"Divorce is the one human tragedy that reduces everything to cash." — Rita Mae Brown
Returning to John and Jane imagine instead of a marriage, a traditional 50-50 business partnership to which John contributes $250.00 in cash, Jane contributes $250.00 worth of labor, and money and labor combine to build a house they sell for $500.00. When the partnership dissolves, the law requires that partnership assets be distributed in equal shares, one-half ($250.00) each to John and Jane. John argues that he should get more because without his cash there would be no house. While John’s premise is true, so too is the fact that without Jane’s labor, there would be no $500.00 house to sell. Appropriately the law doesn’t care: John and Jane each get the same $250.00.
Equitable Distribution is the process by which the Court divides the assets created, bought or saved during the marriage partnership, between the date of marriage and the date of separation. Equitable Distribution begins with the simple premise that each spouse is entitled to one-half (1/2) of the assets of the marriage partnership. But unlike our traditional business partnership model, the Court has significant leeway to “adjust” the equities in favor of one spouse or the other, and to distribute more or less than one-half (1/2) of the marital assets to either spouse. This flexibility marks a radical departure from our traditional, 50-50 business partnership model and speaks directly to the meaning of Equitable Distribution: “equitable” means “fair,” and does not always mean “equal.” There is no precise formula for dividing property; indeed the Judge may find that an “equal” division of property is not “fair,” and may order an unequal division of assets according to a number of Equitable Distribution Factors provided under North Carolina law.
Now rather than building a single house, let’s revisit married John and Jane who built a life together for 25 years. During the salad days of their marriage John finished medical school, then went on to practice medicine and make a lot of money. For 25 years Jane worked behind the scenes: she supported John through medical school, built and kept their houses, raised, fed, clothed and nurtured their children, supported John’s career growth leaving him to earn a lot of money and kept the family ship afloat in every sense of the word. John and Jane divorce when John is earning more money than ever before – John has 15 to 20 more high income years left before he retires – and their marital partnership is worth $1,000.00. Equitable Distribution begins with the premise that John and Jane each are entitled to get $500.00 and ends with the conclusion that a Family Court Judge can give Jane considerably more than $500.00 taking into account the intangible value of her contribution to John’s career success, John’s significantly greater earnings capacity and a variety of other equitable distribution factors that all contribute to the conclusion that “equitable,” and not “equal” is a fair outcome.
Equitable Distribution is a complex openwork fabric of laws and economic concepts that 1) identify and divide assets that belong to the marriage partnership – “marital property,” 2) identify and divide intangible changes in the value of marital property – “divisible property,” and 3) identify and allocate assets that do not belong to the marriage partnership – “separate property.” Marital and divisible property are divided in the Court’s judgment and discretion based on a number of different equitable distribution factors that allow for the conclusion that equal is not always fair. Spouses are encouraged to settle their differences by negotiated agreements – most typically called Separation And Property Settlement Agreements – and mediated settlements guided by skilled attorneys are always preferable to litigation. Click on the link below to read more about Equitable Distribution, or skip straight to Frequently Asked Questions – Separation And Property Settlement Agreements, for answers to the most common questions we hear every day.
“Equitable Distribution” describes the legal process for dividing property between spouses who have separated and are, or are soon to be, divorced. Equitable Distribution is a highly technical area of practice: your specific case will have issues that are not and cannot be addressed in this summary. Please discuss the specifics of your case with us at your convenience.
Timing Is Everything, Marital Misconduct Is Not.
No one may sue for Equitable Distribution until after they are separated. Obviously married folks can agree to anything they want by way of dividing their property before they separate – and as with all aspects of a family law case, the Courts favor those who negotiate their own settlements – but the right to go to Court and sue for Equitable Distribution is limited to those persons who already are separated. Also by way of warning, any claim for Equitable Distribution must be asserted before a judgment for absolute divorce is entered. Once the “gavel falls” and the Court grants either party a judgment of Absolute Divorce, unmade Equitable Distribution claims are barred forever. Finally marital misconduct by a spouse, such as an extra-marital affair or illicit sexual behavior, has no bearing in an action for Equitable Distribution. An Equitable Distribution action is all about property; Marital Misconduct is irrelevant to claims Equitable Distribution.
Equitable Distribution Settlement.
Most Equitable Distribution issues are settled by a negotiated agreement between you and your spouse: lawyers often refer to these contracts as “SAPS” (“Separation And Property Settlement Agreements”). Settlement is always preferred; Equitable Distribution litigation is cumbersome, time-consuming and expensive, and the Court cannot award legal fees to either party on account of an Equitable Distribution claim.
