Equitable Distribution - the Division of Marital Property
After a separation from your spouse, the process of identifying, categorizing, valuing and dividing the property acquired during your marriage and your existing debt is known as equitable distribution. Property that is subject to an equitable distribution includes real property, vehicles, household furniture and furnishings, bank accounts, investment accounts, annuities, retirement accounts, business interests, cash, the cash value of life insurance policies, art, collectibles, jewelry, electronics and anything other asset or item of property acquired by you or your spouse during the marriage that does not meet the statutory definition of separate property.
Property division can be both complex and contentious. At Hill Evans Jordan & Beatty, we will work diligently to ensure that your rights are protected during this process and that you receive a fair share of the marital estate. If you have an equitable distribution claim in Guilford County or in the surrounding area, you can count on our attorneys and staff to look after your best interests and fight for what you deserve.
How to Settle Your Equitable Distribution Claim: Voluntary Agreement or in Court
It is possible to settle your equitable distribution claim in several ways, with the most common being either by a voluntary agreement, typically referred to as a Separation Agreement and Property Settlement or by filing a lawsuit in court.
While it is generally cheaper and quicker to settle things voluntarily by agreement, you should still have an attorney review the proposed property division to ensure that all property is being accounted for and that everything is being appropriately divided. When an agreement is reached, you and your spouse will sign a Separation Agreement and Property Settlement Agreement that operates as a contract between the two of you and which sets forth the specific property and debt that each of you will receive. Once you sign the agreement, you lose any right you might have had to bring a lawsuit against your spouse for an equitable distribution of property.
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In the event that you can’t reach a voluntary agreement, one of the parties may file a lawsuit asserting a claim for equitable distribution. The parties will then follow the various steps and guidelines established by the District Court in the county in which the lawsuit was filed. This process typically involves the creation of an affidavit which identifies and values all marital property, separate property and debts and sets forth contentions as to whether an equal or unequal distribution of marital property and debt is equitable. Frequently, parties reach an agreement regarding the division of property after filing a lawsuit either through ongoing settlement discussions or through mediation. If that happens, the parties may enter into a Consent Judgment or a Mediated Settlement Agreement regarding the settlement of their claims. If the case can’t be settled before trial, a Pre-Trial Order will be entered and a judge will be tasked with categorizing, valuing and dividing the parties' marital estate and debts.
Requirements to File an Equitable Distribution Claim
Equitable distribution is governed by North Carolina General Statute §§ 50-20, 50-20.1 and 50-21. The only requirements to file an equitable distribution are that you must be married to the person you are filing the claim against, and you must be separated from that person. Furthermore, your equitable distribution claim must be pending (filed) before your divorce is finalized. Finally, there cannot be a valid separation or property settlement agreement that has already divided the marital assets and in which the parties have waived their right to an equitable distribution of property.
Unlike a claim for divorce, you don’t have to be separated for one year in order to file an equitable distribution claim. Thus, it is possible to file and complete your division of property before your divorce has been finalized.
Steps in Equitable Distribution
There are four steps in the equitable distribution process: (1) identification, (2) categorization, (3) valuation and (4) distribution.
- Identification. The first step in the equitable distribution process is to identify all property owned by one or both parties on the date of separation. Property that is identified during this stage includes real property, vehicles, household furniture and furnishings, bank accounts, investment accounts, annuities, retirement accounts, business interests, cash, the cash value of life insurance policies, art, collectibles, jewelry, electronics and any other asset or item of property owned as of the date of separation. Marital debts are also divided during the equitable distribution process, so all debts existing as of the date of separation also need to be identified in this process.
- Categorization. After property and debt existing as of the date of separation are identified, each item of property and each debt must be categorized as either marital or separate. Marital property is property acquired during the marriage by labor of the marriage. Although how property is titled may be important in categorization, generally how property is titled is not controlling in determining whether property is marital or separate. Separate property is property owned by one of the spouses before the date of marriage or property acquired by a spouse by gift or inheritance prior to the marriage or during the marriage from someone outside of the marriage. Separate property is not divided by the court during equitable distribution and is kept by the party who owned it before the marriage or acquired it individually during the marriage. The remaining property is classified as marital property and will be the property that is divided during equitable distribution.
There is a presumption in the law that any property acquired during the marriage is marital property. If a spouse believes that an item of property acquired during the marriage is his or her separate property, that person has the burden of proving the separate nature of the property.
There is a third category of property called divisible property which concerns property and property rights that arise after the date of separation. Divisible property includes passive changes in value of marital property that occurs between date of separation and the date of distribution. It may also include property that was earned during the marriage but was not paid or received until after the date of separation. Divisible property is also subject to equitable distribution.
- Valuation. As the parties identify property and debts that existed on the date of separation, they will also gather documents and information to establish the value of these assets and debts. The most common value assigned to marital property is the fair market value, which is frequently defined as the amount a willing buyer will pay a willing seller under willing circumstances. The fair market value is often considerably less than the replacement value. For most assets this is a fairly simple process, but appraisers and other experts can be brought in to assist if an asset is difficult to value, such as an interest in a business. The valuation of an asset is made as of the date of the parties' separation; however, if an asset substantially appreciates or depreciates following the date of separation, this change in value can and should be considered when the final property division is made. If the parties cannot agree on the value of a marital asset, then the court will ultimately have to decide the correct value based on the evidence presented.
- Distribution. The last step in the equitable distribution process is the distribution of the assets and debts in an equitable manner. Under North Carolina General Statute § 50-20(c), the court will equally divide the marital property unless the court determines that such a distribution would be inequitable. There are a number of factors that the court is to consider when making this decision, which are discussed below.
