PRACTICAL ASPECTS OF EQUITABLE DISTRIBUTION
The equitable distribution statutes of North Carolina are found at NCGS 50-20 and 50-21. The underlying concept in equitable distribution is that marriage is an ongoing economic partnership. During the course of most marriages, marital assets are acquired - house, motor vehicles, savings, pension rights, household furnishings, etc. These are capable of classification (separate, marital or mixed), evaluation (net value after liens, not gross value) and distribution. Division takes place without regard for whose name appears on the asset -- in other words, "Title doesn't matter."
Equitable distribution can be accomplished by separation agreement or property settlement agreement at any time after the date of separation [DOS] of the parties. This can be done before or after a judgment of absolute divorce is entered, and a properly drafted property settlement agreement can even be done during the marriage and before the separation of the parties (called a "marital agreement") or before their marriage (called an antenuptial agreement or premarital agreement, under NCGS Chapter 52B, the Uniform Premarital Agreement Act). The signature of each of the parties before a notary public is required and the agreement should clearly specify what division is being made as to marital property. Great care must be taken to include everything that needs to be divided. Otherwise, a general release clause (which is standard in most separation agreements) may bar any further distribution of property which is omitted (intentionally or otherwise) from the agreement. If there is a disagreement on dividing property and the property (such as a pension) is not included for division in the agreement, it is vital to insert a clause that specifies that the said property is not being divided in the agreement and is being left for the courts to divide.
Another way of dividing marital property is by consent judgment. The court is empowered to sign a consent judgment for equitable distribution at any time before or after a judgment of absolute divorce. Such a judgment might be necessary, for example, where suit was instituted and then a settlement was negotiated before the actual trial on equitable distribution occurred. Another example of the use of such a consent judgment is when it is necessary to divide a military pension (direct payments under the Uniformed Services Former Spouses Protection Act are available only with a certified copy of a court order) or to distribute a private pension (under the Retirement Equity Act, a Qualified Domestic Relations Order, called a "QDRO" for short, is required to bind the pension plan administrator to the terms of the pension division or distribution).
In the absence of a separation agreement or consent order/judgment, a trial regarding equitable distribution is the only alternative. Such a trial will seldom be undertaken without substantial values of assets on either or both sides of the marital partnership. The claim for equitable distribution must be filed after the separation of the parties and before their divorce to be valid. The trial may be conducted during the interim between separation and judgment of absolute divorce (at least one year) but the final judgment may not be signed until after the judgment of absolute divorce is entered.
There is a presumption in the statutes and the cases that an equal distribution will be an equitable one. An unequal division of marital property should occur only when it is obvious to the court that it would be unfair and inequitable for the court to evenly divide the property based on such factors as are shown in N.C.G.S. 50-20(c)(1)-(12). In most cases involving an agreement, an equal division will be negotiated. In most cases that will involve a proposed unequal division, trial will be necessary if the inequality is substantial.
There is also a presumption that everything acquired during the marriage is marital property. Separate property remains separate, regardless of who may have title to it, except that:
When a party uses separate consideration to acquire real property and then places title in the name of husband and wife ("tenancy by the entirety"), there is a strong presumption that the realty is marital property because a gift has been made to the marriage, and the presumption can only be overcome by clear, cogent and convincing evidence.
When marital property or funds are used to acquire property after the separation, the property is characterized as marital because of the source of the funds.
When there is an increase in the value of separate property during the marriage, and the increase is due to marital efforts, expenditure of marital funds or other marital causes, the increase is deemed "active appreciation" and is marital property.
Four Basic Tasks.
The role of the court in an equitable distribution case (and thus the lawyers when negotiating settlement) is to perform four basic functions regarding the property of the parties: identify, classify, evaluate and divide. This is, of course, much more difficult than it appears at first glance.
Identification. In the process of settling property division (or going through an equitable distribution trial), it is first essential to identify the property -- regardless of whether it is separate or marital property, what is it and who has it? Is it a house, a pension or a potted palm?
