What is a Transmutation Agreement?

California is a community property state. This means that “all property, real or personal, wherever situated, acquired by a married person during the marriage while domiciled in this [California] is community property.” (Family Code section 760)

Therefore, if you are married and living in California, any property acquired, whether it’s income, a house, or even debts, will be considered one-half property of each spouse.

One spouse would be entitled to one-half of the other spouse’s income or other certain assets at divorce. That spouse would also be responsible for one-half of any debts incurred during the marriage as well. (Note that if one spouse receives a personal gift or inheritance to that spouse alone, that will remain 100% their own separate property.)

Couples often decide before their marriage to not follow the California community property laws, and treat certain property as they wish. This is called a prenuptial agreement, or a prenup.

Couples are allowed to contract between themselves to treat their income as 100% their own, or any houses or properties they may purchase during the marriage as their own. This is common for couples with high assets and high debts in California.

Once married, couples are also entitled to contract regarding their marital properties and debts – it doesn’t have to be before the marriage. These are referred to as “post-nuptial” agreements, meaning after the marriage begins, but before the parties separate or divorce.

One type of post-nuptial agreement is called a Transmutation Agreement. This is when the couple agrees to change the character of their certain properties. This can mean a change in property from one spouse’s separate property to the other spouse’s separate property, and change in the property from one spouse’s separate property to the couple’s community property, or a change in property from the couple’s community property to one spouse’s separate property.

Under California Family Code section 852, a valid transmutation must be in writing, and it must be signed by the adversely affected spouse. The adversely affected spouse is the spouse that is losing their interest in the property through the change.

For example, if Husband owns a house as his sole and separate property and wants to change it into community property, he is losing a one-half interest in the house, which will go to his spouse. Therefore, he is required to sign the transmutation agreement. Sometimes both spouses are adversely affected, so they both sign. It is best to just have both spouses sign the agreement to be safe.

This written agreement must also contain an “express declaration” of the transmutation, or language which expressly states that the characterization or ownership of the property is being changed. The couple need not use the exact word “transmute” but there must be an indication that the couple understands that there is a change occurring in what they own and how they own the property.

The transmutation agreement will be binding at divorce, should the couple later seek one. The couple’s property will then be divided according to the agreement. These agreements may be later challenged on the grounds of undue influence, duress, or coercion, meaning the adversely affected party was pressured or threatened into signing. If that can be shown, the transmutation agreement will be found invalid and not binding at divorce.