Equitable Distribution: What You Need to Know
The rights to equitable distribution (“ED”) of marital property vest at the time of the parties’ separation. The rights to ED are not, however, automatic, but must be specifically asserted by one or both of the parties.
Upon application of a party, the court shall determine what is the marital property and shall provide for an equitable distribution.
At any time after the separation of the parties, either may file an action for ED, either as a separate action, or together with another action brought pursuant to Chapter 50, or as a motion in the cause. A final ED judgment may be rendered either before or after the parties are divorced, at the discretion of a judge. If the judgment is being entered by consent, the parties themselves can stipulate to do so prior to the divorce.
Temporary orders and injunctive relief are obtainable under the terms of special statutory provisions that allow for injunctive relief to prevent disappearance, waste or conversion of property alleged to be marital or separate, and that also allow for entry of orders for dividing part of the marital assets. The partial distribution may provide for a distributive award. Injunctive relief to prevent disappearance, waste or conversion is available before or after an ED action has been initiated. An order partially distributing marital property may not be made until after an ED action has actually been filed.
In most ED actions, the statutes do not permit one party to recover attorney’s fees from the other party. The one small exception to this rule allows the discretionary award of reasonable attorney’s fees and costs to the owner of separate property who sues the other spouse to regain possession of separate property removed from the marital home or possession of its owner by the other spouse.
Defenses Against Equitable Distribution
There are various defenses that can be asserted against a claim for equitable distribution.
With the exception of the two special technical provisions, an absolute divorce bars the assertion of a claim for ED that was not already pending at the time of the divorce. This bar has been interpreted relatively strictly in case law.
Prior Separation Agreements
In addition to bar by absolute divorce obtained without preservation of an ED claim, the other common bar to ED is prior execution of a valid, comprehensive property settlement dividing the parties’ property or otherwise releasing the right to ED. So long as the agreement is duly executed in accordance with the formal statutory requirements, the agreement might bar a subsequent ED pursuant to the rules discussed below. Such a bar may arise not only from property settlements entered into at the time of separation but also from written premarital and postnuptial agreements.
In general, under prior law reconciliation was deemed to void the executory or unperformed provisions of a separation agreement that contained property provisions. The courts now draw a distinction between pure separation agreements, in which separation is of the essence, and contracts in which the parties intend a complete property settlement, unrelated to whether they ever reconcile after a separation. Property settlements are to be construed according to the parties’ intent and the language of the contract. A reconciliation would void a release only if the release of property rights in such a contract “necessarily” depended on the parties living separate and apart.
Another thing that can affect an ED claim is whether both parties survive. The time of a spouse’s death can make a critical difference in the viability of a pending ED action. The death of a spouse prior to the granting of an absolute divorce, but while the ED claim is pending, will bar ED. However, the death of the spouse following the grant of divorce while an ED claim is pending will not bar ED. In such a case, the administrator or executor of the decedent’s estate and any heirs whose interests would be affected by the ED action must be joined in the pending action. If the heirs are not joined, then any order of sale of real property is void as to those heirs.
Federal Law Preempting State Laws
In a limited number of instances, federal law may preempt a State’s right to make a party’s property the subject of equitable distribution.
For example, one case has held that social security benefits are not distributable by North Carolina courts, as such distribution is precluded by the anti-assignment and the other comprehensive provisions in federal social security law. In another case, the U.S. Supreme Court held that state courts may not distribute, as marital or community property, any retirement pay that has been waived by a serviceman in favor of receiving veteran’s disability benefits.
Our Court of Appeals has more recently recognized that military disability payments are not included within the definition under federal law of “disposable retired or retainer pay,” and hence may not be classified as marital property and may not be distributed under state equitable distribution law. The Court had earlier held, consistent with the holding in the U.S. Supreme Court case, that disposable serviceman’s retirement pay, as defined by federal law, is distributable under the explicit language of the Uniformed Services Former Spouses’ Protection Act and G.S. 50-20(b)(1), which restricts distribution to “eligible” military pensions and therefore does not run afoul of preemption problems.
In distributing marital property, the court conducts a three-step analysis.
Only the parties’ marital property, which includes both assets and debts, is to be distributed. An order distributing the parties’ property must contain written findings of fact supporting the court’s determination that the marital property has been equitably divided.
A. Identification and Classification
First, the court is required to identify and classify all the parties’ property, based upon the evidence presented regarding the nature of the asset or debt. Identification is the assessment of whether husband, wife, or the marital entity has any claim of ownership to any type or item of property. Identification is the preliminary step in which the court determines the full extent of the parties’ interests in all property, and this step precedes the classification of such specifically identified property.
Classification is the process by which the court applies the statutory definitions of marital and separate property to the specifically identified items of property in which the parties have some ownership interest. Classification by the court must be supported not only by evidence but also by appropriate findings of fact.