Classification. Classification means labeling it as separate, marital or mixed. Classification (and the next topic below, evaluation) are done as of the date of separation. Separate property is, by definition, nondivisible property. It can be taken into account in negotiating or ordering a division, but it cannot be divided since it is not marital property. The most common examples of separate property are:
A. Property acquired by either party before the marriage.
B. Property acquired by one party during the marriage through gift or inheritance.
C. Professional or business licenses which cannot be transferred.
Anything outside of these is, as a general proposition, marital property.
It is possible, of course, for property to have both aspects--marital and separate. By way of example, if Major Brown inherits a parcel of land before his marriage to Mrs. Brown, and then he improves the land by building the marital residence on it during his marriage to Mrs. Brown, the land would retain its separate character but the house would be marital property. Similarly if Major Brown inherited a bank account of $500 before his marriage to Mrs. Brown, and then he added $600 to the account during the course of their marriage (from marital funds), the bank account would also have two different components - separate and marital.
Evaluation. Once the classification has taken place, then the property must be evaluated. Evaluation is as of the date of separation, although the court must, at the request of either party, take into account increases of decreases in value as of the trial date. The court and the parties must use the net value after liens, not the gross value of the property. A house worth $100,000 that has a mortgage of $80,000 remaining is, by way of example, only worth $20,000 in divisible marital equity. A car purchased for $10,000 will probably be worth $8000 after a few months of being driven. If it has a lien on it from the finance company of $7000, then the net value for equitable distribution purposes is only $1000.
Sometimes valuation poses a real problem. This occurs in the case of certain "collectibles" (such as guns, coins or stamps), closely held investments (i.e. real estate partnerships) and private business interests (a medical practice or a beauty salon). In such cases, an appraiser should be hired to make an independent evaluation of the particular item. It is also fairly common to hire an appraiser for the marital real estate of the parties so as to pin down a value for the homeplace. Problems also arise when a substantial period of time has elapsed after the date of separation, and the court in these cases may consider post-separation appreciation or depreciation of property, as well as payments made on property and debts after the DOS.
Distribution. The final task is to divide the property. The court can do an unequal division based on enumerated factors set out in N.C.G.S. 50-20(c), such as the physical/mental health of a party, substantial separate assets, wasting or squandering of marital property, having custody of minor children, etc. Marital fault (i.e., adultery, abandonment, domestic violence) cannot be used as a ground for unequal division of marital property. Sometimes the court uses a distributive award, which is a lump sum paid at interest over no more than six years, to equalize the parties' shares of the marital property.
Since there is seldom a neat and easy way to cut every asset down the middle, a settlement involving division of marital property frequently involves allocating items to each party with the final result that the total net values in each one's "column" are approximately equal. Great care should be taken to avoid the unnecessary sale of assets when this will greatly reduce the value of the property (i.e. selling the homeplace during a period when residential sales are slow or the market is depressed) or when the sale will result in a penalty (such as liquidating an Individual Retirement Account or a tax-deferred savings plan).
SECURING THE OBLIGATION.
It is also important for the attorney to consider securing (with a deed of trust, mortgage or other security instrument) any property division obligation which is to be paid in future installments. A life insurance policy, for example, should be considered against the possibility of the death of the payor before the installment payments are complete. Seldom will a claim against the estate of the payor be a satisfactory remedy for the payee in such a case. Instead of instant cash (as with a life insurance policy), the creditor-spouse is left with a time-deferred claim against the estate of the deceased payee, which must be asserted against the administrator/executor (who could be the new spouse of the payor) and may be asserted against an estate which is basically insolvent. For all of these reasons, it pays to have a frank discussion of securing property installment payments in the event of death or, quite possibly, some wrongful conduct of the payor such as waste, conversion or dissipation.
TRACING AND COMMINGLING PROBLEMS.
