Yours, Mine, And Now Ours?

In California, where spouses are concerned, property rights are determined by looking at the basic principle of “Yours, Mine and Ours” – what‣s yours is yours, and what‣s mine is mine (separate property). Then, as the spouses acquire property during the marriage, what‣s ours is ours (community property). But “your” property still belongs to you, and “my” property still belongs to me.

For many young couples, there is no distinction between their own property and the marital property. They come into the marriage owning minimal property. If the marriage ends, just about everything belongs to the community. But when marrying later in life, or for the second or third time, a new spouse may bring substantial separate wealth to the table.

The distinction between “your property” and “my property” breaks down where the parties elect to share their property, thus changing “your property” to “our property.” This is called a “transmutation.”

Take, for example, a recent opinion published by California‣s Court of Appeal. When the parties married, husband had considerable assets, while wife had few. In order to protect their assets, the couple retained an attorney to assist them with estate planning documents that would eliminate the need for probate and minimize taxes if husband died.

One tool this couple used was a trust – a written agreement between an individual who creates the trust and a person who is given the legal right to manage and control the trust‣s assets (the trustee). They also executed a “Spousal Property Transmutation Agreement,” in which husband explicitly agreed that he was transmuting his separate property to the community property of both parties. The agreement identified certain assets that would become a part of the trust, as husband‣s and wife‣s community property.

Upon separation, husband argued that the transmutation did not apply in the dissolution, because language in the transmutation agreement indicated that it was not made in contemplation of separation or marital dissolution, but solely to direct the disposition of property on the deaths of the parties. The appellate court decided that husband had effected a transmutation that gave wife half of the identified separate property. And once he had made that transmutation, he could not take it back. So, at the end of this three year marriage, wife took half of the substantial assets husband brought into the marriage.

There are no magic words to create a transmutation. It does not have to include the word “transmute.” While it must be a written, express declaration that unambiguously indicates a change in character or ownership, it does not have to use the terms “separate” and “community.” A slip of paper that says “I give you half of my interest in the house we live in,” signed by husband, may be a valid transmutation.

But where there is any ambiguity, the court will be cautious in finding a transmutation. For example, the court found no transmutation where the parties created a trust that designated all the assets in the trust as community property, and any asset they owned in the future would be assigned to the trust. The problem? The trust did not provide that all property would be changed to community property.

The bottom line is that there are subtle differences between language that will maintain “your property” and language that makes it “our property.” It is important not to overlook these distinctions, as they may make the difference between “keeping” your assets and “sharing” our assets.