What is Divisible Property?

The classification of Divisible Property for an Equitable Distribution claim is often the hardest concept for individuals to grasp due to the fact that the definition is excessively long and involves the transformation, modification and/or change of a marital asset.

1. All appreciation and dimunition in the value of marital property and divisible property of either party occurring after the date of separation and prior to the date of distribution, except that appreciation or dimunition in value which is the result of postseparatoin actions or activities of a spouse are treated as divisible property.

2. All property, property rights, or any portion thereof 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 and before the date of separation, including, but not limited to, commissions, bonuses, and contractual rights.

3. Passive income from martial property received after the date of separation, including, but not limited to interest and dividends.

4. Increases and decreases in marital debt and financing charges and interest related to marital debt.

Divisible property exists to cover the gap between separation and trial

Divisible property was added to the North Carolina Equitable Distribution Act by S.L. 1997-302 and applies to actions filed on or after 1 October 1997. Before it existed, the marital estate was frozen at separation and everything that happened afterwards could only be handled as a distributional factor. The category now gives the court a way to classify, value and divide the change itself.

It is a third classification, not a subset of marital property. G.S. 50-20(a) requires the court to determine what is marital and divisible property and to distribute both, and where the evidence shows divisible property exists the court must classify, value and distribute it. Failures to do so have been repeatedly remanded, including a passive increase in the value of a marital IRA in Nicks v. Nicks, 774 S.E.2d 365 (N.C. Ct. App. 2015), and a significant postseparation decrease in marital retirement accounts in Cheek v. Cheek, 211 N.C. App. 183, 712 S.E.2d 301 (2011).

Postseparation changes in value are presumed divisible

The most important rule in this area is a presumption. In Wirth v. Wirth, 193 N.C. App. 657, 668 S.E.2d 603 (2008), the North Carolina Court of Appeals held that “under the plain language of the statute, all appreciation and diminution in value of marital and divisible property is presumed to be divisible property unless the trial court finds that the change in value is attributable to the postseparation actions of one spouse.” Romulus v. Romulus, 215 N.C. App. 495, 715 S.E.2d 308 (2011), and Cheek v. Cheek both follow it.

The presumption sets a low threshold for the party raising the issue. In Lund v. Lund, 779 S.E.2d 175 (N.C. Ct. App. 2015), a wife met her burden of showing divisible property existed by testifying to her opinion that the marital home had increased in value during the separation; if the court found her credible, the increase had to be classified as divisible unless the husband established that it was active.

Rebutting it takes more than showing that a spouse kept working. In Romulus the presumption that the postseparation increase in the value of a dental practice was divisible was not rebutted by evidence that the husband continued at the practice after separation, because simply doing everything he had done before did not establish that his actions caused the increase.

Active and passive have settled meanings

G.S. 50-20(b)(4)a. excludes from divisible property any appreciation or diminution “which is the result of postseparation actions or activities of a spouse.” Brackney v. Brackney, 199 N.C. App. 375, 682 S.E.2d 401 (2009), supplies the working definitions: passive appreciation refers to enhancement of value due solely to inflation, changing economic conditions, market forces or other circumstances beyond the control of either spouse, while active appreciation refers to the financial or managerial contributions of one of the spouses.

The Court of Appeals in Brackney also identified the question findings must answer — whether the increase or decrease in value “is the result of” postseparation actions or activities of a spouse. Where an order does not resolve that, the matter is remanded for a finding on whether the change came from a spouse’s conduct or from market forces.

A change that is active is not simply ignored. It moves across to G.S. 50-20(c)(11a), which puts acts of either party to maintain, preserve, develop or expand, or to waste, neglect, devalue or convert the marital or divisible property after separation and before distribution among the factors the court weighs when it is deciding whether an equal division would be equitable.

Earnings from marital effort received after separation

G.S. 50-20(b)(4)b. covers “all property, property rights, or any portion thereof 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 and before the date of separation, including, but not limited to, commissions, bonuses, and contractual rights.” The test is when the work was done, not when the money arrived.

