Facts: Two years before the marriage, Husband purchased a 63-acre farm consisting of a 10-acre portion with a house and a 53-acre portion with a barn. During the marriage, Husband converted the barn into a guesthouse. Husband testified he performed most of the work himself. Wife testified that she helped by assisting with the design as well as selecting furniture, paint, decor, and appliances. During the marriage, Husband borrowed money against the property that required Wife to execute a Deed of Trust. The trial court ruled that the 10-acre portion was Husband’s separate property but the appreciation in value during the marriage was marital property. When the marital estate was divided in the divorce, the trial court found that the 53-acre portion was Husband’s separate property because Wife made no substantial contribution to the property’s appreciation in value. Wife appealed the ruling regarding the 53-acre portion and the classification of both properties.

On Appeal: The Court of Appeals affirmed the trial court.

When dividing the parties’ property in a divorce, the court must first determine which property qualifies as “separate property” and which qualifies as “marital property.” “Separate property” is defined as: “All real and personal property owned by a spouse before marriage . . . .” “Marital property” is defined as:

(A) . . . 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, except in the case of fraudulent conveyance in anticipation of filing, and including any property to which a right was acquired up to the date of the final divorce hearing, and valued as of a date as near as reasonably possible to the final divorce hearing date. . . .
(B) “Marital property” includes 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 . . . .

[I]ncreases in the value of separate property during a marriage will not be considered marital property unless both parties “substantially contributed” to the appreciation in the value of the property. While these contributions may be either direct or indirect, they must satisfy two requirements. First, the contributions must be “real and significant.” Second, there must be some link between the spouses’ contributions and the appreciation in the value of the separate property. Whether a spouse made a “substantial contribution” to the preservation and appreciation of separate property is a question of fact.

Regarding the marital appreciation of the 53 acres, the Court affirmed the trial court, writing:

Wife did not present any evidence at trial that the value of the 53 acres had, in fact, increased from the time the parties married to the time of the divorce. Husband presented evidence that the value of the 53 acres actually decreased from the time of the parties’ marriage to the time of trial. Further, despite Wife’s argument that she made “significant contributions to the guesthouse,” Wife failed to present evidence of any link between her contributions and any appreciation in value of the 53 acres.

Wife then argued that the entire 63-acre property had transmuted from Husband’s separate property into marital property because she signed Trust Deeds when Husband used the properties as collateral for a loan.

Transmutation occurs when separate property is treated in such a way as to give evidence of an intention that it become marital property. One method of causing transmutation is to purchase property with separate funds but to take title in joint tenancy. This may also be done by placing separate property in the names of both spouses. Conduct between the parties can affect the classification of the property. For example, if either spouse makes a gift of separate property to the marital estate, the property is transmuted into marital property. A presumption of transmutation arises when a party uses separate funds to purchase property but places the property in the names of both spouses. Transfer of title in previously separately owned property to joint ownership also creates a presumption of a gift to the marital estate. Either of these presumptions can be rebutted with evidence of circumstances or communications clearly indicating an intent that the property remain separate.

The Court reasoned:

In the case before us, Wife presented no evidence that she signed either note, assumed liability for them, or that she made any payments on the loan Husband obtained in December 2006 or the loan Husband obtained in June 2007. Instead, Wife simply relies on the signatures she put on the two Deeds of Trust to argue that both the house and ten acres as well as the other 53 acres were transmuted into marital property.

We do not believe that Wife’s signature on the Deeds of Trust has any effect on her ownership interest in the house and ten acres or in the 53-acre parcel. It is not unusual for a bank, when loaning money to one spouse who is the record owner of a piece of property, to require the other spouse to sign a Deed of Trust to protect the bank’s interest in the property. In fact, Husband testified on cross examination that the bank required Wife’s signature for that very reason. Contrary to Wife’s suggestion, however, the act of signing one or more Deeds of Trust, without more, does not transfer any rights in the property to the nonowner spouse that he or she does not otherwise have.

Accordingly, the trial court was affirmed.

Sandford v. McKee (Tennessee Court of Appeals, Middle Section, September 27, 2012).

Information provided by K.O. Herston: Knoxville, Tennessee Matrimonial, Divorce and Family Law Attorney.