Equitable Distribution

When couples divorce, one of the problems they must address is dividing up property and debt acquired during the marriage. This process is known as “equitable distribution.”

The law presumes that the property will be divided equally. That is, both spouses will walk away from the marriage with an equal value of property after any debt is distributed. But a judge may decide, or the spouses may agree, differently. In other words, one spouse may receive a property distribution of more the half of the value of the total property.

How do you go about dividing up Property and Debt in North Carolina?

The dividing up of property and debt involves three steps:

Identifying property as marital and divisible property, or separate property.
Valuing the marital property and the balance of marital debt.
Distributing the property and debt.

What Kind of Property is Divided in a North Carolina Divorce?

Except for separate property, which is discussed below, all property that has been acquired during the marriage is on the table to be divided up. It does not matter which spouse actually owns the property or whether the property is titled in both spouses’ names, or titled in just the name of one spouse. Sometimes, even pets are treated as property.

What is Marital Property, what is Divisible Property, and what is Separate Property in North Carolina?

Marital property is all property acquired by either spouse or both spouses during the marriage and before the date of separation, regardless of whose name is on the title or who paid for the property.

Examples include:

Land, houses, and buildings acquired during the marriage, regardless of which spouse owns it or if the property is held by an LLC
Bank accounts, investment accounts, retirement accounts
Vehicles of any type, on or off road
Boats and any type of watercraft
Household furniture furnishings and artwork
Jewelry
Guns
Ownership interests in businesses and any type of professional practice, such as a medical practice, formed or acquired during the marriage, including part ownership interests
Stock options acquired during the marriage, even if they cannot be exercised until a date after separation
Gifts given by one spouse to the other
Income earned during the marriage

Divisible property is any increase or decrease in the value of marital property that happens after the date of separation.

Examples include:

Increases or decreases in the value of retirement or investment accounts because the stock market has gone up or down
Increases and decreases in the value of real property because prices have increased or decreased.
Bonuses or commissions earned before separation but received after separation, such as sales or real estate commissions

Separate property is all property owned by a spouse (1) before the marriage or (2) acquired by gift (not from the other spouse) or inheritance during the marriage. Separate property generally is not distributed in equitable distribution.

Examples of separate properties include:

Land/buildings/houses owned before the marriage, which are not transferred to both spouses in joint names during the marriage
Inheritance received before or during the marriage
Any kind of bank, investment, or retirement account owned before the marriage
Any other property whatsoever that was owned before the marriage
Contributions made before marriage or after separation to retirement accounts

Remember, however, that any gifts which you have given to your spouse, or your spouse has given to you, are marital property.

Will your separate property still be your separate property when you separate?

Even though you own separate property because you owned it before the marriage, or because you acquired it by gift or inheritance during the marriage, your separate property might not be yours when you divorce. Some part of the total value of your separate property may, in fact, be marital property at separation.

How can your separate property have a marital interest when you separate?

The most common way the marriage acquires an interest in separate property is through the contribution of “funds, talent, or labor” during the marriage, which increases the value of the separate property during the marriage. This increased value will be marital property.

Below are examples of contributions made during the marriage that will create a marital interest in separate property.

Mortgage Payments:
Mortgage or loan payments made with earnings during the marriage on separate property will create a marital interest in the separate property. However, if the separate property is rented and the rent is applied to the mortgage, then a marital interest is not created.

Renovations and Improvements:
Renovations or improvements made to separate land, houses, and buildings during the marriage—whether contributions are money or a spouse’s labor—which increases the value of the property, will create a marital interest in the property.

Business Interests:
Businesses or professional practices owned and operated by a spouse that increase in value during the marriage—whether contributions are money or a spouse’s labor— will create a marital interest in the business or practice. To learn more about safeguarding your business during a divorce, read our article on Marriage, Divorce & the Family Business: Protecting the Family Business from Divorce.

Contributions During the Marriage to Retirement or Investment Accounts:
If you own a retirement account when you get married, and you continue to fund that retirement account during the marriage, there will be a marital interest in your account as of the date of separation based on the amount contributed during the marriage. Continued contributions after the date of separation will not create the marital interest.

How is a marital interest in separate property valued in North Carolina? Can my separate property be distributed to the other spouse?

It is difficult to value the marital interest in separate property that has been created during the marriage. Usually, appraisers or valuation experts are involved.

A judge may distribute your separate property to your spouse if there is a marital interest in the property. That may not seem fair, but it can happen.

For example, if you inherited your grandmother’s house, and the house increased in value during the marriage because of mortgage payments, renovations, or improvements, then a judge may actually distribute that house to your spouse even though it was your separate property.

How can you prevent your separate property from having a marital interest when you separate?

Get a premarital agreement signed before you marry. A well-prepared premarital agreement will provide that any increase in value in your separate property during the marriage will continue to be your separate property, regardless of why the increase in value occurred.

Get a postmarital agreement signed by your spouse. If you are gifted or inherit property during the marriage, then the only way to absolutely protect the separate property from having a marital interest is to have your spouse sign an agreement stating that any increase in value during the marriage will not be marital property but will remain your separate property.

Keep separate accounts: Create and maintain separate financial accounts that exclusively hold separate money or assets that you have inherited or been gifted during the marriage. Do not mix marital and separate funds or assets (such as shares of stock).

Avoid transferring ownership: Do not put your separate property in the name of you and your spouse during the marriage unless you and your spouse sign a document that states that the property will continue to be your separate property. Specifically relating to real property, transferring property to you and your spouse during the marriage will create a presumption that the property is intended to be fully marital.