The definition of marital property is found in section 50-20(b)(1) of the North Carolina General Statutes — all real and personal property acquired by either spouse during the course of the marriage and before the date of separation, and “presently owned,” except property determined to be separate property in accordance with the statute. The statutory definition of marital property now contains a presumption that all property acquired after the date of marriage and before separation is marital (except separate property by definition); the presumption is rebuttable by a preponderance of the evidence. This presumption changed prior case law.
“Presently owned,” with respect to time, refers to ownership or interest in the property on the date of separation (or even just before such date, if one spouse has unjustifiably seized possession of marital property without accounting for it). “Presently owned,” with respect to right, refers to the extent or basis for claiming an interest in the property, notwithstanding the present possession, title holder or claim of interest by others.
The definition of separate property is found in section 50-20(b)(2) of the North Carolina General Statutes — all real and personal property acquired before marriage, or property acquired during the marriage by bequest, devise, descent or gift. Professional and business licenses which would terminate on transfer are expressly defined to be separate property, as is any increase in value to separate property and income derived from such property. However, the increase in value that remains separate is passive appreciation only, such as by inflation, market forces, third-party effort, or government action. Increases in value attributable to the marital unit, i.e., active appreciation resulting from the personal, financial or managerial contributions of one or both spouses, is marital.
G.S. 50-20(b)(2) has two special provisos, the so-called spousal gift provision and the exchange provision. Property exchanged for separate property remains separate, regardless of how titled, “and shall not be considered to be marital property unless a contrary intention is expressly stated in the conveyance.” Property acquired as a gift from one spouse is, on the other hand, separate “only if such an intention is stated in the conveyance.” These provisions have been interpreted to mean that where separate property is used in the acquisition of real property that is put into tenancy by the entireties, there is a presumed gift of the separate property to the marital estate, said presumption rebuttable only by clear, cogent and convincing evidence.
Some property is not, properly speaking, either marital or separate. For example, property acquired after separation does not fall within the statutory definitions of either marital or separate property. Post-separation appreciation of marital property is itself neither marital nor separate but, rather, must be treated as a distributional factor.
1. The Concept of Acquisition
When and how property is “acquired” is crucial to classification. The cases have developed the view of acquisition as an ongoing, dynamic process of obtaining equity (net value) in an item of property when or as payment is made. Regardless of when title to an item of property is taken, the property is acquired as it is being paid for. The marital unit shares, at equitable distribution, in increases in the value of separate property that the marital unit has proportionately acquired in its own right. The increase attributable to the marital unit is traced using the “source of funds” methodology that has now been exhaustively described in the case law.
2. Dual Classification
Some property is of dual character, being part marital and part separate. Numerous cases have addressed these distinctions and should be consulted for specific details beyond the scope of this article. Briefly stated, dual classification occurs in a number of situations, e.g., where earnings and a non-owning spouse’s efforts during the marriage are applied to separate property; where separate property is improved through addition or accession to it of other property acquired during the marriage; where the efforts of a spouse in actively managing separate property during the marriage augment the value of the property such that the resulting increase should equitably be viewed as marital property.
Second, the court is required to fix the net value of the marital property as of the date of separation, with net value being market value, if any, less the amount of any encumbrances. The net value is thus the value that a court would be dividing between spouses.
Finally, the court must distribute the marital property in an equitable manner. An equal division of the marital property is mandatory under the Equitable Distribution Act, unless the court determines in the exercise of its discretion that such a distribution would be inequitable. A distribution is not subject to reversal on appeal unless the court abused its sound discretion.
The factors to be considered in an unequal division are enumerated in section 50-20(c) at sub-sections (1) through (12) of the North Carolina General Statutes, and these factors include: the parties’ financial condition at the time the division of property would be effective; support obligations from a prior marriage; length of this marriage; age and health of the parties; need of a custodial parent to occupy or own the marital residence for the benefit of the parties’ child or children; the expectation of non-vested pension rights; a party’s contributions to the acquisition of property; a party’s contributions to the education or career of the other spouse; any direct contribution to the increase in value of the other party’s separate property; the relative liquidity of the marital estate; the difficulty of evaluating business interests and the economic desirability of distributing such an asset to one party, “intact and free from any claim or interference by the other party”; tax consequences; acts to maintain or devalue marital property occurring after the date of separation; and any other factor deemed by the court to be just and proper.
Factors within section 50-20(c)(12), which is a catch-all category, may relate to the source, availability, and use by husband and wife of economic resources during the marriage.
Once evidence of any of the factors in section 50-20(c) is introduced, the trial court is required to make findings of fact on such factors, whether or not the judge divides the property unequally between the parties. The trial court is only required to consider the distributional factors on which evidence is presented.
According to express statutory provisions, distribution of marital property must be without regard to the issues of alimony and child support.