Family Code Section 852 Transmutation(s):
What Is It? Common Perils!
A Sample Transmutation Agreement for People Who Refuse to See Lawyers
By; Michael C. Peterson, CFLS
Some of our recent caseload has included litigation related to transmutation agreements, including those prepared by unrepresented spouses, or which were prepared by non-family law estate counsel on behalf of parties establishing joint living trusts and then, sometimes inevitably, the parties separate, file for divorce, and the one who is disadvantaged by the transmutation seeks to set it aside. They may indeed be successful. I would like to share some observations and pointers concerning them, and provide a very simple, but arguably legally sufficient, sample for those who will insist on avoiding the assistance competent legal counsel (and the admitted expense) and who might otherwise cobble together something that is guaranteed to be ineffectual.
In California a “transmutation” is a change in the legal characterization of assets or debts from community property to one spouse’s separate property estate, or from one spouse’s separate property estate to the community estate, or from one spouse’s separate property estate to the other spouse’s separate property estate. Family Code section 850(a), (b) & (c). In the absence of a transmutation, in dissolution proceedings property characterization is determined in light of the ‘default’ rules under the Family Code (e.g. the date of/source of acquisition rules found in Family Code section 760, et seq., for community property assets, Family Code section 770, et seq. for separate property assets, and Family Code section 900, et seq. for community debt).
Like common law Statute of Frauds rules involving contracts generally, valid transactions between spouses purporting to change the characterization of a particular asset or debt carry a heightened evidence requirement; the Legislature has recognized a state policy interest in requiring a writing in connection with transmutations to preserve judicial economy and avoid endless litigation about ‘pillow talk’ alleged promises between spouses that, at trial, often come down to ‘he-said/she-said’ stories, perjury with huge financial incentives, and character assassination by each party’s lawyer against the other party.
Unlike the common law Statute of Frauds, there are virtually no special circumstance implied exceptions (such as partial performance in reliance on an oral promise) to the California transmutation formal writing requirement under Family Code section 852(a), and appellate courts have continually recognized that this statute is to be strictly construed. Marriage of Benson (2005) 36 C4th 1096, 1100. One exception does exist as to gifts of small-item personal property such as clothing, jewelry, and other “articles or a personal nature” that do not have a substantial market value (i.e. that $20,000 anniversary ring is not exempt from the writing requirement if a wife wants to take the position that the husband verbally told her it would be hers alone). Family Code section 852(c). Another exception applies to pre-1985 transmutations.
Family Code section 852 governs the enforceability of a transmutation and states as follows:
“(a) A transmutation of real or personal property is not valid unless made in writing by an express declaration that is made, joined in, consented to, or accepted by the spouse whose interest in the property is adversely affected.
(b) A transmutation of real property is not effective as to third parties without notice thereof unless recorded.
(c) This section does not apply to a gift between the spouses of clothing, wearing apparel, jewelry, or other tangible articles of a personal nature that is used solely or principally by the spouse to whom the gift is made and that is not substantial in value taking into account the circumstances of the marriage.”
Hence, Family Code section 852 requires (in order to be valid and enforceable) that the spouses’ transmutation agreement: (1) be in writing, (2) be signed by the spouse whose interest is adversely affected, and (3) contain an express declaration that the characterization or ownership of the property is being changed.” Estate of MacDonald (1990) 51 C3d 262, 264. This third requirement is not to necessarily say that the writing need to have ‘lawyerly’ or ‘magic’ works about “community property” or “separate property” (although such words, correctly used, certainly help- see Marriage of Barneson (1999) 69 CA4th 583, 591 providing that a “… transmutation may be effected by means of a transfer, but a transfer is not necessarily a transmutation…”); the written and signed document needs to adequately evidence an intent to change the nature of the ownership and/or obligation of a particular asset or debt such that words like “give,” “grant,” “take” and “accept” can suffice. So be careful of what you write in that Christmas card to your significant other when referencing the new Rolex watch which the card accompanies; for that matter, be careful what you write in emails and text messages, which can possibly be construed as meeting the writing and signature requirements under existing case law in other contexts.
