Asset & Property Division in North Carolina
Understanding Property Division in North Carolina Divorce
In North Carolina, property division in a divorce is handled through a process known as equitable distribution. The equitable distribution process can be handled either by negotiation and agreement between spouses or by a decision of a Judge after a trial. The process involves identifying, classifying, valuing, and ultimately distributing marital and divisible property amongst spouses. While many cases are resolved through an equal division of marital property, equitable distribution does not always mean property must be divided equally, and thus, outcomes do vary depending on the facts of any given case.
Classifying Property: Separate Property, Marital Property, and Divisible Property
The first step in the equitable distribution process is to identify and classify all of the property owned by spouses who are going through the separation process. This step is a crucial step given that the classification of assets and debts will control if and how those assets and debts are distributed.
North Carolina law defines three general categories of assets and debts: separate property, marital property, and divisible property.
Separate Property
Separate property includes the following categories of assets:
- Assets acquired by either spouse prior to their marriage;
- Property which was gifted to a spouse (other than from their other spouse) during the marriage; and
- Assets that were inherited by a spouse during the marriage.
In addition, separate property includes income received from separate property as well as passive appreciation from separate property. For example, if a spouse owned a rental house outright before the marriage, the rental income received from the property during the marriage and the increased value of the property due to general market appreciation would also be considered separate property.
The classification of assets as separate property is critical in the property distribution process, given that separate property will not be divided as part of the process. In other words, a spouse’s separate property will remain their separate property following a divorce.
Marital Property
Marital property in North Carolina generally refers to property acquired or earned by a spouse following the parties’ date of marriage but prior to their date of separation, except where such property would otherwise be considered separate property (ex., an inheritance received by a spouse during the marriage). Given that the definition of marital property largely depends on when property was acquired, the title of assets obtained during the marriage does not control whether the property is marital property or separate property. For example, when a spouse earns income during the marriage and deposits that income into a bank account in their name only, that bank account is still considered marital property, given that the deposited funds were earned during the marriage. Similarly, retirement contributions made with marital earnings and purchases made with marital income are considered marital property regardless of title.
One major exception to marital property is that certain assets acquired during the marriage with separate funds are still generally considered separate property. For example, if a spouse purchases a new car during the marriage with funds that are their separate property, the vehicle will be considered their separate property.
Marital property also consists of marital debts, which are determined in a slightly different manner. When it comes to debt, a debt will be considered a marital debt only if it was acquired following the parties’ date of marriage and prior to separation, and also was acquired for a marital benefit.
Divisible Property
Divisible property refers to four major categories of property acquired after separation, including the following:
- Passive appreciation and depreciation of marital property occurring after the parties’ separation, such as the market growth of a retirement account or real property;
- Property acquired after separation, which was earned by a spouse during the parties’ marriage and prior to their separation, such as bonuses or restricted shares that are received following separation;
- Passive income received from marital property after separation, such as rent received from a marital rental property; and
- Passive increases or decreases in marital debt and related financing charges that occur after separation.
Like marital property, divisible property is divided amongst the parties going through a divorce. Divisible property can often have a huge impact on the ultimate distribution of property. For example, while it is important to distribute assets such as a marital home or retirement account, it is just as important to include any passive growth of those properties due to market forces following separation.
Mixed Property
A final category of assets, divided by Judges and parties alike in an equitable distribution case, is mixed property. Mixed property refers to certain assets that are classified as part separate property and part marital property. For example, if a spouse holds a 401(k) account prior to their marriage, the balance as of the parties’ date of marriage and any passive growth on that account during the marriage (i.e., growth due to market appreciation) will be considered separate property. However, if that same spouse contributes to the 401(k) throughout the marriage, those contributions and the passive growth on the same prior to separation would be considered marital property given that they were funded with marital earnings. Thus, the account would be considered a mixed asset with both separate property and marital property components.
