What is "transmutation"?
Transmutation is the process whereby spouses in California can change the community or separate property nature of the assets that they own. Thus for example:
- The separate property of one spouse can be "transmuted" into the separate property of the other spouse or the community property of both spouses.
- The community property of a couple can be "transmuted" into the separate property of one of the spouses.
Some Reasons for Transmutation
Here are some ways that transmutation can be used to a couples benefit:
- Transmuting property into community property may allow a full step-up in cost basis of the asset upon one spouse's death. This may allow the surviving spouse to sell the property with no or substantially less capital gains tax.
- For Medi-Cal planning purposes, transmuting the family home may provide a family substantial savings.
- Properly written transmutation agreements can reduce the likelihood of litigation regarding the character of property after the death of either or both spouses.
- Transmuting property allows parties to have legal title to assets that properly reflect their true beliefs about the character of the property. For example, only one spouse may have taken title to a home in order to receive favorable financing rates even though it was the clear intention of the couple that the home be their community property.
Applicable to Divorce
Keep in mind that transmutation agreements also affect the division of assets for purposes of divorce. Thus, it is always important to understand the ramifications of how your assets are characterized.