§ 11.02 Transmutation by Agreement; Transmutation by Use
| Jurisdiction | United States |
| Publication year | 2021 |
§ 11.02 Transmutation by Agreement; Transmutation by Use
[1]—Express Agreements (Transmutation by Agreement)
It has been argued that, after acquisition, the character of property can be changed pursuant to an agreement between the spouses.80 In most community property states, it is possible to change the character of property, by agreement, from separate to community81 and from community to separate.82 This issue has not been clearly resolved in equitable distribution states.
Many equitable distribution statutes include within the definition of separate property, in addition to certain specified types of acquisitions (such as gifts or inheritances), property designated as separate property by the spouses in a valid agreement.83 Consequently, there is statutory authority for changing by agreement what would ordinarily be marital property into separate property. Still, such agreements presumably would be subject to the same requirements and equitable limits as are applicable to all marital agreements.84 They therefore normally would have to be in writing and signed only after all relevant information regarding the property had been disclosed.85
Some community property states have permitted oral transmutations.86 This rule, however, is subject to abuse, with spouses frequently having different recollections regarding whether the oral transmutation agreement was made. In light of the serious ramifications that can flow from such an agreement, it seems wise to require a written agreement. California has adopted such a statute, abolishing its prior policy permitting oral transmutations.87
There is no statutory authority in common law states for changing separate property into marital property by agreement. It is unclear whether such authority will be accepted by the courts. All courts to date have determined that spouses can change separate property into marital property by agreement.88
In principle, there seems nothing wrong with giving spouses the power to enlarge the category of property that is marital property. The normal definition of marital property merely reflects marital partnership theory, a theory presumed consistent with the expectations of the spouses regarding their property, absent some other statement of the spouses' understanding. As long as the agreement is written and it is executed freely and intelligently by the spouses, there is no policy justification for forbidding the expansion by contract of the scope of marital property. Indeed, almost all community property states permit spouses to change separate property to marital property by agreement.89 A written agreement should clearly and unambiguously set forth the parties' understanding.90
This concept was applied in a more troubling manner in a West Virginia case.91 During a period of marital turmoil, the parties signed a settlement contract in connection with a planned divorce. The spouses then reconciled, but filed for divorce about ten years later. The court concluded that, for purposes of the later divorce, the settlement agreement constituted a marital agreement that transmuted certain marital property into the respective spouses' separate property.92 This seems an unwise application of transmutation by agreement. The parties presumably signed the settlement agreement in contemplation of divorce, and attempted to adjust the equities consistently with the situation of the parties then. There is no guarantee that the property division alone was fair, even at the time of signing. For example, one spouse might have received a great amount of the marital estate and waived any right to alimony; conversely, a small amount of property could have been requested in light of a significant alimony and child support obligation. It seems quite unclear that once the spouses reconciled they wished to transmute the marital estate into two separate estates, based upon the terms of the marital settlement agreement. In addition, the situation of the parties could have changed between the time the settlement agreement was signed and the time the parties finally decided to divorce. In light of this uncertainty, it would seem wise to ignore the first settlement agreement when considering the estate of the spouses in the later divorce. A Virginia court has reached this conclusion.93
[2]—Implied Agreements (Transmutation by Use)
In addition to transmutation by express agreement, a few courts have accepted transmutation by implied agreement.94 This extension of transmutation doctrine is unwise. It is subject to abuse, since quite ambiguous circumstances have been deemed sufficient to effect a transmutation by implied agreement.
For example, in one case a spouse let the other frequently use a car the spouse bought before marriage.95 The court considered this sufficient to effect a transmutation to marital property by implied agreement, even though title was maintained in the name of the purchasing spouse. This policy amounts to a court punishing a spouse for not hoarding separate property. In addition, the result in this case is not consistent with marital partnership theory. Under normal marital property analysis, property is characterized based upon the nature of the consideration used to purchase the property, not which spouse uses the property. The character of the property then remains unchanged, unless and until the property is the subject of a gift or the parties clearly agree to change its character.96 If separate property becomes marital property if the other spouse is permitted to use it, this rule could significantly limit the scope of separate property. For example, does a separate property house become marital property because the other spouse is permitted to live there?97
Some courts have ruled that a nonmarital house can become marital if the parties lived in it.98 This idea has been applied also to a vacation home used on occasion by the family.99 In one case, the court held that the wife's separate property home had become marital through use, but awarded the husband at divorce only 25% of the equity that the parties had accumulated during the marriage.100
A few other states appear to have accepted the concept of transmutation by use. For example, in an Iowa case101 certain furniture purchased with separate property was considered transmuted into marital property due to the family's use of the furniture.102 South Carolina may also accept transmutation by use.103 A number of other states have accepted this idea in some circumstances.104
Courts have sometimes applied this concept to rule that a business started by a spouse before marriage had been transmuted. For example, in a South Carolina case, the husband began operating a produce stand before marriage. During marriage, the parties paid their family living expenses from produce stand profits, and the wife worked at...
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