Valuing Marital Assets: A Crucial Step
Once all assets have been classified, the next step in the equitable distribution process is to value assets. In general, assets are valued as of the date of separation to determine their value, although current values can also be taken into consideration when calculating the value of divisible property. The valuation of certain assets can be relatively straightforward, such as determining the amount of funds in a bank account to determine that account’s value as of separation. However, other assets are more difficult to value.
Certain assets, such as jewelry, vehicles, and real property, may require an appraisal to determine the fair market value of those assets at the time of separation. It is important to keep in mind that the fair market value is the value that another party would currently pay for that property, not the purchase price for the asset. In the context of marital homes, this process will generally involve a real estate appraiser actually visiting a home and preparing an appraisal of fair market value based on comparable sales in your area.
Another complex area of valuing property is valuing marital businesses. The proper fair market value of a business must first be determined before that business is distributed and another party is compensated for their share in the ultimate distribution of property. The process of valuing a business will generally involve hiring financial experts to immerse themselves in the books of a business and provide an estimated value for the business after extensive analysis.
Whether a spouse or a Judge is valuing a simple asset, such as a bank account, or determining a complex value for a business or the retirement benefits accrued during marriage, the valuation step is a crucial step, given that Judges generally must first value assets before distributing assets in the final step of property division.
Dividing Key Assets: Specific Considerations
The final step of the equitable distribution process is to actually divide marital and divisible property amongst divorcing spouses. While the general rule is that an equal division of property is considered to be equitable, Judges and parties have the ability to order or agree upon an unequal division of property.
While all assets are important, the following assets are important considerations in the property division process:
- The Marital Home: Perhaps no other area receives as much attention in the division of assets as the marital home. In general, the spouse who maintains ownership of a marital home will need to buy out the other spouse’s interest in the home, which can involve an outright payment of cash or the transfer of other marital assets such as retirement funds during the marriage. As part of this consideration, parties will often need to come to terms, or a Judge will need to decide how to handle any mortgage associated with a marital home through refinancing or otherwise.
- Retirement Accounts: Retirement benefits accrued during the marriage in pension plans, individual retirement accounts, and other retirement plans are an important part of ensuring each spouse’s financial future following divorce. The equitable distribution process provides the opportunity to divide retirement accounts amongst parties and even transfer retirement funds from one spouse to another incident to divorce. If done properly, retirement benefits may be transferred without any of the typical tax consequences that would come with removing funds from retirement accounts. However, it is important that such transfers of retirement funds are done in the exacting ways required by North Carolina law and Federal law, including the use of Qualified Domestic Relations Orders to transfer 401(k) and other retirement benefits.
- Businesses: Once a marital business has been valued by a forensic expert, the business will generally be distributed to one party, with the other party receiving a payout for their share of the business. Sometimes this buyout will come in the form of an upfront shifting of assets or lump sum payment, although other times the spouse retaining the business may be ordered to make payments for years to come following divorce.
- Investments & Bank Accounts: Investments and bank accounts must be properly classified, valued, and then divided in the equitable distribution process. When it comes to investments, certain tax consequences, such as capital gains, need to be considered as part of dividing property to ensure a fair division of property.
- Personal Property: Dividing personal property is another important part of every equitable distribution case. Personal property, such as household furniture and belongings, is often divided amongst parties, although sometimes the involvement of a family law attorney is necessary. This can especially be the case when dealing with higher-valued personal property such as treasured collections, jewelry, and other similar items.
Factors Influencing Equitable Distribution
North Carolina law provides a list of factors for Judges and parties to consider when determining whether or not an equal division of marital and divisible property is equitable in any given case. These factors, which are known as distributional factors, are defined by statute and include the following:
- “The income, property, and liabilities of each party at the time the division of property is to become effective.”
- “Any obligation 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 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.”
- “Any direct or indirect contribution made by one spouse to help educate or develop the career potential of the other spouse.”
