In the United States, there are two ways property is divided in a divorce: community property division and equitable distribution.
In a community property state, the rule of law is that both spouses own all income and assets earned or acquired during the marriage. Both the husband and wife equally own all money earned by either one of them during the marriage, even if only one spouse worked. All property acquired during the marriage with "community" money is owned equally by both, regardless of who paid for it. The same is true of debt, both spouses own an equal amount of any debt accumulated during the marriage.
North Carolina follows equitable distribution laws.
In equitable distribution states, when the spouses are unable to resolve property rights on their own, the Court determines what is a fair and reasonable distribution for each spouse. It does not matter who bought the property or whose name it is titled in - if it was purchased during the marriage, it is considered "marital property" (property owned by both spouses). It is important to understand that equitable does not mean equal, however the law assumes that an equal (50/50) division of the marital property will be equitable unless factors exist to disprove that (see below for factors). Equitable Distribution states also recognize separate property, which is property that belongs to one spouse and not the other.
Separate property includes:
- Inherited Property (such as money or real estate);
- Property acquired prior to marriage (including real estate, bank accounts, and vehicles);
- Gifts to one spouse by a third person - (gifts from one spouse to the other are marital assets).
- If an asset was acquired prior to the marriage and there is an increase in value because of work by the other spouse, the increase in value may be considered marital property, but the asset itself remains separate property. Separate property can become marital property. For example, if it is used to benefit both spouses, it may then considered a gift to the marriage.
Another important consideration in equitable distribution is retirement income, such as IRAs, pension plans and 401(k) Plans. Often times, retirement accounts have money in them that is separate (contributed prior to marriage or after separation) as well as marital (contributed during the marriage). The gains or losses to retirement accounts due to market forces are also divisible between the spouses, and it is important to understand how the law in this area works. See below for more information about retirement accounts.
There are several factors the Court uses to determine what is equitable. Among them are:
- How long the couple was married
- The age, physical and emotional health of each
- The income or property each spouse brought to the marriage
- The standard of living during the marriage
- Economic circumstances of each party at the time of division
- Income and earning capacity of each, including education and training
- Direct contributions to increased value of separate property
- Tax consequences for each party
- Present value of property
- Needs of the spouse who has physical custody of children
- Support obligations for prior marriage
- Expectation of retirement benefits which are separate property
- Expectation of retirement benefits which are marital property
- Liquid or non-liquid nature of property
- Difficulty in valuing interest in a business
- Conduct by one party that relates to the economic condition of the marriage - economic fault (see below)
- Any other factors which the court may deem relevant.
Behavior such as adultery, domestic violence, abandonment, and alcohol and drug abuse is not relevant in determination equitable division of marital property. Even if a spouse admits to having engaged in any or all of these behaviors, he or she would may still be entitled to a 50%(or greater) share of the marital property. Economic behaviors (economic fault) are relevant. For example, if a husband transfers marital property to his mistress immediately before separating from his wife, the law says this is economic fault, and this conduct is considered by the court in deciding on a fair division of property.
Distribution of Property - Retirement Accounts
Included in the property to be divided are retirement plans, pension plans, investments, stocks, bonds, etc. acquired during the marriage. In most cases, a divorced spouse will need a court order to collect on an ex-spouse's retirement income in the future.
Dividing or valuing retirement plans can become extremely complex. There are many different types of plans with different interpretations of the law, requiring documents to be drafted in a specific way, and with different tax consequences. For some plans, orders must be approved by the plan administrator, in addition to the Court, to be enforceable. Because the issues can be complex, it is best to hire an attorney to protect your rights and ensure the documents are properly prepared.
The information provided below is a broad overview of different methods by which retirement plans are divided. Contact an attorney at Haas & Associates, P.A. for specific information about your situation.
A Domestic Relations Order (DRO) is used for state government plans, such as teachers, state employees and local government retirees.
A Qualified Domestic Relations Order (QDRO) is used for ERISA (Employee Retirement Income Security Act of 1974) retirement plans such as Tax-Deferred Saving Plans, and most large companies' 401(k) or pension plans.
Court Order Acceptable for Processing (COAP): Sometimes referred to as a Qualified Court Order, these orders are used for Federal Government employees who are members of either the Civil Service Retirement System (CSRS) or the Federal Employees' Retirement System (FERS). Examples: employees of the Postal Service, Federal Aviation Dept., civilian employees on military bases, etc.
When a Court Order Acceptable for Processing is drafted, monthly benefits will be paid to the Alternate Payee (ex-spouse) when the Participant/Employee retires, and will continue being paid for the lifetime of the Participant/Employee. If the Alternate Payee (ex-spouse) is entitled to a Former Spouse Survivor Annuity (agreed upon by both parties or court ordered), the monthly annuity will start when Participant/Employee dies and continue for the life of the Alternate Payee (ex-spouse).
Military Pension Division Order (MPDO):The Military Retirement System provides benefits to members of the uniformed services. Examples: Army, Air Force, Navy, Marines, Coast Guard, Reserves, National Guard, Public Health Service, and the National Oceanic and Atmospheric Administration. The Uniformed Services Former Spouses Protection Act lays out requirements for a MPDO.
DRO's and QDRO's are the most common types of orders used in the equitable distribution of retirement benefits. A DRO or QDRO is a court order which instructs the plan administrator to pay an Alternate Payee (the former spouse) a portion of retirement benefits accrued by the other spouse. Each type of plan has its own guidelines and methods for distributing benefits. Below is a discussion of the various types of plans, and the manner in which they will distribute benefits between divorcing parties.
ERISA (Employee Retirement Income Security Act of 1974) Defined Benefits Plans:
A private retirement plan set up by a company, union or person that provides a Participant/Employee with a monthly income for life upon retirement. Examples: IBM Retirement Plan, AT&T Pension Plan, Nortel Retirement Plan.
When a QDRO is drafted for an ERISA Plan, benefits may be paid to the Alternate Payee (ex spouse) when the employee/participant (other spouse) reaches earliest retirement age or when he/she actually retires or at any time in between (dependent on the order). The benefit is distributed in monthly payments for either the lifetime of the Participant or the Alternate Payee (depending on how the order was written).
ERISA Defined Contribution Plans:
This is a private, tax-deferred savings plan set up by a company, union or person that will provide an income to a participant/employee upon retirement. Examples include any Thrift Savings Plan, Profit Sharing Plan, or Employee Stock Ownership Plan sponsored by a company, such as a company 401(k) Plan that the employee contributed to. Regardless of whether the company matched the contribution.
Because these plans have an actual value at any given time, benefits may be paid in a lump sum payment to the Alternate Payee (ex-spouse) immediately, when the Participant/Employee reaches his/her earliest retirement age, or at any other time as permitted by the plan.
Equitable Distribution is a complex area of law, and it is important to be informed. The experienced family law attorneys of Haas & Associates, P.A. will guide you through the legal process. Commitment and responsiveness to our clients' needs are our top priorities. Please contact us at 1-866-783-9669, or via our online contact form, to get more information and schedule a consultation with one of our attorneys.