That reversed a real gap in the earlier law. Before divisible property existed, commissions and bonuses that were not vested or certain at separation fell outside the estate altogether — see Godley v. Godley, 110 N.C. App. 99, 429 S.E.2d 382 (1993), and Edwards v. Edwards, 110 N.C. App. 1, 428 S.E.2d 834 (1993). The burden of separating preseparation from postseparation effort can rest on the receiving spouse, as with the corporate distributions in Simon v. Simon, 231 N.C. App. 76, 753 S.E.2d 475 (2013).

G.S. 50-20(b)(4)c. adds “passive income from marital property received after the date of separation, including, but not limited to, interest and dividends.” Income generated by a spouse’s postseparation labor is not within it.

Divisible debt is narrower than it once was

G.S. 50-20(b)(4)d. now covers “passive increases and passive decreases in marital debt and financing charges and interest related to marital debt.” The word “passive” was added by S.L. 2013-103 with effect from 1 October 2013. Before that amendment all postseparation increases and decreases in marital debt were divisible property; since it, an active reduction — a spouse paying the mortgage down out of postseparation earnings — is no longer classified as divisible property.

Those payments are not lost. They fall to be weighed as a distributional factor under G.S. 50-20(c)(11a) when the court decides whether an equal division would be equitable, which is how postseparation mortgage payments were treated in Peltzer v. Peltzer, 222 N.C. App. 784, 732 S.E.2d 357 (2012).

New borrowing after separation is neither marital nor divisible. In Warren v. Warren, 175 N.C. App. 509, 623 S.E.2d 800 (2006), an increase in an equity line caused by additional draws after separation was the separate debt of the spouse who incurred it, although postseparation payments that reduced financing charges and interest on the marital debt were divisible property.

Divisible property is valued at the date of distribution

G.S. 50-21(b) fixes two different valuation dates: marital property is valued as of the date of separation, and “divisible property and divisible debt shall be valued as of the date of distribution.” The same asset therefore produces two figures, and both have to be proved.

The date of distribution has been treated as the date the equitable distribution judgment is entered. In Nicks v. Nicks the evidence of the increased value of a marital IRA at the date of trial was sufficient to support classification of the increase as divisible property even though the judgment was entered four months later.

Evidence at both ends is essential. Burger v. Burger, 790 S.E.2d 683 (N.C. Ct. App. 2016), holds that gains and losses can be classified as divisible property only where the evidence shows an increase or decrease in the value of the account after separation and before the date of distribution; a court cannot distribute a change nobody has proved.

Common questions

What is the difference between marital and divisible property in North Carolina?

Marital property under G.S. 50-20(b)(1) is what the spouses acquired during the marriage and before separation and still owned at separation, valued as of the date of separation. Divisible property under G.S. 50-20(b)(4) is what happened to that estate afterwards — passive appreciation and diminution, postseparation receipts earned by marital effort, passive income, and passive changes in marital debt — valued as of the date of distribution under G.S. 50-21(b).

Is an increase in a retirement account after separation divided in North Carolina?

Usually yes, where the growth was passive. Under Wirth v. Wirth, 193 N.C. App. 657 (2008), all appreciation and diminution in the value of marital property is presumed divisible unless the court finds the change is attributable to a spouse’s postseparation actions. Failing to classify and distribute a passive postseparation increase in a marital IRA was error in Nicks v. Nicks, 774 S.E.2d 365 (N.C. Ct. App. 2015).

Does a bonus paid after separation count as divisible property?

It can. G.S. 50-20(b)(4)b. classifies as divisible property anything received after separation but before distribution that was acquired as a result of either spouse’s efforts during the marriage and before separation, expressly including commissions, bonuses and contractual rights. What matters is when the work that earned it was performed, not when the payment was made or which spouse’s name is on it.

Written for North Carolina law and reviewed by David P. Sheehan, attorney, Charlotte. General information, not legal advice — see the disclaimer.