It is not unusual for one spouse to make a gift to the other. Gifts may range from small trinkets to substantial sums of money, or real property being transferred from one spouse to the other spouse. California law requires that a spouse must sign a transmutation agreement if his or her substantial gift to the other spouse is to be considered legally valid.
A small gift is usually not cause for concern in the eyes of the law. However, gifting a spouse a sum of money or real property without following the rules of transmutation can be a trap for the unwary. It becomes an issue when a couple divorces, one spouse dies, or the spouses simply have a disagreement as to who owns what.
Gifting to a Spouse
There are many reasons why a spouse would gift property that would otherwise be his or hers by law to the other spouse. Some examples of how gifting situations arise during a marriage include:
- As a show of affection, or “just because”.
- To show a commitment to the marriage.
- For credit reasons. This could be either to build credit or because the other spouse has better or worse credit.
- As a planning tool if one spouse predeceases the other. For example, a spouse who is significantly older than the other or has a terminal illness may make a monetary or real property gift to the other.
- To avoid probate.
Law on Gifting
California Family Code Section 852 has a rather complex statute which essentially requires that, if one spouse gifts their property to the other spouse during the marriage, that gift must be accompanied by a transmutation agreement signed by the spouse whose interest is adversely affected. The notion here is that a significant gift adversely affects the other spouse financially.
Your family attorney can tell you that the law also requires that for the transmutation agreement to be effective as to third parties, third parties must be noticed unless the agreement was recorded.
This gifting law does not apply to the following:
- Clothing, wearing apparel, jewelry, 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
The law does not affect the characterization of the property where separate and community property are commingled or otherwise combined.
Examples of When a Transmutation Agreement Is Required
A transmutation agreement is advisable anytime one spouse makes a substantial gift to the other. What is considered “substantial” depends on the parties’ relative financial circumstances. Examples of situations in which a transmutation agreement would be required to ensure the gift’s validity include:
- One spouse gifts a car to the other. Putting one spouse on the title and signing a pink slip and DMV documents is not enough. The adversely affected party must sign a transmutation agreement.
- One spouse purchases a residence before marriage and wants to put the other spouse on the title and share the equity fifty-fifty. This refers to situations where one spouse owned the residence before marriage or invested his or her separate property into the residence. Simply signing a quitclaim deed will not meet the transmutation requirements. A transmutation agreement is required.
- Gifting stock or a financial account to the other spouse. The law requires that the gifting spouse sign a transmutation agreement in addition to the financial institution’s transfer documents.
Does Every Gift to a Spouse Require a Written Agreement?
No. The law does have some flexibility. Small gifts such as clothing, jewelry, and sentimental gifts are usually exempt from this requirement. This does depend on the value of the gift, to some extent. For example, if you gift jewelry worth tens or hundreds of thousands of dollars, it would behoove you to have a transmutation agreement in place.
Can I Draft or Contract Around a Transmutation Agreement?
No. You cannot draft or contract around this requirement. The law is clear in this area. It often happens that one spouse will make an oral or email agreement with the other that he or she will waive the legal requirements for a gift or otherwise dispense with legal formalities. If you do so, the result will be that this agreement could be invalidated in the event of death or divorce or if one party contests the gift at a later date. You are better off observing the transmutation requirements and having a transmutation agreement executed by the adversely affected party than taking your chances with an oral agreement, which is not legally binding.
Contact a Family Law Attorney for More Information
It is highly recommended that when making a substantial gift to a spouse, you have an experienced lawyer guide you through the transmutation process and to prepare the necessary documents. If you do it yourself, so to speak, and draft your own legal documents, a mistake on your part could lead to the transmutation agreement being invalidated with financial consequences other than what was intended. Contact Cottle Keen Lopiccolo & Heyde today.
