Category: Marital Property

What is the Impact of Marital Debt?

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By Amy A. Edwards

I recently had a client ask what it means, exactly, to have marital debt. That’s a fair question. In North Carolina, the legal process of dividing marital assets and marital debts is called equitable distribution. Spouses or former spouses have a marital estate, and each usually gets half of the marital estate.  Think of the marital estate like a pie. Marital assets and marital debts make up the pie, which is sliced and cut in half.

With several exceptions, marital assets are assets acquired by either spouse during the time the parties are married and living together. Marital assets are the starting point of the marital estate pie but if there are no marital assets, then only the marital debt is divided between the parties. Separate property includes things like inherited property or property acquired before marriage. It is not added to the pie, so it isn’t be sliced up and divided between the parties. After the marital assets are divided, the debts are taken into account and either divided or not divided, depending on whether the debts are marital.

To be a marital debt, the debt must be generated during the marriage, and exist at the date of separation. The debt must be for the “joint benefit” of the marriage in order to be marital. Usually, a joint benefit is something that benefits both parties, even if the benefit is indirect, such as using a credit card for groceries, gas in the car, something for the children, etc.  If a debt is a separate debt, it does not have any impact on the pie that is the marital estate. The person with separate debt is stuck with responsibility for paying it. On the other hand, marital debt is “credited” to the share of the marital estate that the person paying the debt will receive. The marital estate is thereby adjusted to account for the payment of marital debts.

Example A (no marital debts)
Marital Assets: $100,000 (house equity, cars, etc.) ÷ 2 = $50,000 each
Husband gets $50,000
Wife gets $50,000

Example B ($10,000 in marital debt)
Marital Assets: $100,000 (house equity, cars, etc.) ÷ 2 = $50,000 each
Husband gets $50,000
Wife gets $50,000

But Wife pays $10,000 in marital debt, so she really only got $40,000.  Husband would owe Wife $5,000 in assets or money so that each spouse gets $45,000 (50% of the adjusted marital estate).  But if Wife paid $10,000 in separate debt (i.e., non-marital debt), she would not get any credit for paying it and each spouse would still get $50,000 in value for his or her share of the marital estate.

 

 

Your Nest Egg: Retirement Plans and Divorce

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A retirement plan may be the most valuable asset any couple owns.  Pensions are essentially promises to pay the employee when the time arrives, based on the years of employment and other factors. A defined contribution plan, like an IRA or 401(k), is an actual account containing various investments.  These accounts are intended to be used for income upon retirement, and there are severe tax penalties if you use or withdraw funds if you are under the age of 59 and ½, on top of the funds being considered income.

When a couple separates, they may choose to enter into a contract called a separation agreement, which resolves all of the marital property issues.  On the other hand, you or your spouse may file a lawsuit called equitable distribution and ask the court to make the decisions about who keeps what.  Yet another way to finalize the property is through mediation of some other type of alternative dispute resolution.

An account must be classified, meaning it will be considered marital, separate or mixed (part separate and part marital) property.  Next a value must be agreed upon or ruled upon by the court.  CPAs or other financial professionals will give expert opinions when disputed.  The court will also rule on the plan value for funds earned before the marriage, if any, and the vale based on any funds contributed after the separation.  Matters become more complicated if there are required minimum distributions (RMDs) based on age after the separation, withdrawals after separation (thereby reducing the overall value), roll-overs or companies managing the plan change several times over the years.

When a retirement benefit must be divided, there is typically a court order directing the plan administrator to send two checks each month when the benefits are paid, one to you and one to your former spouse.  This order is called a QDRO (qualified domestic relations order), or sometimes just a DRO, depending on whether the account is subject to a federal law called ERISA.  For military accounts, a MPDO (military pension division order) is the type of court order that accomplishes a division of benefits.  Done properly by your attorney, there is no taxable event when a retirement is divided.  It stays there until the effective date for payment, and you and your spouse will each claim only the amount paid to you for tax purposes.   Another consideration to take into account is how death benefits are assigned, and who any beneficiaries will be.   If there are any outstanding loans against the account, the court or the parties must determine how that debt will be treated.

