Can a spouse’s separate property be considered marital property in a divorce?  Or vice versa?  The short answer is yes.  During a marriage the character of property can change – either by agreement or transfer.  The law calls this transmutation.  The most common transmutation is when the separate property of one spouse becomes community (marital) property.

A less common form of transmutation is when community property is transmuted to become the separate property of one spouse.  Least common is when one spouse’s separate property is transmuted to become the other spouse’s separate property.

Commingling

Transmutation can occur when a spouse’s separate property is commingled (mixed or combined) with community property in such a way as to lose its separate character.  For example, if a spouse deposits his/her separate funds into a marital account, those funds become commingled.

Commingling creates a presumption in the law that the commingled money or property is now community property.  This presumption can be overcome if the separate property is still clearly identifiable or can be traced to a separate property source.  If the commingling happened long ago, often such tracing is difficult to do.

A common exception is when a spouse uses separate property funds as a down payment on a marital home.  It’s normally relatively easy to trace (or simply agree upon) the down payment transaction.  Therefore the down payment funds normally retain their character as separate property.

Transmutation – Basic Law

In the absence of commingling, a transmutation is not legally valid unless:

• It is declared in a written document which
• clearly states that the characterization or ownership of the property is being changed and
• clearly shows the acceptance of the spouse who is adversely affected by the transmutation.

The “in writing” requirement does not apply to a gift between the spouses of items such as clothing, jewelry or other tangible personal items, as long as:

• The item is used solely or principally by the spouse who received the gift and
• The item is not substantial in value when taking into account the financial circumstances of the marriage.

Fiduciary Duty and Transmutation

In a marriage, the spouses have a duty of the highest good faith and fair dealing with each other.  Under this duty, neither may take any unfair advantage of the other.  As regards community property and debt, this duty continues until the property has been divided by themselves or by a court.  The duty includes an obligation to do the following if requested by the other spouse:

• fully disclose all material information regarding all assets and liabilities in which the community has or may have an interest and
• provide equal access to all information and records pertaining to these assets and liabilities.

With respect to a transaction between spouses affecting community property, the fiduciary duty includes:

• providing access at all times to records regarding the transaction; and
• providing on request full and true information of everything affecting the transaction.

Because of this fiduciary duty, there is a presumption in the law that an interspousal transfer that unfairly advantages one spouse was induced by undue influence.  The advantaged spouse must overcome this presumption by showing that the disadvantaged spouse’s consent was:

• freely and voluntarily made;
• with a full knowledge of all the facts; and
• with a complete understanding of the effect of the transaction.

The information above is provided to help you understand some legal basics that may be relevant to your situation.  It was obtained mainly from California Judges Benchguide 202 – Property Characterization and Division.  The law in this area is fairly complex.  You may benefit from obtaining legal advice about your particular situation.