Transmutations may be undertaken for a number of reasons, and they also occur by operation of law and often inadvertently. For instance, deed transfers are transmutations that do not require a separate writing or agreement. For instance, spouse A owns the home they were awarded in their last divorce, and remarries spouse B. If spouse A then transfers title to that home to he and spouse B, to whom he will be married until death due them part, as “husband and wife (or husband, etc.) in joint tenancy” in order to create a right of survivorship that is automatic upon the death of either spouse, and so to avoid probate, spouse A has transmuted his formerly SP property into CP. That type of transmutation is typically intentional, but rarely does spouse A first seek advice about its legal effect. After all, he is sure this relationship will never end by divorce. Or, possibly the spouses refinance spouse A’s home during marriage to get better rates, or pull out money, and the other spouse’s income is needed to qualify for the loan, or maybe not and the escrow officer, as part of refi escrow, drafts a transfer deed from A to A&B because that is her habit, and spouse A is never told of its legal effect. And, there are times when spouse B badgers or fools spouse A into signing a transfer deed that include he or she. (Rules relating to fiduciary duties and presumptions of undue influence are discussed throughout our Blog).
Transmutations can also be undertaken in estate planning for tax basis reasons, where an estate lawyer prepares a written “transmutation agreement.” And sometimes the parties, for often naïve reasons or as a result of being pressured, simply want to gift some or all of their separate assets in a manner that makes it the joint property of both spouses. Not uncommonly, they draft their own – and then wind up in the lawyers’ offices litigating about it at great expense, and with highly variable outcomes.
Almost always when transmutations are involved, there is another important legal principal at play – that of Family Code section 2640 reimbursements; however, most transmutation agreements fail to consider and are silent regarding whether these reimbursements are to be retained or waived. Family code section 2640 states as follows:
“(a) ‘Contributions to the acquisition of property,’ as used in this section, include downpayments, payments for improvements, and payments that reduce the principal of a loan used to finance the purchase or improvement of the property but do not include payments of interest on the loan or payments made for maintenance, insurance, or taxation of the property.
(b) In the division of the community estate under this division, unless a party has made a written waiver of the right to reimbursement or has signed a writing that has the effect of a waiver, the party shall be reimbursed for the party's contributions to the acquisition of property of the community property estate to the extent the party traces the contributions to a separate property source. The amount reimbursed shall be without interest or adjustment for change in monetary values and may not exceed the net value of the property at the time of the division.
(c) A party shall be reimbursed for the party's separate property contributions to the acquisition of property of the other spouse's separate property estate during the marriage, unless there has been a transmutation in writing pursuant to Chapter 5 (commencing with Section 850) of Part 2 of Division 4, or a written waiver of the right to reimbursement. The amount reimbursed shall be without interest or adjustment for change in monetary values and may not exceed the net value of the property at the time of the division.”
Subsection (a) defines what are “contributions” to the acquisition of property (typically property that is acquired by spouses in joint title form, making the property a community assets).
The kicker is subsection (b), which is intended to reimburse a spouse for separate property funds or assets used to acquire, maintain (subject to limitations), and/or improve that community property, subject to documentary proof tracing to the separate funds or assets that were so used. Subsection (c) addresses what happens where SP of spouse A is contributed to the acquisition of what is the SP of spouse B.