Equitable Distribution Litigation.
If you and your spouse cannot reach a property settlement, the Judge will make an “Equitable Distribution” of your marital assets, marital debts and divisible property. In doing so, the Court first considers three (3) classifications of property: (1) Marital Property; (2) Separate Property; and, (3) Divisible Property.
“Marital property” includes all property owned at the date of separation that was acquired by you, by your spouse or by both of you during the marriage. A couple of exceptions immediately come to mind, for example if you owned property before marriage, inherited property or received property by a gift from a third person, these items probably are not marital property. Gifts given between spouses are not quite so clear. Gifts between spouses during the marriage are presumed to be gifts to the marriage and are usually marital property, unless the spouse states at the time of conveyance that it is intended to be separate. Parties with significant separate assets, such as second or third marriage spouses, are well advised to speak with a matrimonial lawyer before paying for something like a marital home with separate assets.
Marital property also includes retirement accounts and other, similar, rights to receive payments in the future such as:
- Vested and non-vested retirement rights including military pensions eligible under the Federal Uniform Services Former Spouses Protection Act,
- IRA, 401(k), Corporate Savings and Investment Plans to the extent that either or you, or your employers, made contributions during the marriage, and
- Other deferred compensation rights “earned” during the marriage.
“Separate property” typically includes all property owned by either spouse before the marriage and property acquired during the marriage by one spouse through an inheritance or by a gift from a third person and also includes income from separate property. Sometimes a marital interest can be created in a separate property if either or both spouses use marital funds or efforts to pay for or to improve the separate property, such as when couples use marital income to improve or pay-off a home owned prior to marriage. Also, separate property may be inadvertently converted into marital property if it is used to purchase items during the marriage and if not properly addressed at the time of purchase. For example, if you buy a home during your marriage and pay for it with your separate property – such as funds inherited from a deceased spouse – and “take title” to the home in your and your spouse’s names, you may have inadvertently converted your separate funds into a marital asset. The nature and type of property you buy dictate the title formalities you should consider before spending your separate property on marital items.
“Divisible property” is a classification of property that speaks to changes in the value of marital property that occur after the date of separation and before the date of distribution, changes in amounts of marital debts by reason of accrued interest and charges, and passive income from marital assets, like interest and dividends. For example, if marital property increases or decreases in value after separation and before the date of distribution, the court must consider these changes in value when awarding property to each spouse.
Dividing Marital, Separate and Divisible Property
In an Equitable Distribution action separate property is kept by the spouse who owns it; typically marital property, marital debts and divisible property are divided by the Judge, with adjustments, setoffs and credits for payments made by either spouse after the date of separation. The court does not have to divide debts in the same percentage as it divides assets. The court must consider the purpose for which the debt was incurred and the disposition of any asset encumbered by the debt. As with marital assets, the factors outlined above will guide the court’s hand in dividing marital debts. However, and this is important to remember, the term “equitable” means “fair,” and does not always mean “equal.” There is no precise formula for dividing property; indeed the Judge may find that an “equal” division of property is not “fair,” and may order an unequal division of assets according to a number of factors provided under North Carolina law.
Unequal Division of Assets.
In some cases, the court may order an unequal division of property and, in doing so the court must consider the following factors:
- The income, property, and debts of each party;
- Support obligations for any prior marriage;
- The duration of the marriage and age and health of each party;
- Needs related to custody of children;
- Any expectation of retirement benefits that are not marital property;
- The contributions, intangible or other, made by each party to the acquisition of the property including services as a spouse, parent wage earner, or homemaker;
- The contribution of one spouse to the education or career of the other;
- Direct contributions to an increase in value of separate property;
- The liquid or illiquid character of the marital property;
- The difficulty in valuing as asset or business, corporation, or profession and the desirability of keeping such assets intact;
- The tax consequences to each party;
- Acts of either party to preserve or waste marital property after separation; and,
- Any other factor that the court finds to be just and proper
As you can imagine, these factors allow a Judge to fashion a division of assets that take into account a variety of unique circumstances. In short, every case is different; your case is unique to you and only to you. In preparing to work with your attorney, you should provide as much information as is possible. Don’t assume that your spouse will get one-half of everything automatically; let us do the work for you to get you the best possible result in your particular case.
Taxation of Property Divisions.
