Property distribution is typically an agreement by the two parties called a property settlement.  Not every couple is able to agree to a property settlement and may find it necessary to have the court distribute their property.  When the court becomes involved in the property distribution, the parties will be required to work through the court mandated steps.  The process of property distribution by the court is called equitable distribution.

At the time of a separation, the right to equitable distribution vests, meaning that the power is given to the parties to ask the court for equitable distribution.  A party is required to specifically ask for because the right to equitable distribution is not automatic.  A party will apply for equitable distribution and then the court will both determine the marital property and provide an equitable distribution to the parties.

During a divorce, sometimes one party is concerned that the other party will make assets disappear.  The court offers both temporary orders and injunctions to prevent assets from disappearing, being wasted, or being converted to something else (called conversion).  You can file for injunctive relief at any time before or after the initiation of an equitable distribution action in order to stop property from disappearing, being wasted, or converted.

In most cases, one party is not able to recover their legal fees from the other person, by statute.  The exception to this is that one spouse can be awarded reasonable legal fees and costs if they have to sue the other party for the return of items removed from the marital home or from the owner by the other spouse, when it is determined that the property is actually separate property.

Equitable Distribution Defenses

When one party asks the court for equitable distribution, the other spouse can assert different defenses against the claim for equitable distribution.  Unless a claim is already pending for equitable distribution at the time of the divorce, an absolute divorce stops a claim for equitable distribution.  There are two technical provisions that are an exception to this.

Prior Separation Agreement

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.  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.

Death

What happens if only one spouse survives while there is an equitable distribution claim?  Depending upon the time of the death, several different things could happen with the equitable distribution claim.

Scenario 1:  The spouse dies before the divorce is granted and prior to the equitable distribution claim being completed, equitable distribution is barred and the surviving spouse will inherit as the current spouse.

Scenario 2:  The spouse dies after the divorce is granted but the equitable distribution claim is still pending.  In this case, the equitable distribution claim will continue because the divorce has been finalized.  If this happens, the executer of the decedent’s estate will join together with anyone else that might be affected by the pending equitable distribution claim as a party to the claim.  If any possible heirs do not join, they would be barred from inheritance in any order for the sale of real property.

Federal Law trumps State Laws

In rare occasions, federal law could prevent a State from making someone’s property a matter of equitable distribution.  One example where North Carolina courts could not make the spouse’s property subject to equitable distribution was a case where social security benefits were in question.  North Carolina is barred from distributing social security benefits.  Another example is that no state is authorized to distribute any retirement pay waived by a serviceman in order to receive disability benefits.

Most recently, the Court of Appeals has ruled that disability payments for former military members do not fall under the definition of “disposable retired or retainer pay.”  Because of this wording, disability payments are not be considered marital property.  However, the retirement pay of servicemen is considered marital property and distributable under both North Carolina General Statute 50-20(b)(1) and the Uniformed Services Former Spouses’ Protection Act.

A three-step analysis is completed by the court when distributing marital property.  The only this that is able to be distributed is marital property.  Marital property includes both assets and debts.  Once the court decides the property to be distributed, the court will provide a written order that distributes the marital property.  The order is required to contain written finding of fact that describe the court’s determination that the property is equitably divided.

The Identification and Classification of Property

The first step of the court in dividing the marital property of a divorce is to first identify and then classify all the property.  The parties will bring evidence to court about all their assets, property owned, and debts, money owed.  The court then goes through all the property and evidence provided to see who might have an ownership claim to the different assets and debts.  Once the preliminary step of identification is completed and the court is able to see the parties’ interest in all the property the court will move to the next step of classification.

Classification is a more technical legal process.  Basically, the court goes through each property item that was identified by the parties because they believe they have an ownership interest in the item and the court applies the statutory definitions of marital property and separate property.  During the classification, the court’s decisions are required to have support of both evidence and the correct findings of facts in the court order.

The North Carolina General Statutes spell out what the definition of marital property is in section 50-20(b)(1).  “All real and personal property acquired by either spouse or both spouses during the course of the marriage and before the date of separation of the parties, and presently owned, except property determined to be separate property or divisible property in accordance with the statute.”  This definition says that the court will assume that everything purchased from the date of the marriage to the date of the separation is marital property unless enough evidence is presented to the court to show otherwise.  The statute uses that term “presently owned”, meaning that the item must be owned at the date of the separation.

North Carolina General Statute section 50-20(b)(2) defines separate property.  “All real and personal property acquired by a spouse before marriage or acquired by devise, descent, or gift during the course of the marriage.”  “The increase in value of separate property and the income derived from separate property shall be considered separate property,” and “all professional licenses and business licenses which would terminate on transfer shall be considered separate property.”

It is important to note that if the value of separate property increases because of something that can be tied to the married couple, the increase in value would be considered marital property.  The value increase could come in different forms, including but not limited to personal contributions, financial contributions, or managerial contributions of either spouse during the time of the marriage.  If the increase in value is from forces outside the marriage, for example; inflation, government action, or market forces, the increased value continues to be separate property.

Under North Carolina General Statute 50-20(b)(2), two special provisions are included to address spousal gift provisions and exchange provisions.

“Property acquired by gift from the other spouse during the course of the marriage shall be considered separate property only if such an intention stated in the conveyance.”

“Property acquired  in exchange for separate property shall remain separate property regardless of whether the title is in the name of the husband or wife or both an shall not be considered to be marital property unless a contrary intention is expressly stated in the conveyance

The purpose of these provisions is to guide the court when a spouse uses separate property to purchase real property using the name of both spouses as joint owners.  If this happens, the presumption of the court is that the spouse intentionally gifted the separate property to their spouse in the form of the new marital estate.  This presumption can be rebutted but evidence must be presented to the court that is clear, cogent, and convincing in order for the court to classify that property as separate.

Not all property can be classified as marital property or separate property.  Any property that is purchased or acquired after the date of separation is unable to be considered marital or separate because it is not included in the definitions of the North Carolina Statute.  Marital property that has an increase in value after the separation also does not fall into marital or separate property.  It would be considered a distributional factor and treated as such.

Dual Classification

In some cases, property being divided can be considered to be part marital property and part separate property.  The most common examples of this are situations where a piece of separate property is improved through the efforts of the spouse that is the non-owner.  The increased value would then be considered marital property while the original property would still remain separate property.

Valuation

The date of the separation of the parties is the date used by the court when determining the net value of the property considered marital.  The formula used to determine net value is:  Market Value – Encumbrances= Net Value.  The net value is then the amount that will be divided between the spouses by the court.

Distribution

The last step is the distribution of the marital property by the court in an equitable manner.  The Equitable Distribution Act requires that the marital property be equally divided, unless the court determines that equal distribution would end up being inequitable.  The court’s distribution cannot be reversed except if the court had abused its discretion when dividing the property.

When the court is looking at an unequal division, North Carolina General Statute 50-20(c) (1) – (12) are the factors that the court must consider for unequal distribution.  Some (but not all) of the distributional factors considered are:

  • The income, property, and liabilities of each party at the time the division of property is to become effective
  • Any obligations 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 direct or indirect contributions made by one spouse to help educate or develop the career potential of the other spouse

During the trial, all evidence in regard to the factors above will be presented to the judge.  The judge will then make a determination about whether it would be appropriate to consider an unequal division of the marital property.  It is important to present evidence on all of the distributional factors that apply to your case because the trial court is only required to consider the factors that evidence was presented in the trial.  Additionally, the division of the marital property is separate from both alimony and child support and as such, those two factors are not to be considered by the court when doing the final distribution of the marital property.