Facts: Husband and Wife, both 65, divorced after 34 years of marriage.

During the marriage, Husband retired from the military after serving over 30 years with a VA disability rating of 100%. Husband received VA disability benefits that he deposited into a Fortera Credit Union account solely in his name.

With the Fortera account, Husband purchased:

• a piece of real estate on Granny White Road jointly titled to both parties to lease to one of the parties’ now-adult daughters under a lease-purchase agreement; and
• a Dodge pickup truck for himself.

Husband argued the Fortera account and the truck and property purchased from it were his separate property because federal law prevents classifying VA disability benefits as marital property.

Wife argued the Fortera account was an asset acquired during the marriage that should be equitably divided. Besides Husband’s VA benefits, the Fortera account included the monthly rent from the parties’ daughter. Wife argued the account became marital property under the doctrines of commingling and transmutation.

The trial court found the account and the items purchased from it were Husband’s separate property because:

• the account was in Husband’s separate name, and Wife had no access to it;
• the jointly titled Granny White property was purchased with funds from the separate Fortera account and was intended to lease to the parties’ daughter, not for the parties to live in themselves;
• there was “no evidence” that Husband intended to gift the property to the marital estate; and
• the Dodge pickup was purchased with funds from the Fortera account and, therefore, could be traced to Husband’s separate property.

Wife appealed.

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

Dividing a marital estate in Tennessee starts with classifying the parties’ property. Property is classified as either marital or separate, and only marital property is equitably divided between the parties. Separate property is not subject to division.

All property acquired by either or both spouses during the marriage is marital property. Thus, rental income earned during the marriage is marital property.

Federal law generally prevents dividing VA disability benefits as marital property. But VA benefits can lose the protections of federal law and become marital property when commingled with marital assets. Separate property becomes marital property by commingling if it is inextricably mingled with marital property.

The Court found the evidence preponderated it in favor of classifying the dispute assets as marital property:

Here, Husband jeopardized the identity of his separate VA funds when he combined them with marital rent income in the Fortera account. It was his burden to show that the benefits continued to be segregated or could be traced into their product.

Husband did not meet this burden. He only offered proof of the total value of the account; he did not show how much came from separate VA benefits as opposed to marital rent income. The two sources of funds were not segregated, and no amount of funds was traced to either source. So Husband’s VA benefits lost their exempt status under [federal law] and became marital property by commingling.

Because Husband funded the Fortera account with marital income, the account is presumed to be marital property. Husband failed to rebut this presumption. At trial, he relied on the fact that the account was in his name only, and Wife had no access to it. But income earned during the marriage is marital property so the evidence preponderates in favor of the finding that the Fortera account was marital property.

As for the Granny White property, Husband purchased it with the Fortera account before commingling his VA benefits with marital rent income. He did not earn the rent income until purchasing the house and leasing it to the parties’ daughter. But, unlike VA benefit funds that remain separate from other funds, the Grainy White property purchased with such funds is not exempt under [federal law]. VA benefits only remain exempt if they “are readily available as needed for support and maintenance … retain the qualities of moneys, and have not been converted into permanent investments.”

Here, Husband’s VA benefits “lost the qualities of moneys” when used to purchase the Granny White property. They were no longer payments of benefits due or to become due. Instead, they were converted into real estate. So there was an end to the exemption.

Because the Grainy White property was not exempt under [federal law], it need not be classified as Husband’s separate property. And, under our statutes, it is marital property. Husband acquired it during the marriage, and it does not otherwise satisfy any definition of separate property.

The Dodge pickup was likewise marital property. Husband purchased it with the Fortera account after commingling his VA benefits with marital rent income. His VA benefits have lost their exempt status and became marital property along with the rent income. And property purchased during the marriage with marital earnings is marital property.

The Court reversed the trial court’s judgment and remanded the case back to the trial court to reconsider the equitable division of marital property, given this ruling.

Griffith-Ball v. Ball (Tennessee Court of Appeals, Middle Section, May 13, 2022).

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