Interspousal transfer deed explained
The Interspousal Transfer Deed is, as its name implies, a California real estate deed used to transfer interests of one spouse in property to the other spouse. The Interspousal Transfer Deed is the only authorized non-grant deed for the transfer of California real property between spouses. It is exempt from the documentary transfer tax. The Interspousal Transfer Deed has the same effect as a court judgment in a dissolution action because it operates to vest the title to real property in one spouse and divests the title from another spouse. A husband and wife may use the Interspousal Transfer Deed to transfer separate property into community property or community property into separate property.
The transfer of real property from one spouse to the other spouse using a Quit Claim deed or Grant Deed might prima facia cause a spousal support payment to be increased and/or increase the presumptive residence value of that spouse for purposes of an ongoing pendente lite support calculation.
A Reverse Declaration of Termination of Joint Tenancy (or Property Agreement) would be sufficient , in lieu of an Interspousal Transfer Deed, if both husband and wife own the real property as joint tenants.
The Interspousal Transfer Deed should be used with extreme care. Any real property that is the subject of a pending divorce or other proceeding must have the consent of the court before the Interspousal Transfer Deed can be validly used to transfer one spouse’s interest in the property to the other.
Common legal hazards with signing
Owners must carefully consider the legal risks of signing any deed of transfer into which they enter. For example, there may be, in fact, some legal consequence to signing a deed, which implicates third parties such as lenders or family members, which may expose the signer to liability under the deed. For example, owners of real property encumbered by a mortgage may not be able to sign an interspousal deed of transfer and record it without exposing themselves to a claim by the lender for breach of warranty or violation of the due on sale clause. Owners who have promised one another through a marital settlement agreement that the property is to remain theirs after the divorce may find themselves faced with a breach of contract action if they sign a deed that is inconsistent with their promises in the marital settlement agreement. Even individuals who acquire a property just as they are about to sign a deed of transfer may find themselves in statute of frauds trouble and may not receive from the spouse who gave them the deed the consideration promised by the individuals in the deed. This means that the spouse may not receive the promised spousal support or the division of other community assets. If other community assets are not sufficiently divisible to accomplish the division of interest in the real property, the spouse may find themselves in need of partition action to have the property fairly divided.
In addition to the legal risk of individuals encumbering the property by mortgage or deed of trust, there is the even greater risk that the division of the property in the marital dissolution action will be denounced as exposing the parties to creditors of the transferring party, all such creditors having been granted permission by the bankruptcy court to bring and prosecute an action to set aside the partition as a fraudulent conveyance.
Effects on property and title
In California, the execution of an interspousal transfer deed will have an effect on the ownership of the underlying whomever signs the deed, provided that a timely and proper deed is submitted to the County Recorder’s Office. If there are no other documents referencing the family law orders or judgment that purportedly require the interspousal transfer deed (including, but not limited to, an assignment order or judgment, a notice of restraining order, or any other enforceable document such as a stipulation or order after a court trial), and if the interspousal transfer deed is properly recorded at the County Recorder’s Office, the person whose name appears on the deed will then be the owner of the property described therein. Even if the law firm for the Client’s spouse knows the transfer is not in compliance with the family law orders and judgments, unless they submit a properly crafted motion to set aside the interspousal transfer deed, the owner of the property that is now in the spouse’s name will be considered the owner of the property.
If an interspousal transfer deed is executed during the pendency of a court action or after entry of judgment, and the transferring spouse has not met the requirements of Family Code Section 851, a spouse may file a request for an order confirming interest in the property in question (see generally, Family Code Section 2100 et. seq; to determine the nature and extent of each spouse’s community and separate property interests in all property under the court’s jurisdiction).
If the court determines that the interspousal transfer deed is invalid and that the property is now the sole and separate asset of the spouse who signed the deed, the family court can award the transferring spouse a money judgment for his/her share of the community interest in the property. Or, the awarding spouse could be awarded the right to the ownership of the property (namely, the real estate) as part of a division of assets pursuant to California Family Code Section 2552. In either case, the transferee spouse will still have the right to have some fair value for his/her interest in the property and his/her share of the community interest therein.
Also, a property deeded from one spouse to the other during the marriage, in the absence of an order confirming the separate property nature of the property prior to its acquisition, is presumed to be community property under Family Code Section 2581. A presumption is evidence that is sufficient to require that the party against whom it is directed to assume the burden of proof, unless that party can establish facts sufficient to show that the presumption is not applicable. Thus, the presumptive character of the property may be rebutted by the other spouse under the Family Code.
Many times, the spouse who does not have legal title to the property will not be able to recover any value from the sale of the property where the court would have to force a sale of the property first, and then divide the proceeds. For example, suppose that the husband transfers a rental property to the wife in exchange for a low down payment, and will then pay off the balance owed on the property when he is able to do so. Further, assume that the wife pays the monthly property expenses, including principal, interest, property taxes, and insurance. During this time, the wife would hold legal title to the property. However, if there was a court order that provided that the property was the community property of the spouses, the presumption of the interspousal transfer deed will not be applicable, and therefore, the husband would be able to provide sufficient facts to rebut the presumption and establish his sole and separate interest in the property.
