party owns is presumed to be community property. As a result, someone claiming a separate property interest in a particular asset has the burden of proving that it meets the qualifications of a separate property asset.
For example, if someone obtained 100 shares of Netflix stock after while living happily married with their spouse, both parties generally would be entitled to 50 shares each in the event of a divorce. Conversely, if someone receives 0.50 Bitcoin after separating from their spouse, it most likely qualifies as their separate property.
Changing the Character of Property
The primary community property rules as to when and how a particular asset was acquired do not necessarily apply without any say from the parties. The parties can agree to characterize specific assets differently from how the default community property principles would. Thus, if the parties want to treat all funds acquired during marriage but deposited in separate bank accounts as separate property, they are free to do so. The change in character from community property to separate property and vice versa is known as “transmutation.”
Transmutation allows the parties to transform the character of property in different configurations, including:
- Community property to separate property of the parties
- From separate property of the parties to community property
- From separate property of one party to the separate property of the other party.
In California, a valid transmutation must satisfy specific requirements that are outlined in the Family Code. Importantly, different requirements can apply to a transmutation depending on when the purported transmutation occurred relative to January 1, 1985.
For transmutations occurring before January 1, 1985, the law required an oral or written agreement based on full disclosure of the pertinent facts surrounding the purported transmutation.
In contrast, transmutations occurring on or after January 1, 1985, require a written declaration explicitly stating that the parties intend to effect a change in the character of ownership regarding the property. Furthermore, this declaration must be acknowledged and accepted by the party whose interests in the property are adversely affected by the transmutation.
A transmutation can come in the form of other legal instruments, such as property records and contracts.
The following instruments can be used to effect a transmutation in property:
- Wills: Before January 1, 1985, a statement in a spouse’s will that claimed all of the couple’s property to be part of the community estate was sufficient to effect a transmutation. However, after January 1, 1985, statements in wills were held to be inadmissible as evidence of a transmutation in proceedings that are commenced before the testator’s death.
- Marital agreements: Premarital and postmarital agreements may effect a valid transmutation.
- Title documents: Property acquired under joint title between the parties is presumed to be community property:
“For the purpose of division of property on dissolution of marriage or legal separation of the parties, property acquired by the parties during marriage in joint form, including property held in tenancy in common, joint tenancy, or tenancy by the entirety, or as community property, is presumed to be community property.”
If the parties want to characterize certain assets and property in a way that deviates from how the conventions of the California community property system would characterize them, the parties should use an express written agreement that articulates their intention to do so. Furthermore, property that the parties acquire under joint title will be considered community property unless some other factor demonstrates otherwise.
Consult the Law & Mediation Firm of Klueck & Hoppes, APC
If you need legal advice regarding issues relating to the division of community property assets in a divorce, you should consult an experienced attorney from the Law & Mediation Firm of Klueck & Hoppes, APC. Our legal team has dedicated their practice to resolving various family law disputes in California, including property division in divorce cases. We can help determine your rights to certain assets to make sure all your ownership interests are properly accounted for.
For more information about how the Law & Mediation Firm of Klueck & Hoppes, APC can help you, call us at (619) 577-4900 or contact us online today.