Can My Ex Look at My Credit Report?

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The Problem: Hide the Ball

The short answer: No! He or she can’t legally access your credit report without your permission. When I begin representing a client, I suggest he or she pull a recent credit report because that is the only way to identify whose name is on what account. I generally don’t need to see it, but I do need my client to be certain what debts are reflected there so we can address them in court or by settlement. That may be the only way to see if your ex has opened a credit card in your name, or jointly in both names. People are sometimes surprised to discover accounts they were unaware of, opened when the ex signed his or her name on the account application. It is not uncommon for the other spouse to open a post office box so mail does not come to the residence. You probably won’t know about this credit problem unless you look.

Now What?

If you find out your ex has been snooping around looking at your credit report, what can you do? You have various rights pursuant to the Fair Credit Reporting Act, including the right to sue him or her. You may want to consult with a consumer law attorney about the remedies available to you pursuant to that statute, including any claim for attorney’s fees. You can also file a police report. Federal law 15 U.S. Code §1681q “Obtaining information under false pretenses” says: Any person who knowingly and willfully obtains information on a consumer from a consumer reporting agency under false pretenses shall be fined under title 18, imprisoned for not more than 2 years, or both. The Federal Trade Commission has a link for consumers to file complaints. Consider asking the credit reporting agency to place a fraud alert on your account, or have your credit frozen, which protects you from any future activity unless you specifically agree.

While there are many web sites that advertise credit reporting services, you should consider checking your credit on the federally recognized web site where you can access free credit report each year: www.AnnualCreditReport.com  This site permits you to access free credit reports from the three credit reporting, TransUnion, Equifax, and Experian once each year for free. Ideally, you should access one credit report every four months. That way, you can cross reference the data available to you and find any variations on a regular basis all year long.

 

Businesses in NC Marital Property Division Cases

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In equitable distribution cases when the court divides marital property, a business ownership interest is an asset to be identified, classified, valued and distributed to (usually) one of them. Like any asset, it might be marital property or separate property and it may be distributed to either spouse if it is marital. The scope of this topic is very broad and cannot be fully addressed here. This article is a brief overview of the things experts, such as CPAs, might consider when performing a business valuation.

Business Entity: What is the Structure?

The way a business is organized impacts the value of it and the manner in which the business is taxed. Sole proprietorships are businesses owned and operated by an individual, created without filing any formal paperwork. Other businesses are created formally by paperwork filed with the NC Secretary of State.  Limited liability companies (designated with “LLC”) are more suited to ownership by an individual or a few people, and they usually require less paperwork. Corporations (designated with “Inc.”) are formal, and require special paperwork to be annually maintained, corporate officers to be elected and formal bylaws to be followed.

Why the Business Structure Matters

There is value added or subtracted from the value of a business based on many factors, including whether the business is publicly traded or owned by a few people as a closely held corporation (CHC).  CHCs owners are often family members who sign buy-sell agreements that require the co-owners to give each other the first right of refusal if one chooses to sell his or her share of ownership. The ability of an owner to sell his or her ownership interest is key because market value is based on what a willing buyer would pay a willing seller. In CHCs for example, willing buyers might require that only a few people, such as family members or business partners, get the first right of refusal in the event a spouse wants to sell. This can reduce the value of the business. If the business owner is a licensed professional, such as a doctor or lawyer, who works alone as a solo practitioner, the value is limited because the value of the practice depends on that one person whose license isn’t transferable. While a business or practice has a value, the actual professional license or business license that terminates on transfer is separate property. Businesses and any co-owners must be named as a party to the lawsuit for the court to have authority to order them to do things.