Protect Business Interests and Professional Practices: For business owners, it’s common practice to require family members or new partners acquiring an ownership interest in the business to enter into premarital or postnuptial agreements; this is the surest way to protect a business from divorce. It is also advisable for the business’s governing documents to specify who may hold an ownership interest in the business or professional practice, and, perhaps, to provide for a buy out of a divorcing partner—although this step alone will not protect the value of the spouse’s interest from being distributed in the divorce proceeding.

How do you value Marital Property in North Carolina?

All marital property (including marital interests in separate property) will need to be valued on the date of separation and on the date of distribution unless you and your spouse agree not to value it as of that time.

Land, houses, buildings: Unless you can reach an agreement, you or your lawyer will need to employ a qualified appraiser to appraise the value.
Financial accounts: Financial accounts, including checking, savings, investment, and retirement accounts, are easy to value based on the monthly statements for the month of separation. Pension plans are more difficult to value and usually require the assistance of a valuation expert.
Household furniture and furnishings: In most situations, there is not much value in household furniture and furnishings. There are appraisers who do value furniture and furnishings, but frequently it is not worth the cost of the appraisal to hire one. You will be well served by reaching an agreement with your spouse.
Vehicles/boats: These can be valued most often with the use of publications such as NADA, Blue Book, or other similar publications.
Business/companies: These are much more difficult to value. You or your lawyer will likely need to obtain the services of a business valuation expert.

What are marital debts in North Carolina?

Marital debt is also distributed in a divorce. Marital debt is debt incurred during the marriage and before the date of separation, which has benefited the marriage. It does not matter in whose name the debt was incurred, so long as it was incurred for the benefit of the marriage.

Marital debt will usually include:

mortgages
credit card debt
personal loans
vehicle loans

Marital debt may also include your or your spouse’s student loans in some instances. For additional information on this subject, see Student Loan Woes: How Marriage and Divorce Affect Student Loans.

How do you go about distributing marital and divisible property and marital debt in North Carolina?

The final step of the process is to divide the marital/divisible property and debt. North Carolina law provides that there shall be an equal division using the net value of the marital and divisible property unless you and your spouse agree otherwise, or a judge decides that an equal division is not fair.

To distribute the property, the property (and its value) is placed in the column under the spouse who is to receive the property or debt. There are two columns, one for each spouse. When the columns are added up, if one spouse receives more of the marital/divisible property, that spouse could owe what is known as a “distributive award”—which is a cash payment to the other spouse to make the distribution equal.

How are Retirement Accounts Distributed in North Carolina?

Retirement accounts that a spouse receives through employment, such as a 401 (k) account, can be distributed in one of two ways. First, it can be distributed to the spouse who owns the account. Alternatively, the account may be divided between the spouses by agreement or by a judge—this is often the case in order to achieve an equal division.

To do so, with the exception of an individual retirement account (IRA), a court order known as a Qualified Domestic Relations Order (QDRO) must be prepared and signed by a judge. This is necessary to prevent any income tax and penalties from having to be paid by the spouse who owns the retirement account. There are different rules for the transfer of funds from an IRA, and these rules are also designed to prevent any income tax consequences.

Because the division of retirement accounts may be complicated and may result in income tax consequences to the spouse who owns the account, you should consult with a competent family law attorney.

May you receive more than 50% of marital property in North Carolina?

North Carolina law presumes that marital/divisible property and debt will be divided equally. However, the law also allows for an unequal division of property and debt if certain facts are present. Those facts include how long the marriage lasted, the health and ages of the spouses, if one spouse has more income, property, or debt than the other spouse, and other facts as set forth in N.C. Gen. Stat. § 50-20(c).

Can you get reimbursement for your attorney’s fees in an equitable distribution case?

Unlike claims for alimony, child custody, and child support, you will be responsible for your own attorneys’ fees and expenses. There are a few exceptions, but the general rule almost always applies.

Do you have to go before a judge? What are the available approaches in dividing up marital/divisible property?

There are several ways to settle dividing up marital/divisible property and marital debt.

Separation Agreement: This involves the spouses (usually with the assistance of a family law attorney) negotiating an agreement which is then put in what is called a Separation and Property Settlement Agreement. During the discussions, financial documents and other information are exchanged. This method is faster and less expensive than the other approaches.

Mediation: Whether you are in negotiations or in a lawsuit, mediation can be an effective tool used in an attempt to resolve issues; however, mediation does not require either party to come to an agreement.

Arbitration is another option and is usually quicker and less expensive than a lawsuit. Arbitration is conducted by a single arbitrator or a panel of arbitrators (usually experienced family law attorneys) who act as the “judge.” The decision of the arbitrator is binding in most instances. However, both parties must agree to arbitration. Arbitration is usually much less expensive and quicker than a lawsuit, and it allows you to keep your financial and personal information private, which a lawsuit does not.

Lawsuit: If no agreement is reached, then filing a lawsuit is an option (and sometimes the only option). Lawsuits are costly and time-consuming, and should be your last option.

Why should you select a Ward and Smith family law attorney?

Ward and Smith is a full-service law firm with offices in New Bern, Wilmington, Greenville, Raleigh, and Asheville, allowing us to serve our clients throughout the state. The family law section is comprised of attorneys who have combined family law experience of more than 100 years, and several of the attorneys are certified by the North Carolina State Bar Board of Legal Specialization as specialists in family law.

The attorneys and family law paralegals are uniquely prepared to assist clients with the resolution of all family law matters, including your equitable distribution matter. Each client receives access to a dedicated paralegal as well as an experienced attorney to assist in their case. Our family law paralegals are specifically trained and experienced in family law and are excellent communicators. Phone calls and emails are returned promptly, and clear updates are given regularly.

The ultimate goal is to settle your case without a lawsuit. However, if necessary, our family law team is ready, willing, and able to take your matter before a judge or an arbitrator.z