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An In-Depth Discussion of Property Division
For over two decades, claims for the identification, classification, valuation and equitable distribution of property have become the most complex financial issues that have to be addressed when people separate. And thus, Equitable Distribution has become one of the most challenging areas in family law today. The process of identifying, classifying, evaluating and distributing property forces lawyers and judges to confront issues of such difficulty and diversity as to often make a custody case look relatively straightforward. Hence, Equitable Distribution takes organization, patience, time, problem solving skills, and the association of other competent professionals such as appraisers and CPA's.
One thing must be said before we dive into an explanation of the Equitable Distribution process. Under no circumstances are you required to go through this process merely because you find yourself considering separating from or divorcing your spouse. What do we mean by this? You and your spouse have the option of distributing your property interests among yourselves without the Court's intervention. You are probably asking yourself how you go about this. Obviously, the first thing you and your spouse will need is an open line of communication. The second requirement is that you are able to come to an agreement with your spouse as to how your property interests will be distributed. If you and your spouse can do this, great! All you would need to do at that point is have the provisions of your agreement incorporated into a Separation and Property Settlement Agreement. In short, a Separation and Property Settlement Agreement is a contract between you and your spouse. It is usually notarized and represents a final and often non-modifiable resolution to the distribution of property interests between you and your spouse. Nevertheless, it is worth noting that even if you are fortunate enough to be able to come to a resolution of property issues with your spouse, it is strongly recommended that you and your spouse seek the representation of counsel to help with the drafting of your Separation and Property Settlement Agreement. However, as we all know from watching friends or family members who have gone through the separation and divorce process, an amicable resolution is not always possible. This is when the process we call Equitable Distribution comes into play.
Set forth below you will find an easy-to-read discussion which we hope will inform you about the process we call Equitable Distribution. However, due to the complexity of this area of family law, there is a good chance you may have questions that are not addressed. If so, please feel free to scroll down to the "FAQ's" section of this document. If you are unclear as to some of the terms mentioned herein, you may want to explore the "Legal Terms" section of our website.
The Elements of Equitable Distribution
There are certain elements that are associated with Equitable Distribution that we need to address up front. After all, if you do not meet the appropriate criteria, you are prohibited from even filing a claim for Equitable Distribution. Furthermore, the elements define for us what the Court's role should be in the Equitable Distribution process and when a claim for Equitable Distribution is considered timely filed.
First, only a husband or wife may file a claim for Equitable distribution under N.C.G.S. Section 50-21 (a). Therefore, if a matrimonial union recognized by the State of North Carolina does not exist, there can be no claim for Equitable Distribution by either party. Next, the husband and wife must be separated. In North Carolina, this means only spouses who are living "separate and apart from each other" may file a claim. N.C.G.S. Section 50-21 (a). Third, the Court's task is to "determine what is the marital and divisible property" and to "provide for an equitable distribution of the marital and divisible property between the parties." N.C.G.S. Section 50-20(a). Finally, except for certain limited exceptions, an absolute divorce within North Carolina "shall destroy the right of a spouse to equitable distribution ... unless the right is asserted prior to judgment of absolute divorce." N.C.G.S. 50-11 (e), (f). This simply means you must have at least a pending claim for Equitable Distribution filed with the Court before the Court grants an absolute divorce. Otherwise, you lose your right to file a claim for Equitable Distribution and all marital and divisible property will be distributed according to the spouse who has title. Obviously, this could work to your advantage or disadvantage.
The Process - Identification and Classification, Valuation, and Distribution
Equitable Distribution can be broken down into a three-step process. Those steps are: 1) Identification and Classification, 2) Valuation, and 3) Distribution. Let's start with step one and move forward. When we talk about identifying and classifying property interests we are really talking about the phase where we attempt to group property interests into one of three categories: Separate Property, Marital Property, or Divisible Property. The best way to successfully group property interests into one of these three categories is to picture the marriage and its ultimate dissolution on a continuum in the form of a timeline. Set forth below is a simple, yet extremely useful timeline that will help you follow the categorization process.
If you look at the timeline, you will see that there are three primary vertical lines going from left to right across the page. On the far left you will see that the first line is entitled "DOM." This is short for Date of Marriage. The next line is entitled "DOS." This line represents the Date of Separation. Finally, on the far right is a line entitled "DOD." This line is representative of the date upon which property interests are distributed to the parties once and for all, or the Date of Distribution.
