Separation and Divorce: Dividing Assets and Debt
In your spare time during your adult life and for the length of your marriage, you’ve carefully managed and accumulating assets. Maybe you’ve not so carefully managed and have accumulated significant debt. Now the marriage is ending and you’re having to learn a whole new language to keep track of what goes where and who owes what to whom. This is the language of equitable distribution, and it is an issue that has to be cleared up before you can safely obtain a divorce judgment.
The whole point of equitable distribution is to classify property as separate, marital, divisible and/or non-statutory so that each party can walk away with their fair share of the assets and of the debt. Getting the right piece of property (or debt) in the right category will help you keep track of what goes where. But what are those categories, and what to I list under each one? What follows is a very basic description of the categories designed to help you speak the language of equitable distribution and increase the productivity of your initial meeting with your attorney.* There is alot of information contained in this entry, but equitable distribution can be a tricky issue that requires precise language. Ensure that the attorney you trust with the division of your assets speaks this language fluently.
Marital, separate, divisible and non-statutory: The property or debt must be classified as either (a) marital, (b) separate, or (c) divisible. Yes, as with all things legal, there are times when the property or debt will not fit into any of these definitions, and thus, is something else. I call it, for lack of a better term, (d) non-statutory. It is not subject to distribution, but it can be considered as a distributional factor by the court when dividing the stuff that IS divisible. An example of non-statutory property is: a commission entirely earned (house was listed after date of separation) and received by the real estate agent spouse after the date of separation and before the date of the equitable distribution (ED) trial. Although the earnings of one spouse after the date of separation are generally that spouse’s separate property, the court will consider this commission as part of the “big picture” when allocating assets and debt that are divisible.
Active and passive increases in value of separate property: Active increases are those increases in the value of separate property occurring during the marriage and before the date of separation, caused by the effort of either or both spouses, e.g., the husband paints his barn. These increases are marital. Passive increases are those increases in the value of separate property occurring during the marriage and before the date of separation, caused by something other than the efforts of either or both spouses, e.g., inflation. These increases are separate. There is a presumption any increase in the value of separate property occurring during the marriage and before the date of separation is marital. The burden thus, shifts to the party claiming the increase to be passive to prove it. There is no such thing as an active or passive increase in the pre-separation value of marital property or in the post-separation value of separate property. Any post-separation increase in the value of separate property is the property of the spouse owning the separate property and thus, is either his non-statutory property or his separate property (under a source of funds theory) and properly treated as a section 50-20(c)(1) distributional factor.
Active and passive increases (decreases) in value of marital property: We see alot of this related to the bursting of real estate bubble in 2008. Active increases (decreases) are those increases (decreases) in the value of marital property occurring after the date of separation and before the ED trial, caused by some post-separation action or activity of a spouse. N.C.G.S. Sect. 50-20(b)(4)a. This increase (decrease) is not divisible property, but is a distributional factor under N.C.G.S. Sect. 50-20(c)(11a) or (12). Passive increases (decreases) are those increases (decreases) in the value of marital property occurring after the date of separation and before the date of the ED trial, and caused by something other than a post-separation action or activity of a spouse, e.g., inflation. N.C.G.S. Sect. 50-20(b)(4)a and c. This increase (decrease) is divisible property. As neither party has the benefit of a presumption with respect to post-separation events/activities, the party claiming the increase (decrease) to be divisible has the burden of proof. If that burden is not met, i.e., no proof the increase was passive, the increase will be treated as a distributional factor. This is tantamount to saying there is a presumption the post-separation increases (decreases) in marital property are active.
Active and passive income from marital property: Passive income from marital property received after the date of separation and before the ED trial is divisible property, e.g., dividends from marital stock. N.C.G.S. Sect. 50-20(b)(4)c. Income received from marital property after the date of separation and before the ED trial resulting from the post-separation efforts of a spouse (active income), e.g., increase in value of marital property stock portfolio occurring as a result of the management of account by the husband, is not divisible, not marital and not separate. N.C.G.S. Sect. 50-20(b)(4)a; Sect. 50-20(b)(1); and Sect. 50-20(b)(2). It is this spouse’s non-statutory property and is properly treated as a N.C.G.S. Sect. 50-20(c) (11a) distributional factor.
Transmutation: This occurs when something happens to alter or change the classification of property during the course of the marriage. Marital property is rarely transmuted into separate property, although it can occur, e.g., spouse (who has right to manage marital funds) uses marital funds to purchase a gift to give to his wife and makes clear his intention that the gift is to be his wife’s separate property. Most often our concern is with whether separate property is transmuted into marital property. An example: separate funds are commingled with marital property, e.g., placed in a joint checking account, during the marriage and before the date of separation. Has the character of the separate funds been altered? Yes, a transmutation of the separate funds into marital funds has occurred unless the party claiming a portion of the funds to be his separate property is able to trace those separate funds into their current form. In essence, the commingling of separate and marital assets, occurring during the marriage and before the date of separation, raises a rebuttable presumption that all the assets are marital.
Marital property presumption: Although the ED statute speaks in terms of a marital property presumption, N.C.G.S. Sect. 50-20(b)(1) it does not mean all property owned by one or both of the spouses is presumed marital. To be entitled to the presumption, a spouse claiming a property is marital is required to prove it was acquired by one or both of the spouses during the course of the marriage, before the date of the separation and presently owned. If this fact is shown and there is no contrary evidence, the property must be classified as marital. If the other spouse, however, is able to show the same property was acquired by gift or bequest or in exchange for his separate property, the asset must be classified as his separate property. The failure in the burden of proof by the party claiming the asset to be marital, however, does not mandate its classification as separate. The party claiming the asset to be her separate property has the burden of showing the asset is her separate property, which can be met by showing it was acquired by her before the marriage. If neither party meets their burden, the property passes outside ED and thus, the party having title retains ownership.
