Tennessee Court Finds Joint Account Funded by Wife’s Inheritance Remains Her Separate Property in Divorce Case

In a recent divorce proceeding, the Court of Appeals of Tennessee addressed issues surrounding the separate and marital property of the parties, as well as the doctrine of transmutation. In Douglas v. Douglas (Tenn. Ct. App. Aug. 8, 2016), the husband appealed the lower court’s classification of a brokerage account as the wife’s separate property. The husband argued on appeal that the account was marital property, based on the doctrine of transmutation.

In Douglas, the account at issue was funded solely by money that the wife inherited from her late father in 2010. Although the husband was not involved with the creation of the account, the wife established it as a joint account with a right of survivorship in both her husband’s and her names. The wife testified that she titled the account in both parties’ names for estate planning purposes and to avoid estate taxes. After establishing the account, the wife began withdrawing approximately $5,000 per month to support the family, make home improvements, and buy adjacent property. The husband did not make any deposits or withdrawals from the account. In 2012, the wife contacted the bank to remove her husband from the account and provided the necessary paperwork to her husband for his signature. After several weeks had passed, the parties’ daughter signed the husband’s name on the documents. The husband testified that he had no knowledge that he had been removed from the account until the parties separated in 2013.

Since Tennessee law distinguishes between separate property and marital property in divorce proceedings, the trial court must first classify the parties’ property as marital or separate. Generally, the property that is acquired during the marriage is deemed marital property. Separate property is that acquired by gift, bequest, devise, or descent. Separate property can become marital property subject to division, however, through the doctrine of transmutation. In Tennessee, transmutation occurs when the parties treat separate property in a way that manifests an intention that the property becomes marital property. The party claiming that the separate property has been transmuted into marital property must prove that this has occurred.

On appeal, the court observed that in some cases, transmutation can be proven by evidence that the separate property was subsequently placed in the names of both spouses. Such an action creates a rebuttable presumption of a gift to the marital estate, which may be rebutted based upon evidence clearly indicating an intent that the property remains the spouse’s separate property. In Douglas, the court ultimately held that the presumption arising out of the joint titling of the account was sufficiently rebutted by the evidence. The court cited testimony by the wife and her account broker that her intent in creating a joint account was not to gift the money to the marital estate but for estate planning purposes. The court also found it significant that the husband was not involved in the creation, management, or utilization of the funds. As a result, and despite the fact that the husband’s name was fraudulently removed from the account, the court held that the account remained separate property regardless of its joint title.

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