The State of North Carolina takes the partnership view of marriage. What this means to you is that there is a presumption in North Carolina that everything received during the course of marriage is presumed to be marital property. Said in a better way, unless you can prove otherwise, the Courts will presume that everything incurred, obtained, earned, and received during the course of marriage is marital property, and thus, is subject to Equitable Distribution. Now remember, as we said above, this does not mean that marital property is going to be divided equally. Rather, this means that you and your spouse's marital property is subject to division based on what the Court deems to be fair. So, if we look at our timeline above, everything that is incurred, obtained, earned and received between the DOM and the DOS is presumed to be marital property. However, as you will see below, there are exceptions to this presumption.
You can have a separate property interest in essentially three ways. First, take a look at the time period before the line marked DOM on your timeline. Obviously, this represents the time period before you were married. All property interests you obtain prior to marriage are your separate property. So, if you had a car that was paid off when you entered the marriage, this car is clearly your separate property. However, let's say this car originally had a debt of $10,000.00 owed on it and at the time of your marriage you had paid $8,000.00 toward that debt. At the time of marriage there is going to be $2,000.00 owed. Because you and your spouse will make payments toward that $2,000.00 residual debt, your spouse will gain a marital interest in that portion of the car's value paid off during the course of the marriage. Even if you actually made the payments, if paid off during the marriage with the money earned during the marriage, a marital interest is created. So, when it comes time for Equitable Distribution, your spouse will be able to claim some interest in the car. But remember, you not only have a marital interest in the car with your spouse, but you also have a separate property interest in the car based on your payments toward the debt prior to marriage.
The second and third ways you can have a separate property interest take place during your marriage. How does this happen, you ask? Well, do you remember the presumption we referred to above when we spoke of marital property? The nature of presumptions is that they can be rebutted. To illustrate, let's say, you receive a gift or an inheritance during the course of marriage. If you receive an inheritance during the course of the marriage, this is your separate property. Although this separate property concept is easy, the separate property concept surrounding gifts is not. This is because gifts fall into the category of things that are presumed to be marital property. Therefore, in order for you to successfully claim a gift as your separate property, you must prove, by documentary evidence, testimony or otherwise, that the gift was given by the donor solely to you. Otherwise, the presumption is that the gift was a gift to the marriage. As a side note, even gifts given by one spouse to another are usually considered gifts to the marriage because they were bought with the marital money, and thus, represent marital property.
Although at this point you have probably had enough of the exceptions, presumptions and possibility of rebuttals, there is one topic that should be addressed while we are in the realm of separate property. That topic is called "tracing." Tracing sometimes comes up when there is a question about whether a property interest is marital or separate. For example, say the husband comes into a marriage owning a home but the home is sold during the marriage and is used to purchase a new home. The new home is later sold and used to finance the purchase of a vacation home and a couple of automobiles. The wife may argue that the sale of the husband's home, his separate property, has caused the separate property to become a marital property. Essentially, she would be arguing that the husband, through the sale of the home and the multiple transactions that subsequently occurred, has made a "gift to the marriage". At this point, the husband would argue it was not a gift to the marriage and he would attempt to trace the funds in order to identify his separate property interest. Obviously, if multiple transactions have occurred, this can be extremely difficult to do. And, even if you do succeed in tracing all of the funds and transactions back to the original separate property interest, the Court still may conclude that there was a gift to the marriage based on the circumstances involving the interest.
Divisible property is the third type of property interest. Divisible property is created within the time period between the DOS and the DOD. If there is divisible property it will be distributed between the spouses like marital property. Divisible property can come in many different forms. For example, if there is a passive appreciation or diminution in marital property between the DOS and the DOD, there is a divisible property interest. Think of a 401(K) account that increases or decreases due to market forces after the DOS, but before the DOD. This would be an example of a divisible property interest that was created "passively". On the other hand, if a spouse's 401(K) account increases as a result of contributions made by that spouse after the DOS but before the DOD, this would be considered an "active" change and that increase in value would be credited to the contribution-making spouse. Divisible property can also be created when property or property rights are received after the DOS but before the DOD as a result of efforts prior to the DOS. For this, think of a bonus that is received after the DOS but before the DOD. That portion of the bonus that can be attributed to work performed during the marriage will be considered divisible property. Divisible property could also come in the form of passive income from marital property received after the DOS but before the DOD. An example of this type of divisible property would be interest and dividends. Finally, increases in marital debt, financing charges and interest related to marital debt is a form of divisible property, and thus subject to Equitable Distribution.
