Facts: Husband and Wife divorced after 15 years of marriage.
When the parties married, Husband owned a one-third interest in a family business. He subsequently inherited the remaining two-thirds interest upon the death of his parents during the marriage.
Because Husband’s business was failing and producing little income, Wife was responsible for paying most household bills from her income.
At trial, the trial court ruled the business was marital property by operation of transmutation based on Wife’s direct and indirect contributions during the marriage. The trial court awarded the business to Husband in the overall division of marital assets.
On Appeal: The Court of Appeals reversed the trial court.
Property division begins with the identification of all the parties’ property interests. The next step is to classify each of these property interests as either separate or marital property.
Tennessee Code § 36-4-121(a)(2)(A) and (D) define “separate property” as property owned by a spouse before marriage and property inherited by a spouse at any time.
Husband’s business was clearly his separate property because he (1) owned a one-third interest before the parties’ marriage, and (2) inherited the remaining two-thirds interest upon the deaths of both of his parents during the marriage.
Separate property can be converted into marital property through transmutation.
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 transmutation is that dealing with property in such a way creates a rebuttable presumption of a gift to the marital estate. This presumption is based upon the provision in Tennessee’s 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.
Four of the most common factors Tennessee courts use to determine whether real property has been transmuted from separate property to marital property are: (1) the use of the property as a marital residence; (2) the ongoing maintenance and management of the property by both parties; (3) placing the title to the property in joint ownership; and (4) using the credit of the non-owner spouse to improve the property. Accordingly, Tennessee courts have classified separately owned real property as marital property when the parties agreed that it should be owned jointly even though the title was never changed, or when the spouse owning the separate property conceded that he or she intended that the separate property would be converted to marital property.
After reviewing the record below, the Court reasoned:
[T]here is no proof to support application of transmutation. Factor number one is clearly inapplicable because the asset at issue is a business entity. Factor number two does not support a theory of transmutation as the only act performed by Wife to maintain the Business was to assist with certain bookkeeping tasks. Wife admitted that Husband handled all day-to-day aspects of operating the business, including writing checks, paying expenses, paying and managing employees, and generally keeping the business going. There was a dearth of evidence that Wife ever worked in or managed the Business.
With regard to factor number three, there was no proof that Wife’s name was ever placed on the Business, jointly or otherwise. Regarding factor number four, . . . there was an absence of proof that Wife ever used her credit to aid or improve the Business.
Further, this Business was not treated by the parties in such a way as to evince an intention that it become marital property. Husband never conceded that it was jointly owned or should be considered a marital asset. As such, there was no gift to the marital estate, and the Business remained Husband’s separate property. The trial court therefore erred in determining that the Business was transmuted to marital property based on the evidence presented.
Accordingly, the trial court’s classification of the business as marital property due to transmutation was reversed. The overall distribution of the marital estate was vacated and the division of property was remanded back to the trial court for reconsideration.
Information provided by K.O. Herston: Knoxville, Tennessee Divorce, Matrimonial and Family Law Attorney.