- “Any direct contribution to an increase in value of separate property which occurs during the course of the marriage.”
- “The liquid or nonliquid character of all marital property and divisible property.”
- “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.”
- “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.”
- “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.”
Importantly, North Carolina law also provides a final distributional factor which is defined broadly as “any other factor which the court finds to be just and proper.” This all combines to give Judges a great deal of discretion when determining how to divide assets in an equitable distribution case. For example, a Judge could find that one spouse’s contributions to the other’s spouse’s education and their increased earning potential now warrant distributing more of the marital assets to the spouse that supported that very education.
However, while trial Judges do have broad discretion to determine whether an equal distribution is equitable as well as how to divide property, they may not generally consider marital misconduct when dividing property. For example, whereas a Judge can consider marital misconduct such as a party’s adultery or domestic violence in the context of alimony, they generally cannot consider said adultery or domestic violence when it comes to property distribution.
Protecting Your Assets During Divorce
When it comes to divorce, there are multiple steps you can utilize to protect your assets. A key step is first understanding your finances and ensuring you have full financial records. Whether you are contemplating a divorce or not, it pays to have a full picture of all of your finances and updated financial records. This becomes especially important in a divorce to have a clear record of your accounts as well as your spouse’s assets, if necessary.
In addition to taking steps to protect your assets at the time of separation or after, contracts such as premarital agreements and postnuptial agreements can help to protect your assets and debts in a divorce. A premarital agreement can be an effective tool to address property division prior to even marrying, whereas a postnuptial agreement is a useful way to address property rights while still married if a divorce is possible in the future.
In the event you need to take immediate action to protect your assets, there are also emergency Court remedies available, such as Temporary Restraining Orders or Preliminary Injunctions. In the event you are concerned that your spouse will hide, waste, or otherwise destroy marital assets, you may have the right to seek immediate court relief whereby a Judge can restrain your spouse from taking certain actions or even require third parties, such as banks, to take protective action.
Miller Cushing Holladay’s Approach to Asset Division
At Miller Cushing Holladay, our Charlotte family law attorneys regularly assist clients with all aspects of their divorce, including equitable distribution. Our team will meet with you to first determine your goals in property distribution and discuss how we can work to achieve those goals. With those goals in mind, we will then work with you to meticulously identify, classify, value, and distribute property. As part of the equitable distribution process, we will work with you as a team to ensure every aspect of your marital estate is addressed.
This process will necessarily involve an in-depth review of your and your spouse’s finances to ensure no variable is left unaddressed and no account is left uncovered. Sometimes, this will mean detailed asset tracing to trace down any hidden or transferred assets. Oftentimes, we will also help with a complex analysis of investment growth in retirement plans to ensure every last penny of marital property is accounted for within the marital estate.
If your case can be resolved without the need for court, our team will work with you to carefully negotiate a property settlement agreement that best addresses your needs and goals. In some cases, we will work with you to skillfully negotiate a direct settlement with your spouse or their attorney. In other situations, we will attend mediation with you in an attempt to resolve property division and a subsequent separation agreement. However, if an out-of-court settlement is not possible in your case, we will not shy away from strong and zealous representation of your interests in court.
Why Choose Miller Cushing Holladay for Your Property Division Case?
The equitable distribution process is one of the most critical aspects of any divorce, given that the outcomes in property distribution can weigh largely on your financial future for many years to come. At Miller Cushing Holladay, we have a team of experienced family law attorneys with over 80 years of combined service for our clients. More importantly, though, is that our entire practice is devoted to divorce and family law matters, which means that, when you hire one of our attorneys, you will know that we are well-versed in dealing with the issues in your divorce.
Experience matters when it comes to equitable distribution, not just because of the stakes at hand, but also because of the complex issues involved in the process. For example, whether the increased value of a business during a marriage is distributed could depend largely on nuanced case law, which assesses the marital efforts of parties during the marriage. A distribution of property will also need to take into consideration the non-liquid nature of certain assets, such as retirement plans and pension plans, to determine the real value of property received by a spouse in equitable distribution. Ultimately, these sorts of considerations require experience in the area of North Carolina divorce and equitable distribution.