Separate property remains separate, regardless of the name in which it is titled. N.C.G.S. 50-20(b)(2). It is sometimes necessary to trace property acquired during marriage back to a separately titled asset. By way of example, the pre-marriage car of Major Brown is separate property. If during the marriage he trades in the car and puts the resulting $500 sale proceeds into a bank account in the name of only Major Brown, the resulting account (although acquired during the marriage) is still separate property. The same would be true if he put the account in the name of his uncle or his daughter.
Gifts between husband and wife are considered separate property only if such an intention is stated in the conveyance. N.C.G.S. 50-20(b)(2). Thus if Major Brown transfers the title on his marital car to Mrs. Brown and indicates in an unequivocal fashion that he wishes for her to have full possession and ownership of the car in the event of divorce, he will be barred from later changing his mind and stating that he had intended all along for this to remain marital property. The same result would occur if he were to take the cash money from the sale of the car ($500) and give it to Mrs. Brown for her to use as she saw fit.
The basic rule here is that you can trace back property acquired during the marriage to its separate origins only if you keep accurate accounts and do your best to sequester the property, not commingle it with marital property. The commingling of separate property into marital property causes confusing and unpredictable results. As a general rule, the titling of real estate from a separate name into the marital names will create a strong presumption that a gift to the marriage was intended and that the real estate has become marital property. Such a presumption does not apply in the case of personal property, however, and each such case is considered on its own merits. The mere fact that separate funds have been deposited into a jointly titled account, or that separate property has been jointly titled, does not in itself prove that a gift to the marriage has occurred. This is an area of the law where an accurate understanding of the law of gifts and trusts (resulting, implied and constructive) is absolutely necessary.
EQUITABLE DISTRIBUTION AND THE MARITAL RESIDENCE.
A frequent problem occurs in the evaluating and dividing of the marital residence or "homeplace." This is a major asset in most marriages, and the attorney will want to offer some constructive suggestions to the client other than "sell it and split the proceeds."
Sometimes, in fact, sale and division of the proceeds is the only alternative. The sale price is ordinarily reduced by the amount of the real estate commission, the mortgage pay-off and any other usual closing costs before the proceeds are divided equally. The closing attorney should be instructed to make out separate checks to the parties or, as a less desirable alternative, a joint check to both of the parties which must be negotiated by both after the closing.
In some cases one of the parties will be in a position to purchase the interest of the other. This is commonly the case where there is little or no equity in the real estate. Sometimes the purchase is actually more of a trade-off, as in the case of allocating a house to the wife when the husband is keeping his pension rights, free from any claim by her. As stated above, the value of a good real estate appraiser cannot be overstated. With the appraisal in hand, the attorney can calculate the equity based on the mortgage pay-off (available by calling the bank or taking a look at the amortization tables which the client should have).
The purchaser will try to negotiate a sale price which is lower, possibly by including an artificial reduction due to what a real estate commission would be if the house were sold on the open market. The seller will, on the other hand, usually try to negotiate the highest available price, such as by including the realtor's "suggested asking price," even though very few houses actually sell at the initial listing price.
Sometimes there are not enough assets for one party to trade off the interest of the other in the marital residence. In appropriate cases, a second mortgage can be obtained to fund this purchase, and that would become a second lien on the property. Transfer of the land over to the purchaser would then be done by a deed containing an assumption clause, requiring that the purchaser assume the existing first mortgage and hold the seller harmless from any liability in connection therewith.
PRACTICAL PROBLEMS OF PENSION DIVISION.
Deciding on the division of the military pension is a formidable task for a legal assistance attorney. Until October 1, 1997, any such pension had to be "vested" for North Carolina law to consider it divisible. Now, however, vested and unvested pensions (that is, those for servicemembers who can retire and those who are not yet eligible) are divisible property to the extent they are acquired during the marriage, and the current law applies to lawsuits started on or after October 1, 1997.