What to Expect - The Equitable Distribution Process (In Mecklenburg County, North Carolina)
At this point in time it would be appropriate to give you a brief sketch of the typical Equitable Distribution process in North Carolina. However, for now, just take a moment to review how the Equitable Distribution process has been illustrated below. Don't worry, we will refer back to it as we move forward with our discussion.
Equitable Distribution as a Claim within the Process
Up to this point, we have only spoken of Equitable Distribution as a process. And while this will remain true throughout this discussion, it should be pointed out that Equitable Distribution is first and foremost a claim for relief. Consequently, when someone makes a claim for Equitable Distribution, they are essentially asking the Court to make a determination as to how the property interests he or she and his or her spouse have accumulated should be distributed. If you look back at the chart set forth above, you will see that the first stage in the Equitable Distribution process is the filing of your claim. A claim for Equitable Distribution can be made in two ways. The first way is by Complaint. If you file your claim for Equitable Distribution by Complaint, you will be recognized by the Court as the Plaintiff. On the other hand, if you are the recipient of the Complaint, you will be recognized by the Court as the Defendant. If this is the case, you will need to make your claim for Equitable Distribution through a Motion or a Counterclaim within your Answer to the Plaintiff's Complaint. That being said, this is the perfect time to clear up the common misperception that a person is at a disadvantage if he finds himself listed as the Defendant in a lawsuit. It makes no difference whether you are the Plaintiff or the Defendant. The titles are representative only of which party filed the lawsuit first and the Court is bound to treat each party and their respective claims fairly.
After the Claim is Filed
Shortly after the claim for Equitable Distribution is filed, your attorney will help you fill out what is called an Equitable Distribution Affidavit of Inventory. This affidavit or inventory is essentially a detailed listing of you and your spouse's assets. It is your first opportunity to convey to the opposing party what assets you believe make up the marital estate. It will be filed with the Court and served on the opposing party at least seven (7) days prior to the Initial Pretrial Equitable Distribution Conference. It is extremely crucial to your case that the affidavit is filed, as noncompliance can mean you are prohibited from offering evidence at your trial. Furthermore, the Court could order sanctions against you.
In the early stages of your case, you and your attorney may also decide to file a Motion for Interim Allocation of Marital Assets or a Motion for Injunctive Relief. If a Motion for Interim Allocation of Marital Assets is filed on your behalf, you are asking the Court to enter orders declaring what is separate property or to divide part of the marital property, marital debt, divisible property or divisible debt between you and your spouse. Unless good cause is shown that there should not be an interim distribution, the Court will enter an Order. The basic requirement of such a motion under N.C.G.S. Section 50-2 1 (1) is the existence of certain marital, separate and/or divisible property. The partial distribution may provide for a distributive award and may also provide for a distribution of marital property or debt and/or divisible property or debt. The Court will consider and give proper credit to such orders at trial. If a Motion for Injunctive Relief is filed, you are asking the Court to freeze a certain asset or to order the opposing party not to waste, dispose of or devalue an asset.
If a Motion for Interim Allocation of Marital Assets, Motion for Injunctive Relief or any other type of motion is not filed by either party, your first appearance in court in an Equitable Distribution case will be at the Initial Pretrial Equitable Distribution Conference. Many important issues are addressed at this conference. First, the Court will ask the parties if the case is appropriate as an expedited Equitable Distribution case. In order for a case to qualify as an expedited Equitable Distribution case, there must be $25,000.00 or less in terms of the fair market value of the marital estate, without counting marital real estate and marital vested pensions. If the case qualifies as an expedited case, the parties are allowed to skip Alternative Dispute Resolution and a trial date will be set. After this determination is made by the Court, the Equitable Distribution Affidavits will be reviewed by the Court and it will be determined if any appraisals need to be performed and how values will be determined. The parties will present their respective statements of the issues and they will also present a proposed plan and schedule for the discovery process and how it is to be conducted. The Court will make sure the parties are aware of the Alternative Dispute Resolution process and that they have selected either mediation, arbitration, or Judicial Settlement Conference. Finally, the Court will determine when the Final Pretrial Equitable Distribution Conference and the Equitable Distribution Trial will occur. In the best case scenario, the parties have agreed on all of the issues set forth above and they arrive at court with a proposed Initial Pretrial Equitable Distribution Order. If not, the Court will make the necessary decisions and direct one of the parties to draft the appropriate Order.