Different Types of Property: Marital, Separate and Divisible
As discussed briefly above, there are two main categories of property in the equitable distribution context, marital property and separate property. Marital property is broadly defined under statute and includes “all real and personal property acquired by either spouse or both spouses during the course of the marriage and before the date of the separation of the parties, and presently owned, except property determined to be separate property or divisible property.” There is a presumption that property acquired during the marriage is marital property, but this presumption can be overcome.
Separate property includes property owned before the marriage and property inherited by only one of the parties and gifts received by only one of the parties from someone other than his or her spouse. Property acquired in exchange for separate property will remain separate property unless a contrary intention is expressly stated in the conveyance. This often occurs when separate property is used to purchase jointly held real estate, as even though the purchase was made with separate funds, the joint ownership converts the newly acquired property to marital property. Even though gifts received by only one of the parties is ordinarily classified as separate property, gifts from one spouse to the other spouse during the marriage are presumed to be gifts to the marital unit and become marital property. The increase in value of separate property during the marriage is normally also classified as separate property, but if the increase in value is the result of marital effort, then the increase is deemed to be marital property.
Divisible property includes passive changes in value of marital property that occurs between the date of separation and the date of distribution, as well as other property that was earned during the marriage but not paid or received until after the date of separation.
Marital and divisible property are divided during the equitable distribution process; however, separate property is not subject to division. For that reason, any separate property that you own needs to be properly identified so that you can retain it following your separation.
The Role of Marital Fault in Equitable Distribution
Generally speaking, the marital fault or misconduct (adultery, cruelty or inhumane treatment, habitual drunkenness, drug addiction, nonsupport, etc.) of a party is not relevant in the equitable distribution proceeding. However, if the misconduct has an economic impact on the parties’ financial condition, then the court may consider this and determine that an unequal distribution is equitable.
Property Subject to Equitable Distribution
Property that is subject to equitable distribution includes real property, vehicles, household furniture and furnishings, bank accounts, investment accounts, annuities, retirement accounts, business interests, cash, the cash value of life insurance policies, art, collectibles, jewelry, electronics and anything other asset or item of property acquired during the marriage. Regardless of how an asset is titled or owned, if it was acquired during the marriage and is not separate property then it is marital property and will be subject to division. The increase in value of separate property during the marriage is deemed to be marital property if the increase in value is the result of marital effort. Even items that don’t have a set value such as pets and photo albums are property that needs to be divided.
Tax Consequences of Equitable Distribution Awards
Post-separation property transfers between spouses are considered “incident to divorce” and are generally not subject to taxes by the Internal Revenue Service. However, if the transfers take place a year or more after the separation, there is a presumption that the transfer was not incident to the separation and consequently the transfer becomes taxable. This presumption can be rebutted with evidence that the transfer did it fact occur as part of a property division incident to a separation. This evidence is often in the form of a court order or a signed contract between the parties. Guidance from experienced attorneys will help ensure that your property division is not subject to taxation.
Factors the Court Considers When Making Equal or Un-Equal Distribution
North Carolina courts are to make an equal division of the marital estate unless they determine that an equal division is not equitable. In making this determination, the court shall consider the following factors, all of which are set forth at North Carolina General Statute § 50-20(c):
(1) The income, property, and liabilities of each party at the time the division of property is to become effective.
(2) Any obligation for support arising out of a prior marriage.
(3) The duration of the marriage and the age and physical and mental health of both parties.
(4) 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.
(5) The expectation of pension, retirement, or other deferred compensation rights that are not marital property.
(6) 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.
(7) Any direct or indirect contribution made by one spouse to help educate or develop the career potential of the other spouse.
(8) Any direct contribution to an increase in value of separate property which occurs during the course of the marriage.
(9) The liquid or nonliquid character of all marital property and divisible property.
(10) 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.
(11) 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.
(11a) 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.
(11b) In the event of the death of either party prior to the entry of any order for the distribution of property made pursuant to this subsection:
- Property passing to the surviving spouse by will or through intestacy due to the death of a spouse.
- Property held as tenants by the entirety or as joint tenants with rights of survivorship passing to the surviving spouse due to the death of a spouse.
- Property passing to the surviving spouse from life insurance, individual retirement accounts, pension or profit-sharing plans, any private or governmental retirement plan or annuity of which the decedent controlled the designation of beneficiary (excluding any benefits under the federal social security system), or any other retirement accounts or contracts, due to the death of a spouse.
- The surviving spouse's right to claim an "elective share" pursuant to G.S. 30-3.1 through G.S. 30-33, unless otherwise waived.
(12) Any other factor which the court finds to be just and proper.
By examining these factors, the court will ultimately decide how to divide the marital estate. In the event it finds that an equal division is not equitable, it has to decide what constitutes an equitable division of property and debts. An equitable division might result in one spouse receiving 45% of the marital estate with the other spouse receiving 55%. Or one spouse might be awarded the residence with the other spouse receiving a greater percentage of the retirement accounts. The court has the discretion in determining what is an equitable distribution of property and how the marital property and debts are to be distributed to achieve an equitable distribution of property and debts.
We Can Help
At Hill Evans Jordan & Beatty, we understand the complexities of North Carolina’s Equitable Distribution laws and will work with you on your case to make sure your rights are protected. After your separation, dividing the property acquired during your marriage is necessary to begin the next phase of your life. As no two cases are alike, there is no cookie cutter approach to resolve property issues. We will listen to the particular facts of your situation and will work towards getting you the property that you desire. If you have an equitable distribution claim in Guilford County or in the surrounding area, call us today so we can help you move forward.
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