Transmuting property – A cautionary Tale

“Transmuting” – It is not bringing the dead to life or shape-morphing aliens in some B movie, In the context of property and divorce however, it can be just as scary and with real-world consequences.

During a free initial consultation in my office, I was speaking with my client about his property situation. He was very happy that even though some of the property was marital and would therefore be divided, at least he could keep his house that was purchased before the marriage. I assured him that, yes, a house purchased prior to the marriage is separate property under Arizona community property law. The superior court has no jurisdiction to divide separate property in the marital estate. I asked him this important question: “Is your name the only name on the title?” He said, no, his spouse was also on the title. I asked him why that was. His response was that he wanted to refinance the house, and the mortgage lender told him it would be better to include his spouse’s income.

I hate to be the bearer of bad news. But unfortunately I had to tell him that, no, the house was no longer separate property. It had become transmuted. As the name implies, transmutation means changing the character of a thing to a different thing. In this case, putting the wife’s name on the deed changed the nature of the property from separate to community property. Community property is subject to division by the court. Separate property is not. So what this action ultimately did was make a gift to the wife of one half interest in the property.

“But” he protested, “We just did that for the loan, my intent was never to turn the property into community property.” The intent is only important if it can be proven. The law allows a party to prove that the property was never intended as a gift by clear and convincing evidence. Clear and convincing is a burden of proof that is a midpoint between preponderance of the evidence and beyond a reasonable doubt. In other words, it’s a pretty strict standard. What would constitute clear and convincing evidence that my client did not intend to gift a half-interest in the house? I can think of one thing: A writing, signed by the other spouse, stating unequivocally that the reason for her name appearing on the deed was for the purpose of refinancing and she was disclaiming any gift of the house. That would do it. There might be something else, but it is hard to think of another piece of evidence that would meet the clear and convincing standard.

This is a cautionary tale. Married couples don’t usually base their decisions on a possible divorce. This is understandable. However, married individuals that bring significant assets to the marriage should be cognizant of the ease with which their once separate property can become community property. Before signing refinancing documents, or selling separate assets for cash, it is a good idea to find local counsel in your area that can review documents and give legal advice before its too late.

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