Community Property and Quit Claim Deeds: The Transmutation of Marital Property
Community Property & Quit Claim Deeds – how does they effect the characterization of property in divorce cases? Quitclaim deeds are used for a variety of purposes in real estate. Commonly, an individual is added or removed from the title. When property is transferred between spouses it can create a transmutation. A “transmutation” is an interspousal transaction by which the character of personal or real property is changed in one of three ways: from separate to community, from community to separate, and from the separate property of one spouse to the separate property of the other spouse – see Family Code Section 850.
Before one can understand the concept of transmutation and how a quit claim deed can effect real property, one must have a basic understand of what community property is. “Community property” is any asset or debt incurred during the course of marriage. In basic terms (with some limited exceptions) anything obtained by a married couple from the moment they say “I DO” to the moment they separate is part of the community estate and equally owned by the married parties. The limited exceptions consist of anything brought into the marriage by either party, any gift received by either party during the marriage, or anything inherited by either party. Everything else is community property.
Community Property and Quit Claim Deeds
So what happens when spouses have changed title to 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.
Transmutations in the family setting are dreadfully complex. Determining property rights are a critical part of family law and transmutations are often inadvertent. Parties frequently do not intend to give up or waive an interest in property they owned before or during marriage. It is the intent as of the date of the alleged transmutation, not what one of the parties intended later in time. Overview of the divorce process
A common situation is where a house is purchased during the marriage, and is in the name of both parties which is clearly community property. An opportunity arises to refinance the property to lower their mortgage payments or obtain a lower interest rate. However, during the refinance process one of the spouse’s credit score is not high enough to qualify for the loan. The parties decide to remove the spouse with the bad credit and sign a quit claim deed (interspousal transfer) with the promise of the other party to put their name back on title after the refinance occurs. However, at some point in time title is not changed back to both parties. 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.
The Transmutation of Marital Property
The question often asked by our client is whether or not this a valid transmutation for the purposes of a divorce? California 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 be supported and established by a written “express declaration” that is “joined in, consented to, or accepted” by the spouse whose prior interest in the property was “adversely affected.”
When 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. An an express declaration is required for there to be a transmutation. So 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. An express declaration cannot be oral and 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 inter-spousal 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. If a spouse tries to enforce that agreement, the benefited spouse has the burden of proving the transmutation which benefits them is valid by overcoming the presumption of undue influence.
In order to rebut the presumption of undue influence three things must be shown:
- 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.
So when one spouse says to the other, “the deed to the property is in my name so it belongs to me” they are often wrong. Unless you can satisfy the elements set forth in California Family Code Section 852 the property is community property and is not the sole and separate property of one spouse.