Equitable Distribution

In 1981, the North Carolina legislature created a right to an equitable distribution. Under the law, a spouse who separates is entitled to a share of assets and liabilities acquired during their marriage upon their separation and divorce without regard to title or fault. As a result, separation and divorce triggers the division of property of every conceivable description. The equitable distribution law treats the marriage as an economic partnership and requires parties to classify, value and distribute assets and liabilities acquired during the marriage. In practice each of these steps can be complicated and difficult even in relatively small estates. What follows is a general outline of the law which is not intended to be fact specific. You should consult with one of our attorneys about the specific facts of your case to avoid possible misinterpretation of this information.

The Process
The first step in equitable distribution is to identify and classify all property and debt which parties own, or owe, on the date of separation. There can be no claim for equitable distribution until there has been a separation. Moreover, an equitable distribution claim must be made prior to divorce. The date of separation is an important date. If debt is paid or property disposed of prior to separation, it is difficult or impossible to account for it in an equitable distribution proceeding. Once the property and debt is identified, it must be classified as either marital or separate. Property owned on the date of separation which was acquired after the date of marriage is presumed to be marital. Debt acquired prior to the separation and after marriage is only marital if it can be demonstrated to have been incurred for a marital purpose. Separate property is property owned on the date of separation which was either acquired prior to marriage, is traced to property acquired prior to marriage, was inherited during the marriage or which has been given as a gift to one party or the other during the marriage by a third party. Except under limited circumstances, gifts from one party to the other during marriage are classified as marital. The classification step often involves the discovery and the assimilation of documents, tracing the source of assets and discovering the reason debt was incurred. Any given asset or liability may be classified as either marital, separate or mixed.

The second step in equitable distribution is valuation. Absent agreement by the parties, it is required that a marital asset be valued as of the date of separation and distribution before a court may make a final distribution. It may be desirable to value separate assets either because the asset is mixed or because the value of the separate estate of a party may be relevant to the division of the property. The courts have been open to a wide variety of valuation methods and may consider opinion testimony from experts about value. Evidence of value runs the gamut from something as simple as a page from the NADA book, to an expert opinion about the value of a minority ownership interest in non-voting stock of a closely held business. Experts commonly engage in valuation of ownership interests in businesses, qualified and non-qualified retirement plans, stock options, executive compensation, contractual rights, commercial and residential real estate, antiques and collectibles and a wide variety of other real and personal, tangible and intangible property.

An asset that has been classified as mixed (part marital and part separate) may have appreciated or depreciated during the marriage. Active appreciation in the value of a separate asset during marriage is martial. Passive appreciation of a separate asset during the marriage is separate. Passive appreciation is caused by market forces outside the control of an owner, or is created by the action of someone or some thing other than the efforts of the spouse. Active appreciation is caused by the efforts of the spouse during the marriage and prior to the separation. Whether appreciation or depreciation is active or passive may make a substantial difference in the value of the marital estate.

The final step in equitable distribution is distribution. There are presumptions in favor of an equal division and an in kind division of marital assets. The court has great discretion in making an uneven distribution so long as at least one of the statutory factors affecting distribution is present. Those factors include income, separate property, prior support obligations, marital duration, health issues, child custody needs, home maker contributions, separate pension benefits, financial and non-financial contributions to the property by the party not having title to property, contributions to the career of the other spouse, active contributions to increase the value of separate property during the marriage, liquidity of marital property, difficulty of valuation of marital property, the need to leave a marital asset with a party, tax consequences, waste by a party or efforts by a party to preserve property after separation or any other factor the court finds to be just and proper.

There is an orderly process for the disposition of these claims. The first step is to establish the position of each party about the classification, valuation and distribution of assets and liabilities. Most jurisdictions in the state require a financial settlement conference facilitated by a mediator prior to the trial of these cases. In most jurisdictions a judge or trial court administrator keeps track of the exchange of information and determination of what issues are left for the judge to resolve. These issues are ultimately defined in a pre-trial order prior to any final hearing by the court. As a preliminary matter, it may be desirable to allocate assets and responsibility for debt to one party or the other. The courts have broad discretion to do this subject to an accounting in the final equitable distribution.

Some cases are more complex than others. Even couples having a home, automobiles, personal property and a retirement plan can encounter tracing issues or a retirement plan that must be divided which can complicate matters. However, it is often possible to resolve many issues in these cases by agreeing on appraisers for the real property and personal property or by dividing property in kind.

Business Owners and their Families
The process of equitable distribution is challenging for entrepreneurs and individuals with diverse business and property interests. It is not unusual for entrepreneurs to have several enterprises which may be related financially and by management, whether or not they are legally related. Often there are multiple owners or even different classifications of ownership for an enterprise. The enterprise may own property unrelated to the operation of the enterprise. Separation of ownership interests or divestiture of unrelated assets may cause liquidity issues that threaten the value or even the viability of an enterprise. Ownership interests may be owned by trusts, subject to Employee Stock Ownership Plans or otherwise subject to third party claims as part of an estate plan, succession plan or exit plan. Owners may have made exit or succession plans that had the effect of minimizing taxes which become unworkable as a result of the dissolution of marriage. Equitable distribution claims impact the operation of closely held businesses and the plans of business owners.

Our attorneys engage in a pragmatic approach to the equitable distribution of business interests. As in any commercial dispute, we focus on the potential effect of the claim on the enterprise and the family of the owner. We work to establish a clear hierarchy of objectives informed by our client's wishes, wisdom and values. We assist our clients in evaluating risk and reward. Our firm has a broad and deep reservoir of talent in areas critical to the needs of business owners and their families including skill in creating effective business organizations, minimizing risk and uncertainty among owners, dealing with complex tax issues, issues involving commercial real estate, as well as succession, exit and estate planning.Our attorneys have special expertise in mergers and acquisitions and the valuation of businesses in a variety of contexts. Our attorneys and staff collaborate to bring the most appropriate expertise to the problem at hand. We have the experience and capacity to deal effectively with large numbers of documents. We have existing relationships with and are comfortable working with professionals including accountants, insurance advisors, corporate counsel, financial planners, investment advisors, business valuation experts and a variety of other professionals who may be needed to resolve equitable distribution issues.

Our Commitment
Our attorneys strive to use our experience, knowledge and creativity to help obtain our client's objectives in court, arbitration, mediation or through negotiation.  We work to marshal the resources within and outside our firm to accomplish an equitable distribution consistent with our client's objectives.