We have written extensively, elsewhere, about Family Code section 2640 principles and their application. As an illustration of the application of Family code section 2640(a) and (b), consider the following hypothetical situations. In 2018 husband and wife purchase a house for $100,000, putting $10,000 of community money down and paying the mortgage for the next five years at $10,000 per year. At the beginning of year six, wife receives a $50,000 inheritance from her dear Aunt Edna and applies this money to the remainder/entirety of the mortgage on the house. In year ten the parties file for divorce and the court orders the house sold and the net sale proceeds to be held by the husband’s attorney in his client trust account pending further division orders. The house is sold for $210,000, and the net sale proceeds after paying the realtors and escrow company is $200,000. In this hypothetical and assuming effective tracing documentary evidence exists concerning the wife’s application of her inheritance money to the house, she would receive the first $50,000 off the top of the net sale proceeds, and the remainder of $150,000 (representing both the $50,000 pay down of the mortgage in monthly increments over the first five years and $100,000 in appreciation over the ten-year purchase period) would be equally divided between the parties as being community in character.
What I want to discuss in this Blog in the transmutation context is the effect of the language in subsection (b), to wit: “unless a party has made a written waiver of the right to reimbursement or has signed a writing that has the effect of a waiver…” in the transmutation context as consideration of that language is usually entirely overlooked – with the consequence that even where a transmutation is valid and enforceable, 2640 reimbursements continue to be in play. If that is your intention, fine. But we find that where written transmutation agreements are entered into (as opposed to those that occur, for instance, by operation of law), unrepresented parties fail to consider them.
Our office recently had a bifurcated over the enforceability of a written transmutation that was prepared by an estate attorney in connection with the parties’ estate plan. The couple were married for 40 years. For most of those years, H was the exclusive bread winner and made good money. W’s mother was very wealthy, and the parties knew that upon her death, W would inherit several million dollars. Accordingly, they spent what H earned hand over foot, and essentially saved nothing. W repeatedly promised H that the money she would inherit would fund their twilight years. W’s mother, however, stubbornly refused to move into the Great Beyond and lived for much longer than the couple anticipated. Finally though, Mom did pass and W inherited the money, which without more was indisputably her separate property per Family Code section 770. The funds were immediately placed into a joint account, and over the next few years it was used to acquire and pay for all manner of things, including three jointly titled homes (think transmutation), gifts to the parties’ respective kids, and a very comfortable lifestyle. The oral agreement between the parties, which W pretty much admitted, was that the money belonged to and would be used to benefit them both. Except … transmutations must be in writing per section 852(a).
One day the parties (aged in their 70s) visited an aging estate lawyer in Orange County to prepare a trust estate document, so that each would be provided for upon the earlier death of the other. In connection with those documents, and supposedly in consultation with the parties, that estate attorney also prepared a written “Transmutation Agreement.” [“TA”]. Evidently this was intended to memorialize the promise and understanding between the parties that the inheritance now belonged to them both. While he may have been competent to draft a simple trust, he had only prepared a few TAs in his 40 odd years of practice. This one page document was filled with spelling errors (including the even the title “Transmutution," and a sentence that the parties understood they had the right to seek the advice of independent “council”). W disavowed the TA and claimed she did not know its legal import when she signed it, and that the TA came to be as a result of H’s plan to unduly influence her and get her to gift half of Mom’s money to him. And, suffice it say, the TA made no reference whatever to what would happen with W’s 2640 reimbursements, and did not mention the section or contain any other language that could be considered to constitute an express waiver of the SP reimbursement W was otherwise entitled to. Of course, the drafting attorney had never heard of section 2640 because he was not a family law attorney, or had slept during his continuing ed. Which means that even had the TA ultimately been found to be valid, 100% of Ws inheritance contributions to the acquisition of the three homes would have to first be reimbursed to her before the remaining appreciation in them (not much) would be equally divided, because that much was CP (again, because the property was acquired during marriage and in joint title form even though with SP funds).
To the extent that once upon a time, when the TA was signed, W really had intended that Mom’s money did belong to them because neither separation nor divorce were then in the air, this outcome was thoroughly avoidable. It doesn’t take all that much for a written TA to satisfy the section 852 formalities, or to expressly waive 2640 reimbursement under subsection (b).