Factors That Impact Value

Name recognition of the business is known as “good will.”  For example, a local car dealership that has existed for 40 years has more name recognition, and may be more valuable than, a brand-new dealership. Consumers tend to more highly trust an established business. Tangible assets contribute to the value as well. Company assets might include equipment and office supplies, vehicles, bank and investment accounts, certain contractual rights, promissory notes and outstanding accounts payable to the company, inventory, and even real estate. Retained earnings are funds that remain in the business accounts, instead of being distributed or paid to the owner(s). This is critical when determining income for purposes of support to the other spouse, especially if it is unclear whether these funds are counted twice, once as business value and again as income. Company debts and expenses can include mortgages, lines or credit and business loans, insurance, state and federal taxes for the business and employees, payroll, retirement contributions for employees, health insurance, etc.  Business value is also impacted by potential liability in the event the business is faced with litigation (personal injury, unemployment claims, malpractice, bankruptcy, etc.) or the likelihood of anticipated litigation.

 

Grey Divorce: Issues For Older Spouses

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Middle-aged and older spouses have the same issues as other couples when they separate and divorce, although they are viewing them from the other direction. They don’t usually have any minor children but they often have substantial assets. People in second or third marriages are more likely to have premarital agreements or “prenups” that dictate what must be done about property and alimony if the couple splits. Another likely scenario of those with silver hair and more than one marriage under their belts is tracing property.  In our state, tracing is used to decide what share of an asset is separate property, and what share, if any, is marital property. This is expensive and time-consuming especially when addressing real estate, investment and retirement accounts. Therefore, this article assumes all assets are marital property and that there is no premarital agreement.

Alimony & Expenses

North Carolina courts must consider the incomes and reasonable expenses of both spouses in alimony cases.  Spouses who are nearing age 65 are facing Medicare and “doughnut hole” insurance instead of private insurance. Medicare could make things better or worse financially when compared with the health, vision and dental insurance offered by a spouse’s employer and whether the employer paid at least part of the premiums. Settlements and court orders for people nearing 65 typically take this into account, changing the amount of support once one or both spouses have Medicare coverage. Older spouses routinely lose loved ones and inherit property. While inheritances are usually considered separate property, assets such as rental property or investments are considered income for purposes of alimony.

Alimony: When Should You Retire?

When alimony is looming, parties may bicker about the reasonable age that the breadwinner or the financially dependent spouse should retire. Although it is extremely rare, I’ve actually had a case in which the judge ruled that the breadwinner couldn’t afford to retire at a certain age.  Of course, he was legally free to retire any time but his alimony was still ordered based on the same income he had from his employment. Judges consider a number of things when deciding if someone should be able to retire for purposes of determining income for an alimony case, including age, health, work history and whether the spouse is genuinely ready to retire or just saying that for court.

Parties might dispute the choice of a retired spouse not to charge adult children for work-related childcare of grandchildren. Spouses can disagree about the timing of a spouse electing to receive Social Security retirement payments, which vary in amount depending on what age the person is. Life insurance becomes more important when dealing with older spouses, particularly if a spouse is depending on alimony that ends if the other spouse dies.  When someone retires, they often lose the term life insurance that is offered by many employers. Another dilemma can arise when the policy was purchased when the insured spouse was young because the cost of buying that protection now would be prohibitively expensive.

Marital Property

Divorcing couples may decide that it makes sense to have one spouse stay in the home and “buyout” the other spouse’s share, which might take less time and involve less risk than trying to sell it.  When there is no mortgage to consider, the cost for that buyout can be too high when there aren’t lots of liquid assets to make up for it. In that event, they will probably end up selling the home and dividing the proceeds, which might raise tax issues if a spouse doesn’t intend to purchase another home with his or her share of the sales proceeds.

Couples who are retired don’t usually have the same opportunity to rebuild financially as those who divorce in their thirties or even forties. So, when pensions or other retirement benefits are the only income besides social security, dividing them equally is a financial hit that can’t easily be absorbed. There are tax penalties for those who take a distribution of money from their retirement before 59.5 years old. On the other hand, when there are IRAs or other accounts that allow owners to choose the dates and amounts of money to withdraw, there might be RMDs (required minimum distributions) of retirement. When spouses have multiple retirement vehicles, some might be taxed differently, such as the Roth IRA versus the traditional IRA. Accordingly, each one has advantages and disadvantages even if they appear to be equal in value. Other benefits might be tax free, such as military disability, which is separate property but counts as income for alimony.

