North Carolina determines who gets which assets following a divorce using a process called Equitable Distribution. The Equitable Distribution determination can be made by mutual agreement of the parties, via arbitration or a Collaborative Law Procedure, or by a court hearing. If there is a valid prenuptial agreement or ante-nuptial agreement, it will determine the distribution of assets considered by the agreement to the extent its provisions are legal in North Carolina. If there are assets not considered by the couple’s agreement, their distribution of those assets will be determined by one of the methods available when no prenuptial agreement exists.
Equitable Distribution may be done in sections, with interim distributions determined by the court prior to the final distribution. All distributions will be considered in making the final determination regarding equitable distribution.
Distribution of Marital Property
Both parties are required to prepare detailed information about the property they own and the value of the property as of the date of separation. Property is divided into three categories:
- Marital Property
- Separate Property
- Divisible Property
All the categories can include any type of asset, including real estate, personal property, intellectual property, intangible property, patents, and businesses. Experts may be called on to determine the value of the assets. Each side may bring in their own experts and usually will in court hearings when the assets being valued are complex.
The court uses the valuation to determine an equitable division of the property. Unless the couple agrees to who gets which marital and divisible assets, the court will make the decision.
Real estate and personal property acquired during the marriage but before the separation that is still owned is marital property unless:
- It meets the definition of separate property, or
- It meets the definition of divisible property
Marital property includes vested and non-vested pension, retirement, and other deferred compensation rights. For example, a spouse who was considering leaving the marriage can’t leave shortly before a benefit vests and deprive the other spouse of a share of the pension or deferred compensation earned during the marriage that hasn’t yet vested. The portion earned before separation will be marital property.
The presumption that assets acquired during the marriage are marital assets is subject to rebuttal if there is sufficient evidence that it should be classified differently.
- Property a spouse owned (acquired) before the marriage
- Property inherited by a spouse during the marriage
- Property given to the spouse during the marriage
- Gifts from the other spouse are only separate property if the intention to make the property the separate property of the spouse is stated when the gift is transferred.
- Property acquired in exchange for separate property retains its status as separate property even if it is titled as if it is marital property.
- An exception is made when an intention for the property to become marital property is written when the new property is titled.
The wording must be explicit.
- I bought you a summer house for your birthday does not indicate the intention for the gift to be anything other than marital property.
- My gift of this summer home to you includes my share in the marital assets I used to purchase it for you as your separate property is specific enough to be considered separate property.
- If separate property generates income or increases in value, the income and appreciation in value are also separate property.
In North Carolina, co-mingling separate and marital assets does not transmute the asset into marital property.
Divisible property refers to changes in the value of property between the date the couple separates and the date Equitable Distribution is determined.
Decreases or increases in the value of property that are the result of actions or activities of a spouse are not divisible property.
If a spouse who is unhappy about the divorce vandalizes marital property, or does not maintain and safeguard property in his or her possession, the decrease in value will be taken from their share of the Equitable Distribution. If Tiger and Elin Woods had been North Carolina residents, the decrease in value to the vehicle she attacked with the golf club would be taken out of her share. Given the size of the marital assets, that knowledge probably wouldn’t have deterred her actions. In a marriage with limited assets, it is shooting oneself in the foot to damage marital property in anger. Walking, running, screaming into a pillow, or playing Whack-a-mole would be better options under those circumstances.
An example of increased value occurs when one spouse restores an old collectible vehicle after the separation. The increase in the value belongs to the spouse who did the work.
Income Received after the Couple Separates and Before They Are Divorced
Income or assets earned during the marriage and before the separation that were not yet received at the time of separation are divisible assets if they are the result of the efforts of either spouse during the marriage. For example, if a manuscript was written during the marriage, it would be marital property. If that manuscript was submitted to a publisher but not yet accepted at the time of separation, the value added during the editing phase done after the separation would be separate property. This category also includes commissions, bonuses, and contractual rights.
Passive income earned on marital property during the separation including interest, dividends, rents, and royalties is divisible property.
Increases or decreases in debt that are passive are divisible by the court. Debt payments by one spouse will not necessarily be given a dollar-for-dollar offset during property distribution. If there is a choice between making such payments using marital assets and making them with one’s separate property, using martial assets may result in a property distribution that feels fairer.
Equitable Distribution does not require an Equal Split
The court may consider the following factors when it determines an equitable distribution:
- The income of each person
- The property each person owns. (This is not limited to marital property.)
- The liabilities each party has at the time of the division of property
- Support obligations either party has from a prior marriage
- How long the couple was married
- The age of each person
- The physical health of each person
- The mental health of each person
- Whether a custodial parent needs to occupy the marital residence or use its household effects
- The anticipated future income of each person, including pension, retirement, and other deferred compensation rights that are not marital property
- Direct and indirect contributions a spouse makes to the value of separate property, education, or career of the other spouse.
- The nature of the assets insofar as whether they are liquid or illiquid because liquid assets can be converted to cash easily. Retirement plan assets may not be accessible until a future date. Other assets may take time to sell and may decrease in value if they must be sold quickly.
