A deed is a legal instrument used to transfer property ownership and thus also proves who has the legal right to property. There are several different types of deeds that can be used to transfer property in different ways, to help fit different needs and scenarios.
One such deed is the interspousal transfer deed. These are often used in the case of jointly-owned property, when ownership needs to be transferred from one spouse to the other, or between two spouses down to just one of the two. Keep reading to find out what an interspousal transfer deed is, when it’s used, and how it all works.
What is an Interspousal Transfer Deed?
An interspousal transfer deed is a legal instrument used to provide sole ownership to a property that is jointly owned. For instance, the deed can be used to provide the title to a house to one person in a marriage.
Note that the technical term for interspousal transfer deed is interspousal transfer grant deed. However, the former term is used more commonly.
Interspousal transfer deeds are just one of many types of deeds that are used to transfer title to the property.
What is the Purpose of an Interspousal Transfer Deed?
The purpose of an interspousal transfer deed is to allow for the relatively easy transfer of jointly-owned property to just one person. The term “spousal” may have provided a clue indicating that this special type of deed is used in cases where marriage is concerned.
Interspousal transfer deeds are most commonly used in divorce cases. When a piece of community property needs to be transferred to just one of the two spouses, the interspousal transfer deed is employed. The property may have been owned jointly by the two spouses. In other cases, the property may have been solely owned by one spouse, but due to community property law, is being transferred to the other spouse as a result of the dissolution of their marriage.
Then, the spouse remaining in the home may agree to refinance the mortgage under their own name. They may also choose to sell the property and provide the ex-spouse with a percentage of the proceeds if they so choose. What happens to a previously shared home in the case of a divorce depends on a case-by-case basis.
When Is an Interspousal Transfer Deed Used?
As discussed in the section above, interspousal transfer deeds are most often used in divorce proceedings. Property can be transferred between two spouses to one spouse, or from one spouse to the other, by using this type of deed.
Interspousal deeds can be used in other ways as well. For example, a mortgage lender may ask the spouse of the borrower to sign an interspousal transfer deed. This way, if a foreclosure sale were to take place in the future, a vengeful ex-spouse can’t attempt to claim half of the recovered debt.
In another example, an interspousal transfer might be arranged if one spouse’s credit is being negatively affected by another spouse’s credit issues. Both of these cases highlight how an interspousal transfer deed might be used outside of a divorce proceeding.
Rules of Interspousal Transfer Deeds
At this point, you should have a general understanding of what an interspousal transfer deed is, and the scenarios in which this type of deed might be used. However, it can still be hard to know which type of deed you should use without first understanding their mechanisms.
Here is an explanation of some of the interspousal transfer deed rules. This should help you gain a better understanding of the capacity in which it can operate, and whether it could be a tool to be used for your benefit:
Interspousal transfer deeds don’t have to be used as a result of a divorce or any other type of special circumstance. While divorce and financial hardships are the most common reasons why interspousal transfer deeds are used to transfer property, you can use them to transfer property to your spouse at any time and for any reason.
Interspousal property transfers aren’t taxable. That means that if you want to transfer property between yourself and your spouse, this is a great tool to leverage in order to avoid being subject to any gift or transfer taxes.
However, there is a caveat when it comes to the aforementioned tax exemptions. In the case of a divorce, the tax exemptions for an interspousal property transfer end just one year after the divorce is finalized. If you are going through a divorce, it’s to your best advantage to sign the interspousal transfer deed documents while you’re still technically married. This allows you to take advantage of the tax exemption benefit. Waiting too long could upend you and subject you to costly transfer taxes. If you are thinking about using an interspousal transfer deed and are not going through a divorce, then don’t worry. The tax advantage doesn’t expire and you aren’t tied to any time limit for signing off on the transfer deed.
If you live in the state of California, pay special attention. California is a community property state, meaning that any and all property obtained during a marriage is considered communal property (unless otherwise stated in a prenuptial agreement.) Usually, this means that any communal property is split evenly between two spouses during divorce proceedings. However, in 2018, the California court ruled that an interspousal transfer deed contains language that transmutes property from communal to individual. This means that you can still use an interspousal transfer deed to effectively transfer the title of a property. If you decided to transfer shared property to your spouse with intention, your half wouldn’t get transferred back to you if you got divorced.
Interspousal Transfer Deed vs Quitclaim Deed - Which Is Better?
Different deeds are designed to complement different scenarios, and no one deed is necessarily better than another. It’s best to evaluate the differences between deed types, understand how they work, and then select the one that best fits your unique circumstances and needs.
The key difference between an interspousal deed and a quitclaim deed is a liability. In the case of a quitclaim deed, a spouse who chooses to give up their interest in a jointly-owned property may still be held liable for the mortgage or other taxes, liens, claims, and debts associated with the property. (In other words, a spouse can’t just drop their share of a house and leave their other spouse with a litany of financial problems.)
In contrast, an interspousal transfer deed provides the transferee with full interest in the property. The individual who transferred the property no longer has any obligations related to the property, and cannot be held liable for the mortgage or debts.
Deciding whether an interspousal transfer deed or quitclaim deed is better truly depends on your relationship with your spouse and the unique circumstances of your marriage or divorce. Further, the advantages and disadvantages of either choice shift depending on whether you are the transferer or the transferee. As the transferee, for instance, you may be happy to become the sole interest holder in a property. On the other hand, it could feel intimidating to be the sole person held liable if anything goes wrong.
Just as you would with any important decision, it’s best to carefully evaluate the advantages and disadvantages of your options and select the one that best suits you.
How to Prepare an Interspousal Transfer Deed
An interspousal transfer deed is used to transfer the property title from one spouse to another. This special type of deed is most commonly used in the case of divorce, when the proceedings result in the requirement that property goes to one spouse over the other. However, there is no set timeline for using an interspousal transfer deed. You can choose to use this deed at any time, even if you aren’t getting divorced. If you are getting divorced, however, it’s recommended that you sign the deed while you’re still married. That’s because the transfer and/or gift tax exemption is limited to up to one year after the divorce is finalized.
Further, many individuals wonder why they wouldn’t use a quitclaim deed instead of an interspousal transfer deed. While one type of deed isn’t necessarily better than the other, a quitclaim deed is only relinquishing one person’s residential interest in a property. It does not release them from financial liability. In contrast, the remaining resident of an interspousal transfer deed has full interest and is thus solely liable in the case of any mortgage issues or debt.
Now that you have all of this information, you may see the value in utilizing an interspousal transfer deed for yourself. There are many situations when an individual might want to transfer the property title to their spouse that don’t have anything to do with divorce. For instance, you might want to gift your home to your spouse for estate planning purposes while also ensuring that no one will be held liable for a gift or transfer tax.
Any time you sign a deed, it’s time to review and update your Estate Plan as well. Trust & Will makes it easy for anyone to create and then routinely manage their estate planning documents. Ease of access and use means that you’re more empowered in your planning process, and thus can have peace of mind knowing that your plan is up-to-date and remains effective. Interested in getting to know what we’re all about? Take our free quiz to see where you should get started, or compare our different estate planning options today!
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