Two’s Company and Three’s a Crowd: Third Parties in Family Law Cases

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Family law cases can be contentious enough with two people, but when there’s a third-party, it gets even more contentious and complicated. Third parties occur most frequently when marital property is at issue, and when there is a custody battle underway.

Third Party Rights

Once a third-party is named as a party in the lawsuit, he or she is entitled to the same rights as the other named parties in the lawsuit. But in an equitable distribution case, those rights extend only to the asset. Third parties have the right to call witnesses to testify, perform depositions, serve discovery, file motions, present evidence to the court, etc.

Equitable Distribution: Co-owners of Property

Most couples own property either in their joint names together or individually. But sometimes, a couple owns assets with a third-party who is a co-owner (CO). For instance, when a couple purchases a home, the in-laws might co-sign the mortgage note so the couple will qualify for the loan. Since they share legal responsibility for the mortgage debt, the in-laws might then want their names added to the deed. When a spouse files a lawsuit for equitable distribution, the division of marital property, the court makes a ruling on ownership of assets and debts. In that scenario, four people would be COs even though the younger couple would be the only residents living in the home. The law requires COs to be joined as parties to the case so they can protect their ownership interest. If the third-party COs are not included as parties to the lawsuit, the court does not have jurisdiction over that property. In the recent Carpenter v. Carpenter, the NC Court of Appeals vacated a court order because the lower court made a ruling on an investment account without naming the child as a third-party because the child was listed as an owner of the account. In another recent case, Nicks v. Nicks, the same result occurred when there were ownership interests in a business, but the business was not joined as a third-party to the lawsuit.

Child Custody Cases

Both parents have a constitutional right to the care and custody of their children. When it comes to non-parents, third parties have a heavy burden to bear if they ask the court to intervene as a party in a child custody case. The non-parent must show the parents’ constitutional rights should be limited because they are unfit. Or, the non-parent must prove the parents have acted in a manner that is contrary with their parental obligations. In other words, non-parents must show there is a very serious problem with the parents before the court could designate them as third parties because the parents have constitutional rights as parents. If they are granted the right to intervene in the case, they are then give the rights of any other party to the case.

Grandparents

Grandparents face the same hurdles as any other third-party when it comes to child custody cases. They have no special status in a child custody case. However, they do have one special rule. Because they are grandparents, they can in some circumstances be designated as third parties if a custody case is pending so they can ask the court for court-ordered visitation. This generally means the court will set aside time for visits, as opposed to giving them the ability to make parenting decisions or have any type of physical custody, which is really physical “possession” of the child.

How Do I Get My Name Off the Mortgage?

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To answer this question, you must understand the basic definitions and differences between property ownership and liability for mortgage debt. These terms are easy to confuse because, very often, the same people who are joint owners are also liable for mortgage debt.

Ownership: Deeds

A deed is the document that most typically transfers ownership of real property. Other times, a Last Will and Testament or even court order will convey an ownership interest. Ownership may be conveyed solely to one owner of the property; other times ownership is conveyed to multiple owners, as is often the case when two married people own a home together.  A deed means ownership of real property.

Liability: Mortgage Debt

Just because you are a joint owner of a residence doesn’t automatically mean you are also jointly responsible for the mortgage debt. There are occasions where only one owner is liable for the mortgage debt. When one of the property owners is self-employed, for example, the mortgage lender might approve the loan based only on the income of one spouse who has income that’s easily verified by a W-2 statement. If you sign the promissory note (i.e., the mortgage debt), you are responsible for repayment of the debt. If you didn’t sign the note, you generally have no responsibility to pay it unless there is a court order or separation agreement that requires you to pay it. Additionally, even if you did not sign a promissory note, you probably signed a document that allows the mortgage to be a lien on property in which you have an ownership interest.

How Do You Remove Your Name?

