What is Transmutation of marital property in Tennessee? Simply put, assume John and Jane are a happy couple looking forward to their wedding day with lofty bliss that forever means forever. John has inherited $100,000.00 from the death of his father and deposited into John’s sole checking account. Jane has been successful at her company and participated in a 401k and her pre-marital balance is $50,000.00. John’s inheritance and Jane’s 401k balance are each separate property that is theirs and not subject to division even upon the event of their divorce. John and Jane, after their wedding day, want to buy their dream house where they will raise a family. John agrees to apply his $100,000 as a downpayment towards purchase of the house and Jane withdraws $25,000.00 to deposit into a new joint bank account used to purchase things for the home. Each of these transactions have under the law caused the $100,000.00 and $25,000 to become marital property through the doctrine of transmutation. The $25,000.00 remaining in Jane’s sole individual checking account is still separate property. In a divorce proceeding, Jane can ask for $50,000.00 from the $100,000.00 equity of the home and John can ask for $12,500.00 from the joint checking account containing $25,000.00. John cannot ask for any amount of the $25,000.00 in Jane’s sole individual checking account. If John had not used the $100,000.00 in his single individual checking account inherited, then Jane could not ask for any portion of it. Inheritance funds are separate property whether acquired prior to or during the course of the marriage.
Transmutation is a legal fiction or doctrine adopted by the Courts that separate property is converted into marital property subject to equitable division between the parties. Tennessee is a “dual property” state because its domestic relations law recognizes both “marital property” and “separate property.” See generally Tenn.Code Ann. § 36-4-121; Eldridge v. Eldridge, 137 S.W.3d 1, 12 (Tenn.Ct.App.2002). Before engaging the doctrine in more detail, it is necessary to understand what constitutes separate or marital property. The definitions of “separate property” and “marital property” are set forth in Tennessee Code Annotated section 36-4-121(b) and include the following:
“Separate property” means ․ [a]ll real and personal property owned by a spouse before marriage, including, but not limited to, assets held in individual retirement accounts (IRAs) as that term is defined in the Internal Revenue Code of 1986, as amended ․ [and] [i]ncome from and appreciation of property owned by a spouse before marriage except when characterized as marital property under subdivision (b)(1).
Marital property” means all real and personal property, both tangible and intangible, acquired by either or both spouses during the course of the marriage up to the date of the final divorce hearing and owned by either or both spouses as of the date of filing of a complaint for divorce ․ [and] (B) ․ includes [1] income from, and any increase in value during the marriage of, property determined to be separate property in accordance with subdivision (b)(2) if each party substantially contributed to its preservation and appreciation, and [2] the value of vested and unvested pension, vested and unvested stock option rights, retirement or other fringe benefit rights relating to employment that accrued during the period of the marriage.
“[Transmutation] occurs when separate property is treated in such a way as to give evidence of an intention that it become marital property․ The rationale underlying these doctrines is that dealing with property in these ways creates a rebuttable presumption of a gift to the marital estate. This presumption is based also upon the provision in many marital property statutes that property acquired during the marriage is presumed to be marital. The presumption can be rebutted by evidence of circumstances or communications clearly indicating an intent that the property remain separate.” See 81 S.W.3d at 747 (quoting 2 Homer H. Clark, The Law of Domestic Relations in the United States § 16.2 at 185 (2d ed. 1987)).
In Avery v. Avery, No. M2000-00889-COA-R3-CV, 2001 WL 775604 (Tenn.Ct.App. July 11, 2001) the intermediate appellate court considered a husband’s investment account that was his separate property. On occasion, the husband withdrew funds from this account and used them for marital purposes. The husband conceded that those withdrawn funds could themselves be considered to have been transmuted into marital funds. The wife argued that the husband’s treatment of some of his separate money as marital money transmuted the entire account into marital property. The Court of Appeals disagreed with the wife’s argument, stating:
“[w]e agree with Husband, however, that the remainder of the money in his personal account was not transmuted into marital property. We find no evidence of Husband’s intent to gift the marital estate or Wife with the remainder of the money in his separate account, and no evidence that he commingled his separate account with jointly held property.” In support of its holding, the Court of Appeals noted that, “[i]n addition to finding no basis for such a finding in the law, we think it would be bad policy for a court to hold that a party risks all of his or her separate property by spending some of it for the benefit of his or her family.”
It is very important for high net worth individuals to use proper pre-marital financial planning to avoid the effect of transmutation. One way is for a party to enter into a pre-nuptial agreement whereby each party agrees that any separate property applied towards a transaction during the marriage will remain separate property.The easiest way to keep things separate, however, is to keep separate property separate. If you are a business owner, it is important to keep accounts separate and in your name or the name of the business. Drafting a buy-sell agreement for the business which sets out how or if the business is divided or the amount the parties may each get upon the sale is also recommended. Many couples make the decision at the beginning to only have sole individual checking accounts where each has their wages deposited without co-mingling.
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