Transmutations: What are they and how do they work?

Simply put, a transmutation changes the character of property from separate to community, community to separate, or the separate of one to the separate of another. Under the California Family Code, transmutations may only occur between spouses or registered domestic partners, and they do not involve third parties.

The Family Code outlines the method to effectuate a valid transmutation. In order for spouses or partners to change the character of their previously acquired property, there must be a written express declaration of the intent to transmute. The writing must be consented to by the party whose property interest is adversely affected. There are tax consequences of transmutations for registered domestic partners unlike for spouses.

For example, suppose a retirement account acquired and funded with community funds during a marriage is the community property of Spouse A and Spouse B. If the couple wishes to transmute the retirement account to the sole and separate property of Spouse A, Spouse B must consent, by way of a written declaration, to the change in character because Spouse B’s interest in the retirement account, as a fifty-percent community property owner, will be affected adversely by the transmutation. While there is no “magic language” to effectuate a transmutation, legal experts generally agree that it is best to include the word “transmute” in any such writing.

If you have questions regarding whether a transmutation is effective, or you would like to discuss your property rights if a transmutation were to occur, please contact us for further information.

What’s In A Name: Titling Real Estate for Same-Sex Couples

For most opposite sex couples, the question of their legal status in California or elsewhere is generally a simple one – they are either married or single*. Under the current legal framework in California, the answer is not as clear for same sex couples because there are four distinct legal statuses that a same sex couple may hold. Furthermore, if an opposite sex couple who is married and residing in California purchases real property, it is generally understood among titling professionals that the couple can hold title to the subject property as community property with right of survivorship, community or separate property, in joint tenancy, or as tenants in common. The four different statuses available to same sex couples inherently cause confusion, even among the most well-intentioned titling experts, which can be problematic because incorrectly titled real property can create adverse tax liabilities. However,  federally recognized spouses can usually change the nature of property from community property to separate property, or vice versa, without income tax consequences although there may be other significant implications.

Registered Domestic Partners

One of the most common statuses for California same sex couples is Registered Domestic Partners (RDPs). This applies to any couple who registered with the State of California on or after January 1, 2000 and who did not “opt out” of the RDP status before January 1, 2005 when AB 205, the California Domestic Partners Rights and Responsibilities Act of 2003, became effective, or who have not subsequently dissolved their relationship.

Pursuant to California Family Code Section 299.2, this title also applies to those same sex couples who entered into a legally recognized relationship in a foreign jurisdiction, whether elsewhere in the United States or in another country, that is “substantially equivalent” to a California domestic partnership. Such “substantially equivalent” relationships include the Civil Unions or Comprehensive Domestic Partnerships provided by state law in Connecticut, the District of Columbia, Oregon, Nevada, New Jersey, and Washington. The limited rights granted to same sex couples in states like Colorado, Hawaii, Maine, Maryland, and Wisconsin are not characterized as “substantially equivalent” and, as a result, a couple who has registered in one of those states but has not subsequently registered with the State of California would not be deemed RDPs under California law.

Married

Married includes all couples either married in California between June 16 and November 4, 2008 or since June 26, 2013. This title is also applicable to couples who were legally and validly married in a foreign jurisdiction, whether in the United States or in another country at any time.

Registered Domestic Partner and Married

Because California law allowed RDPs to marry without first dissolving the registered domestic partnership, many couples who had previously registered with the State as domestic partners subsequently married and, as a result, now hold both statuses. For purposes of property ownership and accumulation of community property, the earlier of the two dates controls.

Property Characterization

Once the actual legal status is determined, the second, and most significant, issue is to insure that the subject property is characterized properly as community property with right of survivorship, community property, separate property, joint tenancy, or tenancy in common, in the title documents. Because RDPs and married same sex couples are entitled to all of the same rights and subject to all of the same responsibilities as opposite sex married couples under California law, all couples with any of these legal statuses are subject to California’s community property regime. This means that there is a presumption that if such a couple acquires property during the tenure of their legally recognized relationship, the property is community property. However, the source of the down payment and the source of mortgage payments must also be taken into account. Only income acquired after the date of registration or marriage is community property (IRS Chief Council Advisory 2010210, May 28, 2010), and, as such, only real property acquired with community property funds is truly community property. Even real property acquired after the date of registration or marriage with previously owned assets, no matter the intent of the couple, will have a separate property interest that must be accounted for, unless there is a transmutation by the parties.