After the Initial Pretrial Equitable Distribution Conference is concluded and the Order is entered, the parties will usually begin initiating the formal discovery process including having any appraisals performed that are called for in the Order. Discovery in an Equitable Distribution case, although quite similar to discovery in any civil proceeding, depends on the style of the particular attorney and the substantive issues of the case. Your attorney may choose to send out Interrogatories, Requests to Produce, or Requests for Admissions to the opposing party based on what information is needed and what can only be obtained through the discovery process. The need for depositions is another decision which also must be made in the individual case, both prior to, and subsequent to, written discovery being obtained.
The parties will work through the discovery process as they await the Final Pretrial Equitable Distribution Conference. If any appraisals are called for, the appraisals will be completed and the experts' reports filed & served on the opposing party. Furthermore, the parties will complete Alternative Dispute Resolution. If all goes well in the Alternative Dispute Resolution process, the parties will enter into a settlement agreement and a Consent Order or out of court agreement will be drafted. If the parties can not settle their claims, they will attend the Final Pretrial Equitable Distribution Conference. At this conference, the Final Pretrial Equitable Distribution Order is filed. As before, the parties can agree to an Order or one will be entered by the Court. The Order will set forth the issues in dispute between the parties which must be determined by the court.
Your last appearance in court will be for the Equitable Distribution trial. Depending on how many witnesses are called and how much evidence is presented, the trial could be as short as a few hours or as long as a few days. As we mentioned earlier in our discussion, the Court's role will be to identify what property existed at the DOS, classify the property interests as separate, marital or divisible, value the property interests, and then distribute it based on the distributional factors set forth in the next section of this discussion. Along the way, the judge is required to make findings of fact as to all issues for which evidence is presented. At the conclusion of the trial, the judge will render his/her decision and direct that an Order be drafted for his/her review. If the Order is acceptable to the judge, the Order will be entered. Unless you appeal the decision, the Order will represent a final resolution of your Equitable Distribution claim.
When we get to the stage where the Court is satisfied that the property interests of the parties have been properly identified, classified, and valued, the Court will proceed with making the determination as to how the property will be distributed. Set forth below is a list, although not exhaustive, of some of the factors the Court may utilize in making its determination. This list is not inclusive because, as you will note, distributional factor #12 is really not an affirmative factor at all. Rather, it is a place where you and your attorney can decide if there are any additional distributional factors that weigh in your favor. Many times, it can be these "written in" distributional factors which may give the Court cause to award you an unequal distribution of the marital estate in your favor. One note about the factors set forth below. If you read through them carefully, you might notice the conspicuous absence of a factor that takes into consideration marital misconduct. Well, it is absent for a reason. Although marital misconduct is a factor the Court may consider in determining the amount and duration of a post-separation support or alimony award, marital misconduct does not affect in any way a person's right to Equitable Distribution or the disposition thereof unless it result in a financial impact on the parties. For example, if one spouse gambles away the parties' savings, the court may consider the actions as a factor. However, the fact that the party gambled will not be of significance to the court. That said, here are the factors as set forth in N.C.G.S. Section 50-20(c)(1-12):
In most cases, your attorney will have made a claim for attorney's fees when your claim for Equitable Distribution was filed. However, unlike claims for attorney's fees that are associated with post-separation support, alimony, child custody or child support, the Court will only award you attorney's fees in relation to your claim for Equitable Distribution if there are verified acts by the opposing party to waste, neglect, devalue or convert marital property during the period after separation and before the time of distribution. As always, this determination is in the discretion of the Court.
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North Carolina is an equitable distribution state. There shall be an equal division by using net value of marital property and net value of divisible property unless the court determines that an equal division is not equitable.
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