The first job of the legal assistance attorney, of course, is to gather the facts about domicile of the military member. Under the Uniformed Services Former Spouses Protection Act, a soldier's pension is only divisible in his state of domicile or (by his consent) in another state, such as where he is stationed. A close comparison of the law of these two states will give the military attorney a much better idea of how to protect the rights of the soldier or the spouse, whoever is the client.
PRESENT VALUES, FUTURE DIVISION.
Sometimes it is necessary to come up with a "fair market value" of the pension rights to help in the determination of whether a trade-off is fair or even possible. Such an evaluation is a difficult task. It would typically involve projection of the life span of the military member, estimation of when he or she will retire, estimation of the grade of the member upon retirement and other factors.
If a pension cannot be divided by offsetting its present value against other marital property, then the court can use a deferred division approach, granting to the nonpensioned spouse a portion of the pension payments "if, as and when received." The amount awarded is based upon the proportion of the number of years of marital pension service to the total years of pension service. By way of example, if Major Brown had been married for 20 years at the time he attained 20 years of service, then half of his then-existing pension rights would be marital. If he were to retire exactly at his 20th year anniversary, half of each monthly pension check would belong to Mrs. Brown as her share of marital property. If he had been married for 10 years during his 20 years of service, then one-fourth of the pension would be Mrs. Brown's.
All of this is complicated. Pensions are worth lots of money, and the danger of malpractice is great. In every case where pension division is an issue, the best that can be done by a legal assistance attorney in this situation is to:
A. Slow down the process and make sure that each client has all of the information he or she may need in order to reach a reasonable decision.
B. Put as many decisions in writing as possible for concurrence by the client, with an outline of the factors to be considered in making the decision and a basis for the attorney's recommendation.
C. Keep a record of each transaction/interview against the possibility of the malpractice claim in the future.
D. When in doubt, associate competent co-counsel (such as a civilian practitioner) and get expert help to be sure that the client has been properly advised.
DIVISION OF OTHER PERSONAL PROPERTY.
Other intangible assets are seldom a serious problem for equitable distribution. Unless there is a penalty attached to early withdrawal, the assets can simply be divided equally or equitably as the parties choose. The valuing of such assets means calculating the amount that is in the account or, if a security is involved (such as stocks or bonds), calculating the value based on the price on the date of separation.
As to tangible personal property, FMV (fair market value) should really stand for "Flea Market Value," since the real value put on personal property by the courts is not its original cost and not its replacement value, but rather the price it would bring at a yard sale or an auction. Many times the parties are in substantial disagreement as to how to divide these assets. As a consequence, much valuable time is wasted over such issues as dividing ashtrays, rugs and lamps. It is wise to suggest to the parties that they figure out an easy way of doing this property division, such as the auction method. Using this approach, one party places tags on each item (or lists prices next to the items on a personal property list). The other party then states whether he/she will buy the item for that price or sell the item to the other party at that price. This is a fast and fair way of dividing up tangible personal property.
Another approach is to use the option system. Under this procedure, the winner of the toss of a coin will have first choice of all items of tangible personal property. The loser has the second choice and the choices then alternate back and forth between the parties until all items are chosen or rejected.
Attorney's fees can be awarded if post-judgment action is necessary to enforce the court's award. Fees are also allowed if injunctive relief must be obtained to prevent a party from damaging or destroying marital or separate property. Otherwise, no attorney's fees can be awarded in equitable distribution cases. The provision for interim allocation of marital assets, N.C.G.S. 50-20(i1), can be used to obtain an advance on marital funds when one of the parties needs access to such property in order to pursue the litigation, hire an attorney, or obtain appraisers, accountants and other experts.
The above is merely a summary of equitable distribution in North Carolina. A vast quantity of information is omitted or still in the process of development through cases in the North Carolina Court of Appeals and the North Carolina Supreme Court. While some answers are given to frequently-encountered problems in the text above, the best way to approach equitable distribution issues in counseling the legal assistance client is to remain current in one's reading and continuing legal education opportunities. The rapid pace at which the law in this area is developing simply demands that legal assistance attorneys be fully educated in mechanics of division of marital property.
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