Opinion ID: 1057654
Heading Depth: 3
Heading Rank: 3

Heading: Distinguishing Marital from Separate Property

Text: In summary, then, Tennessee Code Annotated section 36-4-121(b)(2)(C) defines separate property as including [i]ncome from and appreciation of property owned by a spouse before marriage but specifically excludes such income and appreciation when it is characterized as marital property under subdivision (b)(1). That portion of a 401(k) account existing on the date of marriage remains separate property. Because, however, the account is a retirement or other fringe benefit right[] relating to employment, id. at (b)(1)(B), the entire net amount of income and appreciation that was experienced in Husband's and Wife's 401(k) accounts during their marriage is characterized as marital property, including that which accrued on the premarital balances. See also Langschmidt, 81 S.W.3d at 749 (Retirement benefits accrued during the marriage clearly are marital property under Tennessee law.). While our decision today does not conflict directly with our prior determinations about similar but distinguishable benefits, we acknowledge that our analysis in prior cases has often lacked the clarity for which we strive today. For example, in Harrison v. Harrison, 912 S.W.2d 124 (Tenn. 1995), this Court dealt with the husband's one-half undivided interest in real property. At that time, Tennessee Code Annotated section 36-4-121(b)(1)(B) provided: 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 and the value of vested pension, retirement or other fringe benefit rights accrued during the period of the marriage. Tenn.Code Ann. § 36-4-121(b)(1)(B) (1991) (emphasis added). During the marriage, the value of the real property in question appreciated from $7,000 to $1,361,750. The parties agreed, and the record revealed, that the sole cause of the property's significant appreciation in value was the construction of an interstate highway across the property. Nevertheless, the wife argued that the appreciation was marital property because she substantially contributed to its preservation and appreciation. Although the wife established that she assisted in the care of cattle on the property and that payments on an indebtedness secured by a deed of trust on the property were made from marital funds, this Court held that the evidence did not reveal that the wife substantially contributed to the preservation and appreciation of the real property, and, therefore, the appreciation of the husband's one-half undivided interest was his separate property. Harrison, 912 S.W.2d at 127. In so holding, this Court stated that Tennessee Code Annotated section 36-4-121(b)(1)(B) does not permit the conclusion that any increase in value [of separate property] during marriage constitutes marital property. The increase in value constitutes marital property only when the spouse has substantially contributed to its preservation and appreciation. Harrison, 912 S.W.2d at 127 (second emphasis added). While this statement was accurate with respect to the first clause of subsection 121(b)(1)(B), which applied in that case, it was inaccurate even then as to any property defined as a vested pension, retirement or other fringe benefit right because those properties did not require substantial contribution by the parties in order to be deemed marital. In Cohen v. Cohen, 937 S.W.2d 823 (Tenn.1996), we considered whether unvested pension benefits accrued in conjunction with employment during the marriage are marital property. We first looked to the broad definition of marital property: 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. ... Tenn.Code Ann. § 36-4-121(b)(1)(A) (1991). We determined that, under this unambiguous language, clearly the right to unvested retirement benefits is marital property. Cohen, 937 S.W.2d at 827. We also recognized in Cohen that unvested pension benefits are a form of deferred marital compensation, and that [s]ince the benefits are acquired with the fruits of the wage earner's labor, were it not deferred it could benefit the parties during the marriage. Id. at 829. The husband argued, however, that the plain language of subsection (B) which specifically identifies vested pension benefits as marital property impliedly excludes unvested retirement benefits. Id. at 827. At that time, subsection (B) defined marital property as including the value of vested pension, retirement or other fringe benefit rights accrued during the period of the marriage. Tenn.Code Ann. § 36-4-121(b)(1)(B) (1991). We rejected the husband's argument, concluding that the legislature intended to include unvested retirement benefits as marital property. First, the definition of marital property found in subsection (A) is virtually all inclusive. That broad definition clearly includes unvested retirement benefits. Second, subsection (B), which serves to append to subsection (A's) definition vested pension, retirement, or other fringe benefit rights and certain forms of separate property does not exclude retirement benefits. Third, we note that unvested retirement benefits are not included in the definition of separate property. Cohen, 937 S.W.2d at 828 (footnote omitted). We specifically noted that the statute's provision that marital property includes the value of vested pension, retirement or other fringe benefit rights accrued during the period of the marriage operated not to exclude unlisted items, but operated merely to specifically include listed ones. Id. at 828 n. 4. We also observed in Cohen that including vested and unvested retirement benefits in the definition of marital property is consistent with the legislature's intent to recognize a homemaker's contribution to the marriage. Id. at 828. In retrospect, while this observation was not inaccurate, it unfortunately combined two distinct statutory provisions in a single reference. The homemaker's contribution actually refers to the analysis used in determining whether an increase in value of separate property is marital by virtue of the non-owning spouse's contributions to the property's preservation and appreciation. See Tenn.Code Ann. § 36-4-121(b)(1)(B) & (C) (1991). But evaluation of the homemaker's contribution is simply not necessary when