It is especially important that the intended ownership is properly identified on the original title because, although under California law, a transfer of real property between RDPs or same sex spouses does not constitute a change of ownership that would trigger a reassessment, RDPs and legally unrelated couples do not have use of the unlimited marital deduction, a federal right, and, as a result, they do not have the option of making unlimited transfers between themselves without the potential of those transfers being characterized as taxable transfers by the IRS. This means that if title is taken incorrectly in the original title and must later be corrected to reflect the intended ownership of the property, there is a chance that this latter change in ownership will have negative tax consequences for the affected couple if it is treated as a gift or a taxable event. Community property has a different tax treatment at death which can significantly benefit the survivor, however not all property should necessarily be title as community property. We recommend that you consult an attorney before changing title to property.

If property is incorrectly titled, it is also possible that the incorrect titling could lead to a situation where upon the death of one partner or spouse, the survivor could lose control over the decedent’s one-half of the property, which, when there are other family members involved, can ultimately result in the survivor’s being unable to retain ownership of the property.

Because so many families own real estate prior to marriage or domestic partnership, an analysis of title is necessary to insure that real property assets are titled correctly. The existing legal framework requires that the professionals involved with the transfer and titling of assets understand the issues, talk freely with their clients to insure that they have all of the necessary information to properly title an asset, and know what resources are available for both the professionals and their clients in the event that questions arise that cannot be answered by the titling professional or the client. Titling companies often refuse to give titling advice so it is up to the client to access the proper information.

In light of the current legal framework and the significant issues associated with titling, we recommend the following language for use in titling documents: For RDPs: “Jane Smith and Sally Jones, Registered Domestic Partners, as [community property with right of survivorship/community property/separate property/joint tenants/tenants in common]” For married same sex couples: “Jane Smith and Sally Jones, spouses (or wife and wife), as [community property with right of survivorship/community property/separate property/joint tenants/tenants in common]” For RDPs and married same sex couples: “Jane Smith and Sally Jones, spouses and Registered Domestic Partners, as [community property with right of survivorship/community property/separate property/joint tenants/tenants in common]” For unrelated same sex couples: “Jane Smith and Sally Jones, as [separate property/joint tenants/tenants in common]”

*California Family Code Section 297(b)(5)(B) permits opposite sex couples to register as domestic partners if at least one of the parties is at least 62 years old and eligible for Social Security benefits.

Social Security Retirement and Survivor Benefits – Myths and Realities

70% of the country relies upon social security for a major source of income in retirement.  There are Social security lifetime benefits — like retirement benefits– and social security survivor benefits usually when one loses a spouse.

Social security Retirement income is a plan that working people contribute to by  paying social security tax during their lifetime  to then access in retirement as income. It is voluntary only in the sense that if you don’t work you don’t pay.  Because the plan was started in the 30’s it was designed with married couples in mind in which one was the bread winner (usually he) and the other was at home with the children (usually she).  When the couple got to retirement age (currently 62 or older based on date of birth) both spouses were able to access the plan.  The working spouse would get 100% of the benefits based on how much he had paid into the system.  His spouse at her retirement age was then able to access her benefit, if she had worked and contributed, or one- half of her spouse’s , whichever was greater.  If her spouse predeceased her, then she had the option to continue taking her benefit or the full amount of her spouse’s whichever was greater. Also ex spouses are able to access these benefits if there marriage is considered a long term marriage at divorce- usually 10 years or greater and it is not negotiated otherwise.

For same sex couples this is mostly new information as there has not been access to Social Security before July 2013.  And not having fit into the system, there are some complexities that need to be understood.  To be eligible for social security survivor benefits, you must be married at least nine months.  We are currently waiting for Social Security to issue guidance on whether Registered Domestic Partners (RDPs) may in fact be eligible for survivor benefits based upon the fact that a Registered Domestic Partner is an intestate heir, or rather next of kin under state law. As of now, we know of no survivor benefits paid out to a surviving RDP.  If you have lost a spouse or an RDP in the last few years, you should go to the Social Security office and apply for survivor benefits immediately.

If you were already receiving survivor benefits or retirement benefits as a result of a previous opposite sex marriage and you remarry or are married to your same sex spouse you will lose those benefits as remarriage terminates such benefits.  Interestingly enough, for persons over the age of 62 who would otherwise lose their social security benefits by remarrying, they can under state law become RDPs and have the same rights and responsibilities as married persons but only for state purposes and not for federal.  If you are receiving benefits that should be terminated because you are married to someone else now, you should contact the social security office immediately as well, and be prepared to pay back any benefit that you have received since July 2013.

If you have not started taking social security but plan to in the near future, you should consult your financial advisor about filing and suspending or go to http://www.socialsecurity.gov/retire2/suspend.htm. This allows you to take one half of your spouse’s benefit while you delay taking until a later time as your monthly benefit increases dramatically if you wait.  Age 70 is the longest you would benefit from waiting, but to the extent that one half of your spouse’s monthly benefit is as much or all you need for now, i.e. you are still working etc., this is a great way to maximize your social security benefits.