Division of Property and Debt: Equitable Distribution in a North Carolina Divorce
One of the most difficult parts of divorce, and also one of the most overlooked by the untrained eye, is the determination of the division of property. Many say “We own a house, and that’s about it” and consider themselves finished with dividing property once they determine the equity in the home and how much each party receives. The marital home is certainly often one of the largest pieces of property to divide in a divorce, but what about your vehicles? Your bank accounts? Your retirement? Your stocks? Your interest in a business? Airline and credit card points? iTunes accounts? Debts? All of these things and endless others fall under the large umbrella of property in your divorce.
North Carolina is an equitable distribution state, meaning the law presumes that an equitable distribution of property is an equal distribution of property, a 50/50 split of all marital and divisible property. It is important to note that separate property of each spouse is NOT included in the distribution governed by North Carolina General Statute §50-20.
While it seems like common sense that a divorcing couple’s property should be divided, a claim for equitable distribution (“ED”) is not automatic. The rights to such a claim vest at the date of separation. The claim can be asserted by either party at any time following separation, but it must be asserted prior to the final divorce judgment.
Once an ED claim is filed, there is an analysis that follows. The first step in that analysis is the identification and classification of the property. There are three different classifications the property may fall in: marital, divisible, and separate. Only the marital and divisible property, which includes assets and debts, is distributed in an ED claim.
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Marital property is defined as any and all presently owned (as of the date of separation) real and personal property acquired by either or both spouses during the course of the marriage and before the date of separation. This includes vested and nonvested pension, retirement, and other deferred compensation rights, and vested and nonvested military pensions eligible under the federal Uniformed Services Former Spouses’ Protection Act. It DOES NOT include military disability payments. It is presumed that all property acquired after the date of marriage and prior to the date of separation is marital property; this includes real property acquired after the date of marriage and prior to the date of separation creating a tenancy by the entirety is marital property unless the conveyance specifically states otherwise.
Divisible property is defined as:
- Any increase or decrease in value of the marital property after the date of separation and before the date of distribution, unless such increase or decrease is a direct result of the post-separation activities of one spouse.
- All property received after the date of separation and before the date of distribution that is acquired due to the efforts of either spouse during the marriage prior to separation. Ex: commissions and bonuses earned (paid) after the date of separation based on work done prior to the date of separation.
- Passive income (ex: interest and dividends) from marital property received after the date of separation.
- Passive increases and decreases in marital debt and financing charges and interest related to marital debt.
Separate property is defined as any and all real and personal property acquired by the spouse prior to the date of marriage or acquired by a spouse by devise, descent, or gift during the marriage. Property gifted from one spouse to the other during the marriage is only considered separate if such intention is explicitly stated at the time the gift is given. If one spouse uses their separate property to acquire other property, that property shall remain separate, regardless of how the property is titled. An exception to this rule would be separate property used to acquire real property as tenancy by the entireties – here, a gift of the separate property to the marital estate is presumed. The increase in the value of separate property and income derived from separate property is separate so long as it is passive. Any active appreciation of separate property resulting from personal, financial, or managerial contributions by a spouse during the marriage is considered marital. Business and professional licenses that would terminate on transfer are considered separate property.
It should be noted that property can be (and often is) considered part marital and part separate. A source of funds analysis is used to determine which parts of each property are marital and separate for purposes of ED.
Once all of the property is identified and classified, a net value must be assigned to the property. The net value is determined by taking the market value of all marital and divisible property minus the amount of any liabilities or encumbrances. The net value is what the court will divide between the parties.
Finally, the property must be distributed. As previously stated, an equal distribution (50/50 split of the net value) is presumed to be equitable. There are several factors that the court considers when determining if an equal division is equitable, and if not, what division is equitable:
- The income, property, and liabilities of each party at the time the division of property is to become effective.
- Any obligation for support arising out of a prior marriage.
- The duration of the marriage and the age and physical and mental health of both parties.
- The need of a parent with custody of a child or children of the marriage to occupy or own the marital residence and to use or own its household effects.
- The expectation of pension, retirement, or other deferred compensation rights that are not marital property.
- Any equitable claim to, interest in, or direct or indirect contribution made to the acquisition of such marital property by the party not having title, including joint efforts or expenditures and contributions and services, or lack thereof, as a spouse, parent, wage earner or homemaker.
- Any direct or indirect contribution made by one spouse to help educate or develop the career potential of the other spouse.
- Any direct contribution to an increase in value of separate property which occurs during the course of the marriage.
- The liquid or nonliquid character of all marital property and divisible property.
- The difficulty of evaluating any component asset or any interest in a business, corporation or profession, and the economic desirability of retaining such asset or interest, intact and free from any claim or interference by the other party.
- The tax consequences to each party, including those federal and State tax consequences that would have been incurred if the marital and divisible property had been sold or liquidated on the date of valuation. The trial court may, however, in its discretion, consider whether or when such tax consequences are reasonably likely to occur in determining the equitable value deemed appropriate for this factor.
- Acts of either party to maintain, preserve, develop, or expand; or to waste, neglect, devalue or convert the marital property or divisible property, or both, during the period after separation of the parties and before the time of distribution.
- Any other factor which the court finds to be just and proper.
The court provides for equitable distribution without regard to alimony or child support. After the determination of distribution, the court, upon request of either party, will consider whether an order for alimony or child support should be modified or vacated.
The process of ED can be long and drawn out, but parties are not without relief in the meantime. Interim distributions are often granted after the action for ED has been filed but before the final judgment of ED. The court can declare what is separate property and enter orders dividing part of the marital and divisible property and/or debt. These orders are taken into consideration at trial.
Either party may also seek injunctive relief to prevent the disappearance, waste or conversion of property they are claiming is marital property, divisible property, or separate property of the party seeking the relief.
Attorney’s fees are not generally awarded in ED cases, but there is an exception. If one spouse incurs attorney’s fees and court costs in order to regain possession of their separate property that was removed from the marital home or their possession by the other spouse, the court may enter an order for reasonable fees and costs to the spouse suing for the return of their property. The amount of such fees shall not exceed the fair market value of the separate property at the time it was removed.
It is possible for parties to decide equitable distribution for themselves based upon the agreement. This is often the route taken in North Carolina. North Carolina General Statute § 52-10.1 outlines the basic requirements for a separation agreement between parties. Generally divorcing couples prefer separation agreements to determine the distribution of property rather than relying on a judge’s decision on distribution. The separation agreement shall be legal, valid, and binding provided it is in writing and acknowledged by both parties before a certifying officer.