Community Property and Quit Claim Deeds the Transmutation of Marital Property
Before the issue of what a transmutation is and how a quit claim deed effects real property there must be a understanding of what community property is. Community property is ANY asset or ANY debt incurred during the course of the marriage. With some exceptions, anything obtained by the parties from the moment they say "I DO" to the moment the separate is part of the community estate and equally owned by the parties. The exceptions consist of anything brought into the marriage by either party, anything inherited by either party, or any gift received by either party during the marriage. Everything else is community property.
Now the issue arises where the spouses have changed title to a parcel fo real property by use of a quit claim deed. Then during the divorce, the party who has the property titled in their name claims that the house is their separate property and not community property. This is what is called a "transmutation" which is covered by Family Code Section 852.
In family law, a "transmutation" is where spouses have changed the charcter and nature of a community or separate property, real or personal from separate property to community property or from community property to the separate property of one of the spouses. There are three ways that this occurs:
- from separate to community,
- from community to separate, and
- from the separate property of one spouse to the separate property of the other
The foregoing is set forth in Family Code section 850.
Family law is woefully complex and transmutations make it even more so. However it is a critical part of family law issues due to transmutations occurring inadvertently when the parties did not intend to give up or waive an interest in property they owned before or during marriage. Remember it is the intent as of the date of the alleged transmutation, not what one of the parties intended subsequently. Unfortunately this is what commonly happens.
A common situation is where a house is purchased during the marriage, and is in the name of both parties. This is clearly community property. However, during the marriage it looks to the parties that there is an advantage to refinance the property. Then one of the spouse's credit score is not good enough to qualify for the refinance. Then the spouse with the bad credit signs a quit claim deed with the promise of the other party to put their name back on title after the refinance occurs. However, either the refinance never happens and title is not changed back, or the refinance occurs and title is still not changed back. In either situation the party taken off title may have no intention whatsoever to give up an interest in her separate property, certainly at least not for purposes of a divorce. But the the result is that a transmutation has occurred such that the home is no longer community property but instead is the separate property of the other spouse.
However, is this a valid transmutation for the purposes of a divorce? Family Code 852 sets forth what is required in order to create a valid and enforceable transmutation. Section 852 was enacted to require that transmutations must be supported and established by some kind of written "express declaration" that is "joined in, consented to, or accepted" by the spouse whose prior interest in the property was "adversely affected."
You must in mind that where there is a transmutation that results in one spouse obtaining an advantage at the expense of the economic interests of the other spouse, a presumption arises that the transaction is invalid due to undue influence. Remember, that an express declaration is required for there to be a transmutation. But just what is an express declaration?
Section 852(a) states that the spouse giving up his or her rights to property must expressly acknowledge in a declaration that they join in, consent or accept the transmutation. What this means is that in order for there to be no undue influence, the spouse must understand that they are giving up a property right. This express declaration cannot be oral. This express declaration must be in writing. It must contain clear language that the spouse understands they have a right to the property and that they are knowing giving up that right. In order for there to be a transmutation by quit claim deed as to real property, the quit claim deed must contain the express declaration right on the face of the deed so it is clearly noticeable and clear. A quit claim deed from two spouses into the name of one spouse with no other language supporting the transfer or stating that the property is to be the separate property of the other spouse does not support a transmutation argument or satisfy Family Code 852.
Furthermore, where a transmutation is made and contains an express declaration, it is not automatically valid. All that has successfully been completed at this point is a change in title and satisfying Family Code 852. In California the transmutation law was created to ensure that spouses are protected from the other spouse. This gives rise to the concept of "Fiduciary Duty".
A spouse has a fiduciary duty to the other spouse, which means that they are not permitted to take advantage of their spouse in property dealings. When an asset is transmuted during marriage without consideration (i.e. without compensation for the fair value), the transmutation is presumed invalid. The party claiming validity of the transmutation must rebut the presumption of undue influence.
All interspousal property agreements, including transmutations, must meet fiduciary standards. The fiduciary standard is a duty each spouse owes to the other spouse of up most good faith and fair dealing. Each spouse has an obligation to the other spouse to maximize assets to the benefit of both of them, and not to take economic advantage of the other spouse. Because fiduciary standards, where a transmutation unfairly takes advantage one spouse over the other it is presumed to have been induced by undue influence. )Presumption of intrinsic fraud) If a spouse tries to enforce that agreement, the benefitted spouse has the burden of proving the transmutation which benefits him/her is valid by overcoming the presumption of undue influence.
In order to rebut the presumption of undue influence three things must be shown. In family law real property cases, there will be a conflict of presumptions; thepresumption of legal title & presumption of undue influence. The advantaged spouse must show:
- The transfer was made freely and voluntarily,
- The transfer was made with full knowledge of all the facts,
- The transfer was made with a complete understanding of the effect of the transfer
This is an uphill battle for the advantaged spouse who maintains that the transmutation agreement/quit claim deed is valid. The spouse holding titled must submit evidence regarding the transfer, timing of the transfer, and intentions and understanding of the spouses at the time of the transfer.