North Carolina Equitable Distribution laws are extremely complicated and confusing.  One of the most frequent questions I get involves the handling of an inheritance, financial gift, or lawsuit proceeds that one spouse receives during the marriage.  The question is simple, “Do I have to give half to my husband/wife?”  The answer is a little more complex.

N.C.G.S. Section 50-20 deals with the distribution by the court of marital and divisible property.  Notice that the title of the statute does not address the division of “separate property”, which is what we are talking about when we are discussing an inheritance, gift, or some other financial proceeds that is defined under section 50-20(b)(2).  The formal definition of separate property is:

“all real and personal property acquired by a spouse before marriage or acquired by a spouse by devise, descent, or gift during the course of the marriage. However, property acquired by gift from the other spouse during the course of the marriage shall be considered separate property only if such an intention is stated in the conveyance. Property acquired in exchange for separate property shall remain separate property regardless of whether the title is in the name of the husband or wife or both and shall not be considered to be marital property unless a contrary intention is expressly stated in the conveyance. The increase in value of separate property and the income derived from separate property shall be considered separate property. All professional licenses and business licenses which would terminate on transfer shall be considered separate property.”

I’ve highlighted three sections of this definition of separate property that I’d like to address.  The first states that “real or personal property acquired by a spouse before marriage or acquired by a spouse by devise, descent, or gift during the course of the marriage” is considered separate property.  What this means is that anything you acquired prior to your marriage, (401(k) plans, investments, real estate, etc.) that you have not otherwise “gifted” to your spouse, will remain your separate property and is not subject to equitable distribution.  Also, any financial or other assets that you received from a third party as an inheritance or gift is your separate property.

The second section that I’ve highlighted involves how you should handle property that is acquired in exchange for separate property.  In other words, if you inherit a piece of real estate during your marriage, and you sell that property – the proceeds from the sale are yours alone.  North Carolina follows the source of funds rule – so as long as you can trace back an asset that you own to a piece of separate property, then the asset you currently own is also separate property.

The final point that I would like to make about this section is that the increase in value of separate property and the income derived from separate property is also separate property.  Let’s say you were smart enough to invest in Microsoft back in the 80’s, or perhaps your family was, and now you have a million-dollar plus investment portfolio.  If you and your spouse are living off the income from these investments, and you choose to divorce, all of this income, as well as the gains on the investment portfolio, are considered your separate property and not subject to distribution.

The final point I would like to make is that in North Carolina, it doesn’t matter whose name is on the account (investment, checking, etc.) that you are claiming is separate property.  I recently had a client whose income, all of which was derived from separate investments, was deposited into a joint checking account and the spouse tried to claim that these were marital funds.  The court agreed with me and said that they were in fact my client’s separate property, regardless of the name on the account.

There are a number of caveats, exceptions, etc. to these rather broad statements that are beyond the scope of this blog post, and if you have further questions I recommend that you contact an family law or divorce attorney to go over your personal situation.