An important distinction in New York divorce law is the difference between separate property and marital property. Property that is determined to be separate is not divided as part of the divorce. Instead, it remains in the hands of the spouse who has ownership.
Marital property is property that is determined to belong to both spouses regardless of whose name is on it. This property is divided by the court in the divorce. Generally, separate property is property each spouse already owned when they entered the marriage or received via gift or inheritance or as compensation for a personal injury lawsuit during the marriage. However, separate property can become marital property depending on the actions and intentions of the parties.
How New York Courts Consider Property
While Domestic Relations Law section 236(B)(1)(c) lays out the definitions of marital versus separate property, New York courts have held that they will define marital property broadly and separate property narrowly. This means that if there is a question as to whether something is marital or separate, the courts are likely to err on the side of marital.
Marital property is divided using equitable distribution, which distributes the marital property in a way that is fair but not necessarily 50/50. Additionally, there are situations in which the courts can determine that an item that was separate property has become marital property. Transmutation and commingling of assets can create these situations.
Transmutation of Separate Property
Transmutation is a change in the status of property from separate to marital. In New York, transmutation can happen when one spouse takes separate property money and deposits it into a joint account with the other spouse that has a right of survivorship attached to the account. By doing this, the funds transmute and become a joint marital asset.
The only exception to this is if the deposit was only made for convenience (to make it easier to pay bills, for example), and both parties were aware that this was the reason. The court requires clear and convincing evidence to show the intent was not to make the separate property into marital property. Absent that, the court assumes the intent was to change the separate asset into a marital asset.
If a spouse’s entirely separate account is used to pay marital bills, that account does not transmute into a marital account. It is also important to note that if marital funds are used to improve a separate property, that investment does not wholly become marital property (although the increase in value of the property during the marriage can be considered marital property).
Similarly, if one spouse works on a property separately owned by the other spouse (such as managing renters or doing physical labor), that labor does not transmute the separate property into marital property. But again, the increase in value of the separate property itself can be considered a marital asset. Thus, an increase in value to separate property due to the investment of funds or labor by the non-titled spouse makes the increase in value of that property subject to equitable distribution, while the actual ownership of the property itself remains a separate asset.
Commingling of Separate Property
Commingling is a slightly different concept and is a step that happens before transmutation. Commingling of separate property occurs when separate funds are placed into a marital account. This does not necessarily change the ownership of the funds. The actual transfer of the funds is called commingling. Transmutation occurs if the intent of the transfer is to make the asset a marital asset. Commingling is the transfer, and transmutation is the intent. To become a marital asset, there must be an intent to make it a marital asset. This is what creates transmutation.
Implications for Your Assets
If you are married and concerned about or contemplating a divorce, this information should guide you to consider any transfers of separate property that have been made during your marriage and discuss them with your attorney. If a divorce has not been filed and you have not separated, there is still time to clarify and influence which assets are separate and which are marital.
For example, if you transferred funds to a joint account for convenience, it may be wise to withdraw those funds and place them back in a separate account, but only if your attorney concurs. If your spouse deposited separate funds into a joint account, you will want to gather evidence of that deposit and make notes about any discussions that were had regarding intent.
If your divorce is already underway, you cannot change where the funds are being held. Still, you can work with your attorney to clarify the history of the transfers, document the transactions, detail the conversations that were had, explore the intent that was present, and discuss all of the circumstances surrounding the transfer.
It is also important to determine if you have a prenuptial or postnuptial agreement. These types of agreements may contain language that specifies how separate and marital assets will be defined. Your attorney can review this agreement, interpret it, and evaluate if it is binding and will govern how assets are defined in your divorce.
It is important to keep in mind that the divorcing couple has the opportunity to settle the issue of marital vs. separate property in pre-trial negotiations and by reaching an agreement. In addition, there are important negotiation opportunities available to your attorney and the opportunity to weigh the designation of assets as marital against greater property division, spousal support, and child support.
Transmutation and commingling of assets can significantly impact the totality of marital assets available for distribution in a divorce. This is just one of the important details your attorney will carefully attend to in the management of your high-stakes divorce.