- The difficulty and complexity of an asset and problems that would potentially arise if an asset was divided will be considered. For example, a business owned by one spouse may represent the bulk of the couple’s marital property but giving them equal ownership in the business might interfere with the ability of the business to survive or to obtain financing.
- Tax consequences to each party, including federal and State taxes that would be incurred if marital and divisible property had been sold or liquidated on the date of valuation. The court may consider the anticipated tax consequences when the assets are likely to be sold instead of the tax consequences that would have been incurred on the date of separation.
- Actions taken by either spouse that increase or decrease the value of the marital or divisible property after separation and before distribution.
- Any other factor which the court finds to be just and proper.
In-kind distributions are presumed equitable but the presumption may be rebutted with evidence.
The court may provide for a distributive award to facilitate, effectuate, or supplement a distribution of property. Awards may be payable over a period of time. Liens may be required to secure payments that will be paid over time.
The court has the right to determine what it feels is fair and equitable given the unique circumstances of each couple.
Unlike our neighbor to the south, North Carolina does not consider marital misconduct an appropriate factor to determine when equitable distribution is determined with one exception. If the marital misconduct directly reduces the economic position of marital assets, it may be considered. Returning to Tiger and Elin Woods for an example, the loss of endorsement contracts as the result of his sex addiction could be considered when Equitable Distribution was determined. A North Carolina court could have determined Elin’s share of the Equitable Distribution half the marital assets and divisible property before his affairs became public knowledge and Tiger’s share would be what was left. Business insider reported that Tiger Woods lost $22 Million in endorsement contracts.
Alimony and Equitable Distribution
Equitable distribution determinations are made without giving consideration to Alimony and child support awards. If either party feels the equitable distribution should change the award for alimony or child support, they may ask the court to consider modifying or vacating previous alimony or child support orders.
The Court will review the orders and take the action they feel is justified, if any.
When a spouse dies before Equitable Distribution is achieved, different rules apply. Contact your attorney for assistance.
Protecting Your Property Rights
If real property is involved and your name is not on the title, ask your Family Law attorney about filing a lis pendens to protect your interests in the asset.
Pension and Retirement Benefits
Retirement assets earned during the marriage are considered marital assets. When the job producing retirement benefits lasts longer than the marriage, the marital share is calculated by subtracting B from A in the following diagram.
The value of retirement assets or deferred compensation at Point A in the above diagram less the value of those assets at Point B, determines the portion that are marital assets.
If the job that created retirement assets began and ended during the course of the marriage, the full benefits are marital assets.
The same formula will be used to determine the benefits. The difference is that the value of Point B is zero.
This can become more complicated when an employer allows assets from a 401K plan at a prior employer to be rolled over into the new plan.
In this case, a separate calculation would be made to determine the marital portion of the rolled over assets.
In this case, where the prior employment ends before the marriage begins; the full value of the assets rolled into the plan would be separate property.
Co-Mingling and Prenuptial Agreements
In some states, co-mingling of marital and separate assets would transmute the separate assets into marital assets. This is not true in North Carolina where the legislature expressly states that separate assets remain separate regardless of how they are titled. It would be complicated to determine the amount of separate versus marital property but the separate property would not be transmuted.
Gains or losses in the retirement account apportioned to marital and separate assets would need to be determined.
The differences in North Carolina law and other states regarding co-mingling of assets is a great example of why a prenuptial agreement is so important. Let’s assume that the value of the separate property rollover into the retirement plan is $100,000. As long as the couple resides in North Carolina, the status of the separate property remains secure under North Carolina statues (unless the legislature changes the law which might or might not grandfather assets co-mingled prior to the change in the law). If the couple relocates and establishes residency in another state, where the co-mingled assets are transmuted into marital property, their status as separate property would vanish. For example, Illinois, South Carolina, and California would consider the assets transmuted. In most cases, a prenuptial agreement would protect a couple against changes in the applicable law arising from legislative action or relocation.
Distribution of Pension Awards
The actual distribution of pension awards can be managed in numerous ways including:
- As a lump sum
- Over a period of time
- By an appropriate domestic relations order as a prorated portion of the benefits made to the designated recipient at the time the party actually begins to receive benefits
- By awarding a larger portion of other assets to the party who does not receive the retirement benefits
- If both spouses have retirement benefits that are marital property, they may be used to offset the other’s benefits.
Equitable Distribution claims arise from many different scenarios.
Binding Arbitration or Collaboration Divorce Procedures may be used as an initial attempt to determine Equitable Distribution.
Incompetent Spouses (legally speaking)
If a spouse is incompetent, an attorney-in-fact or a guardian ad litem will be appointed to defend their interests in a divorce proceeding.
Divorces are often complicated. Nuances a layperson is unaware of can significantly affect the outcome you achieve. Having a professional Family Law attorney advise you and ensure you do not make costly mistakes will help you achieve the best possible result from your divorce and the equitable distribution of assets.
At McIlveen Family Law Firm, we realize the uniqueness of everyone’s circumstances. For specific questions about your situation, you may schedule a consultation with us so we can help you understand your options. You can then make an informed decision on whether annulment or divorce is right course of action for you to take.
Sources of Images:
House: Photo taken by the author
Other Images: Pixabay.com
Retirement Calculation graphs created by the author