Let’s assume the property owners are married and they both signed a promissory note for the mortgage debt. If they sell the residence, the mortgage is satisfied (paid off) and neither spouse’s name remains on the mortgage. If one spouse keeps the residence, the other spouse will typically want his or her name “removed from the mortgage.” For our purposes, that means the spouse keeping the property will refinance the mortgage debt, acquiring a brand new mortgage debt in his or her individual name. When the new mortgage debt becomes effective, the old mortgage debt that was in both names will then be satisfied. If the mortgage debt is already in the sole name of the person who keeps the residence, there would be no need for the mortgage debt to be refinanced.

How is Marital Property Valued?

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In equitable distribution marital property cases, the court has a legal duty to identify assets and classify them as marital, separate, divisible or mixed assets (part marital and part separate). Parties are always free to stipulate or agree that assets have certain values, but if they cannot, the judge must make the decision on what each asset is worth.

What Does the Law Say About Value?

For marital property purposes, the value of a marital assets is fair market value, “the price which a willing buyer would pay to purchase the asset on the open market from a willing seller, with neither party being under any compulsion to complete the transaction.”[1] The court must use the net value of marital property, meaning the fair market value minus the outstanding debt at the time the parties separate. [2] If the court finds that a property is worth the same thing as the outstanding debt, the value is zero. Courts also assign negative values to assets worth less than the outstanding debt. New vehicles often fall into this category when the down payment is not substantial.

Valuing Marital Assets is Mandatory

Only if an asset, or part of an asset, is marital does the court then have to make a ruling on the value of it. It sounds like common sense but if neither of the parties presents evidence to the court of the value, the court cannot just make up a value. In one case[3], a couple owned a gas station, and the business was in the husband’s name. Although the wife proved that the business was established after marriage and before the separation, she failed to offer any credible evidence on the value of the business. The court must value an asset in order for it to become a marital asset. Therefore, the court had no choice but to award the business as his separate property.

Property Appraisers

The most obvious way to prove the value of an asset is by an appraiser who has special skill and experience with the asset at hand. People frequently have appraisals performed for jewelry, real estate and antiques. Often, the appraiser is hired by one or both of the parties to prepare a report for the court, to be used during the trial. Appraisers value marital property and the increases in value of separate property when the non-owner says there is an increase in value during the marriage. They also determine values of “divisible property,” which includes certain increases or decreases in the value of marital property from the date of separation until the date of the trial.

Certified Public Accountants

CPAs value any number of things, including the value of ownership interests in corporations, medical or legal practices, stock options and investment accounts, and other intangibles (i.e., the abstract concept instead of something you can hold in your hand). One routine asset that CPAs value is the marital portion of retirement accounts, meaning the value created between the date of the marriage and the date of the separation. All benefits generated before the marriage and after the separation belong to the employee spouse. If there are contributions to, or withdrawals from, a retirement account such as a 401(k) plan, the CPA also values those in comparison with the overall value.

Do-It-Yourself Values

There are a few assets that are straight forward enough for clients to testify about in court, with the help of a few trial exhibits. Vehicles sometimes fall into this category, mainly because there is a ready-made source of information concerning the value, such as the N.A.D.A Blue Book for vehicles. The value of whole life insurance is based on the cash-surrender-value of the policy, which is easy to obtain. Term life insurance has a zero-dollar value. The value of publicly traded shares (not a closely held corporation) on a given date can be shown by using the stock market index. However, when the shares are part of a larger portfolio or investment package, or if some of them are bought and sold before reaching the courtroom, a spouse must value the entire portfolio or investment package which isn’t as easy to value.

If you have unique personal property, like a moose head, you might find a ready-made market on E-bay or some other similar site. Depending on which side you’re on in a case, one disappointing (or exciting) thing is depreciation. The value of personal property, such as household furniture, at the date of separation is a depreciated value, meaning garage-sale value. This usually arises with brand new vehicles and household property. For example, a $1,500.00 computer purchased three years ago might be worth $200.00 on your date of separation.

Retirement as Marital Property

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Retirement benefits are often the most valuable asset a couple owns.  Pensions are essentially promises to pay the employee when the time arrives, based on a formula calculated on the years of employment and other factors. A defined contribution plan, like an IRA or 401(k), is an actual account containing various investments. It has an exact value at any given time. Retirement is intended to be used for income upon retirement, and there are severe tax penalties if you use or withdraw funds if you have not reached a certain age, on top of the funds being considered income.

