Opinion ID: 1057654
Heading Depth: 2
Heading Rank: 2

Heading: Transmutation of Husband's Premarital Balance

Text: Husband originally sought permission to appeal in this case because the Court of Appeals determined that his entire 401(k) account, including the premarital balance, became marital property through the legal fiction of transmutation. We agree with Husband that the Court of Appeals erred in its application of this concept. This Court addressed the related doctrines of commingling and transmutation for the first time in Langschmidt and adopted the following explanation: [S]eparate property becomes marital property [by commingling] if inextricably mingled with marital property or with the separate property of the other spouse. If the separate property continues to be segregated or can be traced into its product, commingling does not occur. ... [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. 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 the instant case, the trial court did not consider the doctrines of commingling and transmutation because it concluded correctly that the parties' 401(k) accounts were retirement (or other fringe benefit) rights and therefore marital property (excepting the balances that existed when the parties married). On appeal, the Court of Appeals disagreed with the trial court that the accounts were retirement rights and, accordingly, did address these doctrines. The intermediate appellate court first observed that Husband, as the party asserting that the appreciation of the pre-marital portion of the 401(k) accounts acquired during the marriage is not marital property, has the burden of establishing by a preponderance of the evidence that the assets in question can be segregated from contributions made with marital funds and gains. Snodgrass, 2008 WL 836392, at . The court then determined that, because Husband could not demonstrate that the $180,000 withdrawal he made from his 401(k) account came solely from the marital property portion of the account, [17] the entire account became marital property and subject to equitable division under the rationale of commingling and transmutation. Id. In so concluding, the Court of Appeals erred. With respect to this issue, we adopt, instead, the analysis used by the Court of Appeals in Avery v. Avery, No. M2000-00889-COA-R3-CV, 2001 WL 775604 (Tenn.Ct.App. July 11, 2001). In Avery , 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. Id. at  (footnote omitted). 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. Id. at  n. 12. We agree with the reasoning of the Avery court. At the time Husband withdrew the $180,000 from his 401(k) account, it totaled more than $2,000,000, including his premarital balance of approximately $54,000. Obviously, there was more than sufficient marital property in the account to support the withdrawal. There is no basis for concluding that Husband's withdrawal of the $180,000 for the marital home transmuted his premarital balance into marital property. Certainly, there is no proof that Husband intended that result. The Court of Appeals therefore erred in concluding that Husband's entire 401(k) account became marital property upon his withdrawal of the $180,000 for marital purposes. Husband is entitled to the balance that existed in his 401(k) account at the time he married as his separate property.