Dividing marital property is a nontaxable event. Generally, if property is transferred between spouses in accordance with an agreement or court order, it will neither be taxed as income nor allowed as a deduction. However, there may be tax consequences when funds are transferred from retirement accounts and when marital assets are sold to third parties.
Your Equitable Distribution Affidavit.
Once your Equitable Distribution case is filed with the Court, the first party to file the claim must prepare and serve a comprehensive financial statement, called an “Equitable Distribution Inventory Affidavit” within ninety (90) days of filing suit. The opposing side then has thirty (30) days to file a similar inventory affidavit in response. Generally, your Equitable Distribution Inventory Affidavit must:
- list items of marital property;
- list items of separate property;
- list items of divisible property; and,
- give the estimated date-of-separation value of each item disclosed.
Your Affidavit should be as complete as possible and can set the tone for the distributions in your case. Don’t worry if you forget something or make a mistake in valuing any particular asset; preliminary affidavits are not binding and any error, omission or change in value may be supplemented at any time before or during your trial. However, this doesn’t mean you can willfully or knowingly hide, conceal or play games with the information on your Affidavit. For instance, your Affidavit is subject to sanctions under Rule 11 (of the North Carolina Rules of Civil Procedure), if the court finds your Affidavit or the information therein to have been frivolous, tendered in bad faith, or prepared for an improper purpose. Similarly, a party may be subject to tough sanctions for failing or refusing to provide an Affidavit and other relevant information and may include the dismissal of your Equitable Distribution claim and an order that you pay your spouse’s attorneys’ fees.
Our best advice? Be forthcoming, honest and thorough. There is no point in deceiving either the court or the other side as to the nature, extent and value of your assets. Your lawyers can provide a wide scope of services to assist you from obtaining information about assets from third parties, to undertaking extensive searches to discover assets that your spouse may choose to hide. Divorce and property divisions often bring out the worst in everyone; we encourage you to put your best possible foot forward when dealing with the court. Judges are savvy and typically know when someone is lying or trying to hide information from the Court. If you choose to litigate EQUITABLE DISTRIBUTION, rather than settling your claims and getting on with your life, you should trust in the litigation process and heed the advice you get from your attorneys.
Equitable Distribution Pre-trial Conference and Pre-trial Order.
After Affidavits are exchanged and, usually, after discovery is completed, a pre-trial conference is scheduled in front of the Judge presiding over your Equitable Distribution case. From this point each party and their respective attorney will work to prepare a pre-trial order that designates what issues are resolved and what issues remain for the court to decide. The pre-trial order is a very important part of your case; it is the agenda for your trial and all of your preparation, investigation, discovery and negotiation merges into this pre-trial order. You cannot later change your mind about agreements you make in the pre-trial order; you will be bound to them. Often preparing a pre-trial order requires several drafts and a substantial time commitment; however, in the end, a complete, comprehensive pre-trial order is always worth the effort. Once the parties come to terms on a final pre-trial order, the Judge usually holds the pre-trial conference “on the record” and in open court. The Judge will ask each party if they understand the terms of the pre-trial order and informing them that they will be bound by it. An initial date for the Equitable Distribution trial is usually set at that time; however, a case is usually scheduled for trial several times before it is finally called for trial.
Mandatory Financial Mediation.
Both parties must participate in mandatory financial mediation after lawsuits for Equitable Distribution or Permanent Alimony are filed, and the mediator’s fees are divided equally between both parties on the day of mediation. Both parties attend mediation with their attorneys. If an agreement is reached during mediation, an agreement or consent order is then drafted for execution: there is a pressured emphasis to “sign off” on any agreement reached in mediation, as it is the purpose of mediation to settle the case once and for all. The parties may settle some or all of their issues during mediation; unresolved issues will then be scheduled for hearing before a Judge.
Mediation just makes sense; mediation dramatically reduces expenses and attorneys’ fees and hastens resolution of your case. Disagree? Consider this example: Most lawyers charge by the hour and most “days” in trial are 10 – 12 hours long. Two lawyers (yours and your spouses) charging $250.00 per hour, mean that every day in trial over property issues costs your marriage $5,000 to $6,000, exclusive of the time it takes to prepare your case for trial in the first instance. Worse still, in most cases each side pays it’s own legal fees. You should consult with your attorney well in advance of any such mediation and heed their recommendations about settlement. Mediation is time well-spent and money well saved. At this point, we think you’ll agree,