Who Decides The Amount Each of Us Gets?

When a couple separates, they may choose to enter into a contract called a separation agreement, which usually resolves all of the marital property issues.  Yet another way to finalize the property is through mediation or some other type of alternative dispute resolution. You or your spouse may file a lawsuit for equitable distribution and ask the court to make the decisions about who keeps what.

The Nuts & Bolts

In North Carolina, as part of the claim for division of marital property (called equitable distribution), the retirement must be classified, meaning it will be considered marital, separate or mixed (part separate and part marital) property.  Next, a value must be agreed upon or ruled upon by the court.  CPAs or other financial professionals will give expert opinions when disputed, such as the exact value of a pension plan when the person has not yet retired. The court will also rule on the plan value for funds earned before the marriage, if any, and the value based on any funds contributed after the separation.  Matters become more complicated if there are required minimum distributions (RMDs) based on age after the separation, withdrawals after separation (thereby reducing the overall value), roll-overs or multiple companies managing the plan if the company has changed or been merged with other companies over the years.

How Are the Benefits Actually Divided?

When a pension must be divided, there is typically a court order directing the plan administrator to send two checks each month when the benefits are paid, one to you and one to your former spouse. This order is called a QDRO (qualified domestic relations order), or sometimes just a DRO, depending on whether the account is subject to a federal law called ERISA. For military accounts, a MPDO (military pension division order) is the type of court order that accomplishes a division of benefits. Done properly by your attorney, the division of benefits does not create a taxable event. Some retirement benefits, IRAs for example, are divided by a roll-over transferring a portion of the account to the other person’s account and the process is completed. Another consideration to take into account is how death benefits are assigned, and who any beneficiaries will be. If there are any outstanding loans against the account, the court or the parties must determine how that debt will be treated.

Are Credit Card Debts Marital?

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In short, credit card debts can be marital, just as any other type of debt. In contrast with marital property, the law doesn’t assume a debt is marital just because it was incurred during the marriage. If a debt is marital, each party is equally responsible for it, although the court usually assigns it to one party to equalize the net part of property each party gets. If a debt is separate, it isn’t calculated into the marital estate. To understand credit card debt, we must first look at what a marital debt is.

The Timing of Marital Debt

A marital debt must generally be incurred by one or both spouses while they are married and before the date of separation (we’ll call it DOS) unless the proceeds were used to pay off the “old” marital debt that existed when the parties separated. [1] Like marital property, marital debt must exist at DOS. If you just paid off your credit card with your bonus from work, and then you separate, the debt doesn’t exist and it is not a marital debt for which you would get credit.

What’s in a Name?

Marital debt can be in the names of one spouse or both. However, there is one important distinction between debt and marital debt. The court can say who is responsible only as between two spouses. But the court can’t tell a third party, such as Mastercard or Visa, that they can only enforce the debt against one person when two people signed the agreement to repay them. The court may indemnify a spouse, meaning that if the husband is assigned to pay the credit card debt and he fails to do so, he has to repay the wife if the credit card company sues her for payment. But if the other spouse had the money to repay you, he or she would’ve probably paid the debt in the first place.

Joint Benefit: The Key Issue

Unlike marital property, to call a debt marital, it must be incurred for the joint benefit of the parties. [2] There is no presumption that the debt is for the benefit of both parties. If you want to prove the credit card debt is marital, you have the burden of proof to show that the charges were for the joint benefit of the parties, up to the DOS. Courts have vast discretion in ruling on whether charges benefited both parties. Charges for groceries and gas probably are, but charges for one spouse’s dental treatment probably aren’t.  Most people make on-going charges, including charges made after DOS. Another difficulty can be non-descriptive statements. How do you show what you purchased from Wal-Mart for $175.43 from six months ago? A critical difficulty is proving what the outstanding credit card balance only on DOS was used to purchase. If the balance at DOS resulted from purchases made over three years, you still have to prove which ones were marital.