analyzing whether a particular piece of property fits within the definition of pension, retirement or other fringe benefit rights. Id. at (b)(1)(B). In Langschmidt, 81 S.W.3d at 742, this Court considered the same statutory language it considered in Harrison: 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 and the value of vested pension, retirement or other fringe benefit rights accrued during the period of the marriage. Tenn.Code Ann. § 36-4-121(b)(1)(B) (1996) (emphasis added). At issue were IRAs that had been funded by the husband prior to his marriage. [12] The wife did not dispute that the premarital contributions to the accounts remained separate property but argued that the investment gains in these IRAs that accrued during the marriage were marital property because the IRAs were retirement benefits. This Court phrased the issue as whether the increase in value of a spouse's separate [IRA] during the marriage is automatically marital property under Tenn.Code Ann. § 36-4-121(b)(1)(B) when the IRA is funded entirely with premarital earnings. Langschmidt, 81 S.W.3d at 742. We held with respect to that issue that the appreciation of a spouse's IRA during the marriage is separate property when funded completely with premarital earnings and absent substantial contribution by the other spouse to the preservation and appreciation of the IRA. Id. While we believe that our ultimate holding in Langschmidt was correct, our analysis lacked clarity. In Langschmidt, we first acknowledged that [r]etirement benefits accrued during the marriage clearly are marital property under Tennessee law, id. at 749, but rejected the wife's argument that the IRAs were retirement benefits within the meaning of the statute because they d[id] not represent deferred compensation during the marriage, but were funded with premarital assets. Id. In drawing this conclusion, we relied on Cohen for its description of retirement benefits as `part of the consideration earned by an employee, [] and as a form of deferred compensation provided by the employer for work already performed.' Id. (quoting Cohen, 937 S.W.2d at 829). This statement is technically correct as far as it goes, but our decision in Langschmidt failed to articulate clearly the correct analytical approach. The IRAs at issue in Langschmidt were not vested pension, retirement or other fringe benefit rights within the meaning of (b)(1)(B) because they were not associated with the husband's employment. [13] Although the statute at issue in Langschmidt did not include the language relating to employment as the current statute does, that relationship was implied because pensions and fringe benefits are always associated with employment. Rather, the IRAs at issue in Langschmidt had been funded by the husband in his individual capacity entirely with premarital funds and prior to his marriage. The Langschmidt IRAs were husband's separate property because, first and foremost, they did not fit the definition of marital property set forth in the second clause of (b)(1)(B). [14] By the same token, because the IRAs at issue in that case were not a product of the husband's employment, they did not involve deferred compensation. We also rejected in Langschmidt, on the basis of insufficient proof, the wife's alternative contention that she substantially contributed to the preservation and appreciation of the Husband's IRA assets. 81 S.W.3d at 750. All of the growth that accrued in the IRAs during the marriage therefore remained the husband's separate property. Id. Lacking clear guidance from this Court, our Court of Appeals has also used inconsistent analyses and reached inconsistent results in considering specifically whether 401(k) accounts are retirement or other fringe benefit rights relating to employment. See, e.g., Pedine v. Pedine, No. E2008-00571-COA-R3-CV, 2009 WL 585943, at  (Tenn.Ct.App. March 9, 2009) (holding that a portion of the marital growth in the husband's 401(k) account was attributable to his premarital balance and was therefore his separate property because that increase in value was purely market-driven); Curry v. Curry, No. M2007-02446-COA-R3-CV, 2008 WL 4426895, at  (Tenn.Ct.App. Sept.18, 2008) (holding that, with respect to the husband's 401(k) account, any contributions made to the 401(k) by [husband] prior to the marriage were ... his separate property. However, any amount contributed during the marriage, and any increase in the value of the 401(k) that accrued during the marriage[,] is marital property.); White v. White, No. E2006-00595-COA-R3-CV, 2007 WL 63602, at  (Tenn.Ct.App. Jan.10, 2007) (holding that the premarital balance in the husband's 401(k) account was not deferred marital compensation and that the post-marriage appreciation attributable to that balance was the husband's separate property because there was no proof of Wife's substantial contribution to its preservation and appreciation); Nash v. Nash, No. E2002-01597-COA-R3-CV, 2003 WL 21706297, at  (Tenn.Ct.App. July 18, 2003) (rejecting the husband's argument that the proof established that all of his post-marriage contributions to his 401(k) account were made to a single fund and that the other fund was therefore his separate property); and Norman v. Norman, No. M2001-02796-COA-R3-CV, 2003 WL 724677, at  (Tenn.Ct.App. Mar.4, 2003) (holding that the balance in the husband's 401(k) account at his marriage was his separate property but that the remainder of the monies in the account as of the time of the parties' divorce was to be divided equitably as marital property). Clearly, this issue has caused confusion and consternation among the courts, litigants, and lawyers. We clarify today that 401(k) accounts held through a spouse's employer are retirement or other fringe benefit rights relating to employment. Accordingly, net gains from any source accruing in such accounts during a marriage are all marital property within the meaning of the second clause of section 36-4-121(b)(1)(B), [15] and it is not necessary to consider the relative contributions of the parties to the increase in value. Also, we agree with the parties that the balances that existed in each of their 401(k) accounts as of the date of their marriage remain their separate property. [16]