At our firm, we pride ourselves on working as a team with our clients throughout the equitable distribution process. Whether we need to negotiate a settlement out of court or provide strong advocacy in court, a cornerstone of our process is open communication all along the way. This dialogue will begin at the outset of your case when we address your goals and then work together to see how those goals fit into equitable distribution in your case. As part of this process, we will review detailed charts and other documents that outline your separate property, marital property, and divisible property so that you have a clear understanding of what is at stake. In addition to discussing outcomes with you, we will also always keep in mind a cost-benefit approach. This means that instead of just telling you what options you have, we will discuss the costs versus the benefits of those options so that you can make well-informed decisions in your equitable distribution case.
Frequently Asked Questions
What is “equitable distribution” in North Carolina divorce?
Equitable distribution is a three-part process used by Judges and parties to divide the process of parties going through a divorce. The process includes identifying and classifying property, valuing property, and finally distributing property.
What is the difference between “marital property” and “separate property”?
Generally speaking, marital property refers to property that was acquired following the parties’ date of marriage and prior to their date of separation, whereas separate property generally refers to property acquired by the parties prior to their marriage. However, many important exceptions exist, such as some of those outlined above, and thus it is important to talk with an experienced family law attorney about the complex process of classifying property.
Is a 50/50 split of assets required in a North Carolina divorce?
While the law favors an equal split of property, an equal division of property is not required. Judges may order, and parties may agree in a property settlement agreement, to an unequal distribution of property.
How are retirement accounts divided in an NC divorce?
Retirement benefits accrued during the marriage and the passive growth of those benefits following separation are distributed as part of the equitable distribution process. If an actual transfer of funds is needed from a retirement plan or individual retirement account, certain documents, such as a Qualified Domestic Relations Order, may be required to process the transfer without tax consequences.
How is a family business valued and divided in a North Carolina divorce?
Unless parties can agree on the value of a family business, the business will need to be valued by forensic experts who are appointed to examine the business’s finances and determine a fair market value for the business. Once a value has been determined, one spouse will generally be distributed the business and then required to buy out the other spouse’s marital interest.
What factors do North Carolina courts consider when dividing marital property?
North Carolina Judges consider a long list of factors known as distributional factors when determining how to divide marital property and divisible property. In addition to being listed above, those factors are set forth in N.C.G.S. 50-20(c).
Can I protect assets I owned before getting married from being divided?
Yes, you can protect premarital assets in a divorce, given that these assets are generally considered separate property and thus not subject to division as part of equitable distribution. While you can rely on the equitable distribution process to sort out what constitutes your separate property, it is often best to plan ahead, though, through the use of a premarital agreement.
What happens to the marital home during property division?
In general, either one spouse will receive the home and buy out the other for their share of the house, or the house may be sold and the proceeds split in some predetermined manner. In the case of a buyout, the spouse moving out of the home may receive a greater share of other marital property within a marital estate, or the spouse remaining in the home may even be required to pay cash to buy out the other spouse’s marital interest.
How do child custody and child support impact equitable distribution?
Child custody, child support, and equitable distribution can impact one another in roundabout ways. For example, when ordering child support, a Judge can look at the estates of the parties, including their assets and debts. In the context of equitable distribution, a Judge can also consider the need of a custodial parent to maintain possession of a marital home when deciding how to divide property.
Can my attorney’s fees be reimbursed in the equitable distribution process?
Under North Carolina law, attorneys’ fees are generally not reimbursable in equitable distribution matters. However, there are some situations where parties may agree in a separation agreement or otherwise to reimburse attorney fees, as well as some extremely limited scenarios where attorney’s fees may be ordered in an equitable distribution case.
