Separate or Not Separate? That is the Question

Marital property disputes often hinge classifying an asset as "separate" or "marital."  Separate property belongs exclusively to the spouse who owns it and is excluded from the equitable division of assets.  Marital property is considered property of both spouses and is equitably divided during a divorce.  Under certain circumstances, separate property can become marital property, partially or entirely.  A recent case from the Tennessee Court of Appeals illustrates the complexity of separate property analyses and offers clarity on approaching these issues.  The key to these cases involves understanding the difference between marital property classification and the concept of "transmutation." 

William and Vernell Lewis divorced after ten years or marriage.  Before the marriage, Vernell purchased a 4-acre lot with a home and detached garage.  William moved in with Vernell prior to the marriage.  They built stalls for William's horses and Vernell paid to put a shed on the property.  The parties then signed an agreement referring to the couple as "co-habitants" of the property and equally splitting the monthly mortgage and utility expenses. 

Eight months after signing the agreement, the two married, but William was not added to the title or mortgage for Vernell's property.  One month later, William quit his job and stopped paying mortgage/utility expenses as previously agreed.  Vernell subsequently paid all the mortgage, utility, and upkeep expenses for the property.  William kept his garage as a workshop and the stall for his horses, but did not financially contribute.  William also referred to the property as "Vernell's property" despite his insistence that he contributed physical labor to its upkeep.  The parties continued in this manner for the next ten years.

Tried but Not True

At the divorce trial, William contended that Vernell's property was a marital asset subject to equitable division.  Vernell contended that it was separate property that she owned exclusively.  The trial court sided with Vernell because William had not contributed financially and only occasionally helped on upkeep.  The court further held that the pre-marriage property agreement did not grant William an interest in the property. 

The Court of Appeals reversed, holding that Vernell's property was marital property.  The Court first noted that "transmutation" and marital property classification are separate and distinct analyses. 

Transmutation converts separate property into marital property when the parties themselves treat it as marital property.  Under transmutation, an entire asset can become marital property.  Courts look at several non-exclusive factors when determining if property has been transmuted:  the use of the property as a marital residence; the ongoing maintenance of the property by both parties; placing the title to the property in joint ownership; using the credit of the non-owner spouse to improve the property; and the use of marital funds to improve the property or pay off an encumbrance.

By contrast, a marital property[1] classification includes the "increase in value [of separate property] during the marriage…if the nonowner spouse contributed substantially to the asset's preservation and appreciation."   Only the increase in the separate property's value becomes marital property.  Classifying the increase in value as marital property can occur even if the parties did not treat the separate property as marital property.  For example, the increase in the value of a pre-marital 401K might be considered marital property if a stay-at-home spouse substantially contributed to the running of the household. 

Here, the Court focused on the parties' treatment of Vernell's property, not their relative contributions, and determined Vernell's property was transmuted to marital property.  Vernell's property was the marital residence throughout the ten-year marriage.  Vernell used her own salary, which is a marital asset, to pay for the property and its upkeep/maintenance.  Both parties also contributed to the property's maintenance.  In so doing, they treated the property as marital property, despite the apparent one-sided financial contributions. 

Winner Might Not Take All

If the Court's decision seems unfair to Vernell, hit the pause button.  Transmutation of property to the marital estate merely places that property on the table of equitable division.  As the Court noted, "we do not express any opinion as to how the marital estate should be divided." (emphasis added).  In other words, Vernell's property might be marital property, but that does not necessarily mean William gets half of it.  In addition to the aforementioned factors, courts look at "[t]he contribution of each party to the acquisition, preservation, appreciation, depreciation or dissipation of the marital or separate property, including the contribution of a party to the marriage as homemaker, wage earner or parent[.]"  The decision dividing Vernell's property will therefore be up to the trial court during round two of Lewis v. Lewis

[1] The full statutory definitions of marital property and separate property may be found at Tenn. Code Ann. § 36-4-121(b).

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