Equitable Distribution, Part 1: Classifying Property
North Carolina uses a concept known as “equitable distribution” to divide marital and divisible property between two spouses who are divorcing. The term “property” used within the context of equitable distribution includes both assets and debts.
There are four types of property that must be identified as part of the equitable distribution process: marital property, separate property, mixed property and divisible property.
“Marital property,” which is subject to division between the parties, is generally considered all property acquired, and income earned, during the marriage and prior to the parties’ separation, unless there is a prenuptial agreement or a postnuptial agreement.
“Separate property” is property that is owned solely by one party. A party’s separate property is not subject to division between the parties. Examples of separate property include the following: property acquired prior to the marriage; gifts from third parties or inheritance; any property acquired in exchange for separate property; and income earned after the date of separation.
“Mixed property” is property that has both a marital and separate component. The following is a hypothetical and simplified example of mixed property: prior to the marriage, a party has a vested interest in a retirement plan. During the marriage, the party’s employer makes additional contributions to the retirement plan. In this situation, the portion of the retirement plan that was owned prior to the marriage would be considered said party’s separate property, and the contributions to the retirement account that were acquired during the marriage would represent marital property that is subject to division between the parties.
“Divisible property” is a form of property attained after the date of the parties’ separation, but which is distributable as part of the equitable distribution process. Divisible property may be distributed between the parties or considered as a distributional factor to support an award of an unequal distribution of marital and/or divisible property in favor of one party. Examples of divisible property include rental income earned on marital real property; federal or state income tax refunds attributable to income earned during the marriage; bonuses or commissions that were earned during the marriage but not paid or received until after the date of separation; and passive appreciation or depreciation of an asset or debt.
If a party disputes the classification of an asset or debt, such as by claiming that an asset is his or her separate property, that party has the burden of proving by a preponderance of the evidence that the property is his or her separate property. By way of example, if a party contends that an asset, such as an investment account, is marital property, and the other party contends that it is his or her separate property, it would likely be necessary to trace the investment account to its origin to determine its proper classification. Such situations may require extensive discovery and research as well as the skills and assistance of a forensic accountant in tracing the asset to its origin.
This post is part one in a series on equitable distribution. Visit our Family Law Blog again soon for Equitable Distribution, Part 2: Factors and Local Rules, to learn more about how Buncombe County handles equitable distribution cases, and what judges in North Carolina may consider when ordering a division of marital property.
This article is intended for information purposes only and is not to be considered or substituted as legal advice. This article is based on North Carolina laws in effect at the time of posting.