One of the most common "tricks" used is that the husband signs a declaration stating that he is making a gift of the property to the wife, that he wishes and intends for the wife to become the sole and separate owner of the property. And in exchange, the wife agrees to intercept all income from the property. In this circumstance, we have found that a spouse has to pay for half the appreciation of the property. If husband can do this, the wife is out a half of the appreciation of the value of the property.
California tax consequences alleged
Property tax reassessment when transferring property in interspousal divorce is a complex subject. As discussed below, the transfer of real property in California between spouses as a result of divorce is generally excluded from property tax reassessment. However, as with all rules in taxation, exceptions apply. Further, an interspousal transfer may have untoward effects on other taxes such as capital gains tax.
In California, Article XIII A, section 2(d) excludes from property tax reassessment "[t]he purchase, sale or exchange of an owner’s principal residence … [and] the creation, transfer, sale or exchange between spouses … of their combined interests in the principal residence … [except] to the extent that only money or charges, as defined by the Legislature, are paid or exchanged. …" Calif. Const., art. XIII A, § 2(d) (emphasis added). The law providing this exception is the Revenue and Taxation Code, section 63 Property Tax Law – Changes in Ownership § 63. Thus, transfers between spouses (those married under California law) of their combined interests in their principal residence do not automatically trigger a property tax reassessment. However, in the Divorce Context, two exceptions to the presumption of non-reassessment apply: Pursuant to California Revenue and Taxation Code section 62 and Property Tax law, § 62 transfers of property solely between spouses, as they relate to divorce, are, in most cases, excluded from property tax reassessment and valuation; provided, however, the transfer is done pursuant to Family Code division 9, division 6, or the Divorce Code, and the transfer is completed within 12 months of final dissolution by a court of competent jurisdiction to dissolve the marriage of the persons so transferring property. These exceptions arguably may apply when the spouse transfers his or her property interest, and the "conversion" of property to real property is accomplished as a result of the transfer . Presumably, the exception applies when the "transfer of real property" is accomplished in divorce or legal separation. Moreover, any resulting capital gains tax will likely be affected as well. Similarly, when spouses swap residences with each other (as part of a complete estate plan to split property), property tax reassessment can be postponed by use of California tax rules that exempt from reassessment property transferred (as separate property). However, the interspousal exchange at the time of divorce or legal separation is not restricted to transfers of separate property. Moreover, other conditions must be met for such exchange to be eligible for postponing property tax reassessment. Strict legal criteria apply to comply with tax exception rules and regulations. The interspousal transfer deed should provide a full and complete description of the property including the conditions to which the property is subject at all times from the date of the preliminary title report to the date the deed is recorded. Properly drafted interspousal transfer deeds can facilitate the transfer of real property between spouses in a divorce proceeding after accurate disclosure of all conditions to which the real property is subject. On the other hand, the failure to comply with the exceptions to property tax reassessment can be very costly. When an exception benefit is mistakenly conferred, private individuals typically must bring such an action, i.e. a tax assessment appeal, in order to obtain a refund of taxes assessed against the property. In such a case, the penalty is typically the assessment of the correct tax amount and penalties for late payment of taxes. However, the amounts can be significant, especially when vast amounts of property are involved. Thus, it is very important to understand the exceptions to reassessment, and how these exceptions may be applied to certain transfers or transactions that occur as a result of divorce or legal separation.
Legal advice and precautions to take
It is necessary to seek legal advice before you sign an interspousal transfer deed in California. So it is important not to sign a deed until you have first had the opportunity to speak with a family law attorney and understand your rights. If you currently reside in the property, you may be giving up your right to live there forever.
The selling spouse may tell you that it is just a formality, but it is not a formality if the deed grants the right to another party. The selling spouse could be selling the property to a boyfriend or girlfriend and then will claim that you have no right to remain in the property based on this deed.
Aren’t there lots of cases where people do this and nobody complains? Yes, but those people all knew what they were signing. People have come to me complaining that they had no idea what they were signing, and that they were told by their spouse that it is just a formality. Therefore, you should not sign any document unless you have a complete understanding of the ramifications of that document.
Alternatives to interspousal transfer deeds
Another option for transferring title to separate property assets during or after marriage with tax friendly outcomes are the use of a prenuptial agreement and an Asset Protection Trust. The use of a prenuptial agreement and a trust combination can help ensure that each spouse’s assets remain divisible in case of divorce, while also helping to preserve the transferor spouse’s estate from creditors. There are often contractual provisions that can ensure the asset, protected in trust, is not "exposed" in a divorce setting if it is core to the separate property’s asset treatment by the IRS and FTB.
A prenuptial agreement is a contract between two people that they enter into before they marry. These agreements can deal with almost any issue that each spouse wants to address , but are especially helpful at establishing what marital property consists of. What a prenuptial agreement cannot address is property you acquire after your marriage. Jarvis v. Jarvis (2013) 215 Cal.App.4th 154.
An Asset Protection Trust is similar to a prenuptial agreement but gives each spouse additional security if marital circumstances change. They may be established in California or offshore. The primary difference is that with a prenup, a spouse may lose their rights to property that could have been considered gift or inheritance property and/or a family business. With a trust, those assets can be incorporated into the trust with an understanding that they are not available to settle any marital obligations that may arise. This combination is appealing when spouses bring children into the marriage from prior relationships.