Equitable Distribution (Division of Property)

Before October 1, 1981, property was divided between divorcing spouses according to which spouse held title to the property. This frequently resulted in unfair property divisions that did not take into account the contributions of a spouse whose name was not on the title.

Since October 1, 1981, property has been divided according to principles of equitable distribution. Equitable distribution is based on the idea that marriage is a partnership and that both spouses make vital contributions and are equally entitled to a share of the property acquired during the marriage.

The general rule is that an equal division of marital property is equitable, but there are many factors a court will consider to decide whether an unequal division is appropriate. These principles apply to dividing marital debt as well. As an alternative to going through court procedures, the parties can agree to a property settlement that divides the property in any way the parties decide.

The first step to estimating how a court will divide property in an equitable distribution proceeding is to classify all the property into separate, marital, and divisible property. Marital property and divisible property are subject to division. Each spouse’s separate property belongs to that spouse and will not be divided.

Separate property is property that a spouse owns and to which the other spouse has no legal claim. The following kinds of property are considered separate:

  1. Property owned by either spouse before the marriage began
  2. Property acquired by either spouse by inheritance, whether before, during, or after the marriage
  3. Property acquired by gift during the marriage, unless the gift is explicitly made to both spouses jointly
  4. Property acquired after the date of separation
  5. Property acquired in exchange for separate property
  6. Appreciation and income derived from separate property
  7. Professional and business licenses that would terminate on transfer

Marital property is defined as all presently-owned property acquired by either spouse or both spouses together during the marriage and before the date of separation, other than property that qualifies as separate property. Separate property can become marital property through the “gift to the marriage” doctrine. For example, imagine that a woman owns a home. She meets a man and gets married. The home remains her separate property. After a few years, the couple decides to move. The wife sells the home and the husband and wife together buy a new home in their joint names. Even if the new home was purchased entirely with cash from the sale of the first home, which was the wife’s separate property, the new home will be classified as marital property unless there is clear and convincing evidence that the wife did not intend to make the new home a gift to the marriage.

Divisible property is divided as if it were marital property. Divisible property includes:

  1. All increase or decrease in value of marital or divisible property that occurs after the date of separation but before the distribution of property, except increase or decrease in value caused by the actions of one spouse or the other. For example, any increase of the value of the marital home after the date of separation is divisible property unless the spouse living in the house actively improved the house’s value, such as by renovation.
  2. All property or property rights received after the date of separation but before the date of distribution that was acquired as a result of the efforts of either spouse during the marriage. This can include things like commissions, bonuses, contractual rights, or stock options that were earned during the marriage but paid or exercised after the date of separation.
  3. Passive income from marital property received after the date of separation. This can include things like stock dividends or rent from rental property.
  4. Increases and decreases in marital debt and financing charges and interest related to marital debt.

Once all the property has been classified, it can be divided. Generally, an equal division of the property is presumed to be equitable and fair, but there is a list of factors the court must consider to decide whether an unequal distribution is appropriate. The factors, as listed in North Carolina General Statute section 50-20(c) are:

  1. The income, property, and liabilities of each party at the time the division of property is to become effective.
  2. Any obligation for support arising out of a prior marriage.
  3. The duration of the marriage and the age and physical and mental health of both parties.
  4. 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.
  5. The expectation of pension, retirement, or other deferred compensation rights that are not marital property.
  6. 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.
  7. Any direct or indirect contribution made by one spouse to help educate or develop the career potential of the other spouse.
  8. Any direct contribution to an increase in value of separate property which occurs during the course of the marriage.
  9. The liquid or nonliquid character of all marital property and divisible property.
  10. 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.
  11. 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. The trial court may, however, in its discretion, consider whether or when such tax consequences are reasonably likely to occur in determining the equitable value deemed appropriate for this factor.
    (11a) 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.
    (11b) In the event of the death of either party prior to the entry of any order for the distribution of property made pursuant to this subsection:
    a. Property passing to the surviving spouse by will or through intestacy due to the death of a spouse.
    b. Property held as tenants by the entirety or as joint tenants with rights of survivorship passing to the surviving spouse due to the death of a spouse.
    c. Property passing to the surviving spouse from life insurance, individual retirement accounts, pension or profit sharing plans, any private or governmental retirement plan or annuity of which the decedent controlled the designation of beneficiary (excluding any benefits under the federal social security system), or any other retirement accounts or contracts, due to the death of a spouse.
    d. The surviving spouse’s right to claim an “elective share” pursuant to G.S. 30 3.1 through G.S. 30 33, unless otherwise waived.
  12. Any other factor which the court finds to be just and proper.

There is no exact science to the application of these factors. The court is required to consider every factor in the list. If there is a balance in favor of one party or the other under the factors, the court is permitted (but not required) to award an unequal division of property. If you need help or a legal opinion as to what a court is likely to do in your situation, please contact us.