Situations that we have encountered when unrepresented parties have attempted their own transmutation agreements, or incorrectly believed that oral promises to the same effect as a transmutation could be oral, and where some prior attorney did not know how to prepare even a basic one that would likely be held enforceable, got me thinking about drafting a form of transmutation agreement that would likely meet the strict provisions of Family Code section 852, but also as short as possible – for parties who for whatever silly reason do not want to involve lawyers - which I want to be clear is a very bad idea. There is, to be clear, no legal requirement that such an agreement be prepared by a lawyer (and, as demonstrated above, hiring some lawyers might just wind up making matters worse), or even that the parties consult with independent counsel (or that said lawyers also execute the document). The latter would be, however, the best practice. Expect to spend $1,500 each and on up (possibly much more) depending on the complexities of your situation. It is not uncommon to see lawyer mediators draft such a document, and then set forth therein that each party has been urged to seek independent counsel and has done so or elected not to have done so, and that they are fully informed of the legal consequences of executing the document.
I offer the following for highly simplistic illustration purposes only to you the self-represented reader, to use at your own risk. I really only do it because some people are going to draft their own, anyway, so at least I’d like to help improve (but not guarantee) their chances. My greater hope for you, however, if you are contemplating a transmutation agreement is that you consult an experienced Family Law attorney (preferably a Certified Family Law Specialist) draft your transmutation agreement. As always, the content of this Blog is entirely subject to our disclaimer!
THE MOUNT VERNON TRANSMUTATION AGREEMENT
The parties to this document entitled “Transmutation Agreement” (herein “Agreement”), husband George Washington (hereinafter “husband”) and wife Martha Washington (hereinafter “wife”), desire to enter into an immediately enforceable and binding contract between them to change the legal form and character in the characterization and ownership of certain asset(s) described in this Agreement.
Specifically, husband desires to change the characterization of his ancestral home, Mount Vernon, inherited by him from his father, from husband’s separate property to community property of his and his wife’s community estate, to be equally owned hereinafter by he and wife.
Further, husband expressly waives the reimbursement provisions of California Family Code section 2640, which would otherwise be available for him if for any reason the parties separate and dissolution or legal separation proceedings between them are initiated.
Husband and Wife each acknowledge that each stand in a fiduciary relationship with each other, that he and she freely and voluntarily enters into this agreement, and he and she acknowledge that he and she are under no form of duress or any other form of “undue influence” (as that term is used by California courts in determining the enforceability of any instrument purporting to be a written transmutation pursuant to California Family Code sections 850, 851, and 852, and case law thereunder) from or caused by wife or any third-party in so transmuting and so waiving as provided by this Agreement. Husband acknowledges that Wife’s prior and future years of devotion to him is legally sufficient consideration for him to enter into this Agreement. In addition, he wishes to assure that if he predeceases her, that she shall receive a 100% interest in and to Mount Vernon.
Husband makes this transmutation, and makes this express waiver of 2640 reimbursement, with full knowledge of all relevant facts relating to the characterization and ownership of the asset(s) being transmuted by this agreement, as well as having a complete understanding of the legal significance and legal consequences of so doing. Husband acknowledges having ample and adequate opportunity to consult with and to receive legal advice from any attorney of his choosing.
Wife accepts all rights and benefits derived from this Agreement and the application of its terms and provisions under the laws of the State of California, and so relies thereon.
Husband and wife intend and acknowledge that all statements of fact and statements of agreement provided herein are to be deemed conclusively true as between the parties and their successors in interest, pursuant to California Evidence Code section 622 which provides:
“The facts recited in a written instrument are conclusively presumed to be true as between the parties thereto, or their successors in interest; but this rule does not apply to the recital of a consideration.”
Husband and wife so agree, and so memorialize this agreement in this writing.
Dated: July 5, 1776 _____________________________
GEORGE WASHINGTON, Husband
Dated: July 5, 1776 ______________________________
MARTHA WASHINGTON, Wife
Notarized signatures, although not required by the above-referenced transmutation and reimbursement waiver law, are also a great idea.
As always, good luck out there!