I attended a mediation training yesterday in which one of the exercises dealt with the issue of “transmutation,” the process by which non-marital property becomes marital because the property owner demonstrates an intent to treat the property as marital.
The two examples of possible transmutation were wife’s pre-marital rental home that she had deeded a half interest to husband (for tax purposes and on the advice of husband’s sister) and husband’s pre-marital home in which the parties had lived together for a decade while he contributed wage income (marital funds) to reduce the mortgage by 75%. The issue was whether these properties were transmuted. In my opinion, that is the wrong issue to be fighting.
The reason attorneys fight the transmutation issue is that they assume once property is transmuted the other spouse will be awarded 50% of its value. Neither case law nor the equitable distribution statutes support this view. The only property in which a 50/50 distribution is presumed is for property acquired by the parties during a long-term (20+ years) marriage. Property acquired during a short marriage or in which there were significant non-marital contributions are not subject to that 50/50 presumption.
In the examples above my view is that the family court would almost certainly find the properties were transmuted (though I acknowledge strong arguments, an especially strong argument in wife’s case, that neither property was transmuted). I am aware of no South Carolina caselaw in which one spouse had deeded an interest in non-marital real estate in which the appellate courts have not found transmutation. Corbett v. Corbett, 313 S.C. 184, 437 S.E.2d 136, 138 (Ct.App. 1993) contains the language, “the manner in which title is held is irrelevant to a determination of whether property is marital…” However no subsequent case cites to Corbitt and Corbitt actually reversed the family court and found the property at issue was transmuted. I am also unaware of cases in which a mortgage was paid from marital funds for a decade on a home in which the parties resided where the appellate courts have not found transmutation.
Rather than fighting transmutation the better fight would be on distribution. In the examples above no marital funds were contributed to wife’s pre-marital home and husband showed no contribution to the preservation or appreciation of this asset. Absent such evidence, it’s unclear why Husband should be awarded any interest in this home. Husband’s pre-marital home had significant equity prior to the marriage and greater equity at the time of filing. An approach the family courts often use–and routinely get reversed for using–is to treat the increase in equity as marital and equally divide that amount. However nothing prevents the family court from determining that Husband’s pre-marital contributions to that home are significant and therefore he should be awarded a majority of the equity in that transmuted home. In the example provided I might have awarded Husband 70 to 80% of the equity in that home.
Arguing that an obviously transmuted property wasn’t transmuted because you don’t want the other party to get half is a misguided approach. Losing on the transmutation argument makes it less likely that the court will give serious consideration to award-less-than-half argument. In cases in which there is a strong argument against both transmutation and a special equity interest, it makes sense to fight transmutation. Otherwise, it often it is better strategy to concede transmutation but force the other party to demonstrate contribution.
I do not disagree with Greg’s statement that family court judges would likely find transmutation when marital funds are used to make mortgage payments, but I do not agree that this would be the correct conclusion because it ignores the key factor in transmutation cases … is there clear and convincing evidence that the owner of the property intended for the property to become marital property? It is obviously a fiction to reach that conclusion based on these facts. A property owner should not be surprised to learn during divorce proceedings that property has been transmuted.
I believe that the use of marital funds to make mortgage payments might give the spouse a special equity interest in any increase in equity during the marriage, but it is not in and by itself proof of transmutation.
In Nestberg v. Nestberg, 394 S.C. 618, 716 S.E.2d 310 (Ct. App. 2011), the Court of Appeals held that the use of the wife’s earnings to make mortgage payments for years transmuted the husband’s property into marital property. I think the case was wrongly decided, and I will include my criticism of that case in the Supplement to the Marital Litigation book that should be published around the end of the year. If you would like to see the current draft of my Nestberg critique, send an email to me at stuckeyroy@gmail.com.