One of the basic theories in equitable distribution and divorce litigation is that of transmutation. Transmutation theory holds that by their actions, the parties are able to modify the status of the property they own from separate property to marital property. Most of the time transmutation occurs when the parties commingle separate property with marital property or place what would otherwise be separate property into both parties’ names. This was demonstrated in Fehring v. Fehring, 58 A.D.3d 1061 (3rd Dept. 2009), where the money received on account of personal injuries by the husband would be initially classified as his separate property. However, the husband deposited the check in a brokerage account held and used jointly by the parties. In January 2006, the husband used $50,000 from the account to purchase real property. The court held that transferring separate property assets into a joint account raises a rebuttable presumption that funds are marital property subject to equitable distribution and that the husband failed to rebut the presumption of marital property given the commingling of funds. It held that the lower court providently exercised discretion in distributing equally the value of interest in real property purchased with funds held in the joint account.
Another example of how separate property may become a marital asset was addressed in a recent decision from the Appellate Division, Fourth Department. In Foti v. Foti, 2014 N.Y. Slip Op 00835 (4th Dept. 2014), the defendant received several pieces of real property as a gift from her father. Subsequently, tax losses associated with those properties were taken on the parties’ joint income tax returns. The court held that there was a question of fact whether the defendant commingled her interests in the entities with marital property and whether a joint federal tax return in which the defendant reported her interest in the entities as tax losses precluded her from taking “a position contrary to a position taken in an income tax return”.
Unfortunately, the Foti decision does not give us enough facts to find out exactly what the tax returns stated. Nonetheless, this shows that even a seemingly innocuous act of filing a tax return may change the status of the property. In my view, decisions like this one could have been prevented if the parties had signed either a prenuptial or a postnuptial agreement. If you are contemplating divorce, be careful to avoid taking any action that converts your separate property to marital property. Once transmutation takes place, it is highly unlikely that you would be able to change the property’s status back to separate property, even with a lawyer’s assistance.