Marital gift presumption: Sometimes known as the McLean presumption. A titling of separate real property in the entireties raises a rebuttable presumption the grantor intended a gift of his separate properties to the marital estate. To rebut the presumption there must be clear and convincing evidence no gift was intended. If the presumption is rebutted, the property retains its separate property classification under the exchange provision of section 50-20(b)(2). If the presumption cannot be rebutted, the property must be classified as marital. If not rebutted, the grantor spouse is entitled, however, to have his separate property contribution to the marital estate considered as a distributional factor. The McLean presumption does not apply to personal property.
Marital debt: Debt, like assets, must be classified, valued and distributed. Debt is marital if acquired by one or both spouses during the marriage and before the date of separation, presently owed, and acquired for the benefit of the marital estate. As with assets, how the debt is titled (which spouse owes the debt) is not determinative. The biggest controversy here is whether the debt was for the benefit of the marital estate. An example: dental bill incurred by one spouse and owing at time of separation has been held not to be marital. Another example: credit used to purchase clothing for a spouse is generally considered marital. There is no presumption that a debt accumulated during the marriage and before separation is for the benefit of the marital estate. Thus, the burden is on the party claiming the debt to be marital to prove it is presently owed by one or both of the parties, was incurred during the marriage and before the date of separation and was for the benefit of the marital estate. Beware: (1) if the debt is in the name of both spouses, is classified as marital and distributed to the husband and the husband does not pay the debt, the creditor (who is not a party to the ED action) can proceed with collection against either or both parties; (2) if the joint debt is classified as marital and distributed to the wife to pay and the wife petitions for a discharge in bankruptcy and that petition is granted, her obligations to the creditor and to the husband under ED can be discharged, thus, eliminating any claim he has against the wife for failure to abide by the ED order.
Divisible debt: Increases in marital debt and any finance charges, i.e., interest, related to the marital debt arising after the date of separation and before the date of the ED trial is divisible debt. N.C.G.S. Sect. 50-20(b)(4)d. Also, any post-separation (pre ED trial) payments made by a spouse on a marital debt is divisible property. Id. The discretion heretofore lodged in the trial court to treat these post-separation payments as a distributional factor or provide a direct credit to the spouse making the payments (see Hay supra) is eliminated. If the payments are made pursuant to a post-separation order, can these payments be classified as divisible in light of N.C.G.S. Sect. 50-20(f) which states that ED should be made “without regard” to support payments arising out of the marriage? The issue has not been decided by the courts. It appears, however, that N.C.G.S. Sect. 50-20(f) merely prohibits post-separation/alimony payments (arising from the marriage at issue) from being considered as a distributional factor. It does not attempt to prevent the proper classification of property or debt. New debt acquired after the date of separation and related to marital property, e.g., repairs to marital home, does not appear to be a divisible debt and could be treated as a distributional factor or the trial court could provide a credit to the party making the payment. A good argument can be made that post-separation payment of taxes and casualty insurance on marital property is marital debt to the extent the taxes and/or insurance premium accrued before the date of separation.
Acquired: Property is acquired when legal title comes into the husband and/or wife. Property is also acquired when some third party has legal title but is holding the property in trust (express, resulting or constructive) for the benefit of the husband and/or wife. If a spouse claims property owned by some third party is a marital asset, that spouse has the burden of showing the existence of the trust and the third party must be joined as a party to the ED action. This third party is a necessary party within the meaning of Rule 19 of the Rules of Civil Procedure. Although the issue of the existence of a trust is normally a question for the jury, in the context of the ED action there is no right to a jury trial.
Source of funds: The general principle provides that if the source of the funds used to purchase the property was marital, the property acquired with those funds is also marital. This is also known as tracing. It is an easy concept if the exchange occurs during the marriage and before the date of separation. What if marital funds, existing at the date of separation, are used to purchase property after the date of separation? Is this new asset marital, separate, divisible or non-statutory? By definition it is not marital, separate or divisible. Nonetheless, the source of funds theory has been used in the past to qualify the post-separation exchange asset as marital. The same principle would appear to justify the classification of fire insurance proceeds, received after the date of separation, where the fire policy insured the marital home which burned either before or after the date of separation. Did the adoption of the divisible property statute, reflecting an effort to deal with post-separation events, signal an end to use of source of funds as a methodology for classifying post-separation exchanges? It can be argued it does, but I don’t think so. That statute does not even address post-separation exchanges of marital property, suggesting the legislature was aware of our case law on the source of funds theory and elected to leave it in place. Furthermore, what the Court of Appeals had to say before the divisible property statute, seems to still apply: without thesource of funds theory, there would be “an incentive for a spouse to convert marital assets titled in his or her name as soon as the parties separated, thereby undermining the very point of the (ED) Act – to alleviate the inequities caused by the title theory approach to the distribution of marital property. The lesson: property acquired in fact after the date of separation may indeed be properly classified as marital property because in theory it was acquired before the date of separation.
* * *
* This entry borrowed heavily from a manuscript by attorney and former Judge K. Edward Greene entitled “The Language of Equitable Distribution”. We thank Mr. Greene for his permission to use his work. We have removed case citations, but are happy to provide them upon request.