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Overview of North Carolina Divorce and Separation and Legal Assistance Services Revised September 16, 2005 DISCLAIMER: The information provided herein is intended to be useful, accurate, and up to date. However, there is no substitute for consultation with qualified legal counsel. Furthermore, it is possible that information that is accurate as of the date this article was posted may become inaccurate thereafter due to appellate court decisions and the enactment or amendment of new laws, regulations, and policies. This article cites additional on-line resources (mostly government sites) believed to contain accurate information. However, the author of this article does not guarantee the accuracy of such information and has no ability to correct any errors that might be contained therein. Finally, it is noted that a great deal of information is presented here, with the intent of being useful to attorneys as well as non-attorneys. However, this article is not, nor is intended to be, a comprehensive treatise on family law. Again, while this article can assist, there is no substitute for personal consultation with an attorney 1. Purpose. This article provides an overview of divorce and separation in North Carolina. It lays out issues that need to be resolved in divorce cases, and information to assist those seeking an equitable settlement of divorce issues. The article explains separation agreements and how the Camp Lejeune Consolidated Legal Assistance Office can help in the process. Additionally, this article provides assistance in locating other online resources, including the text of various statutes and regulations, articles concerning family law topics, and government sources concerning direct payments from the military finance center, tax, survivor benefits, and child support enforcement. This article should assist those negotiating a separation agreement and can identify issues for those who can not reach an equitable compromise. The specific topics covered and links to those sections are indicated below. 2 Grounds for divorce 3 Separation agreements a. b Separation agreement terms c Separation agreement worksheet d 4 Generally Coming to agreement USMC Dependent support order a Interim support standards b c Reduction of interim amounts d 5 Support table Typical alimony provision Alimony a b 6 Generally Effect of Pre-separation Illicit Sexual Behavior Health Care for Spouse/Former Spouse a Generally b Eligibility for military health care 7 Life Insurance for former spouse a b Enforcement c 8 Generally SGLI and the Ridgeway problem Equitable distribution of property a b Marital and divisible property c 9 Generally Dividing property ion a separation agreement Real estate a. Generally b. Post Separation Real Estate Purchases 10 Military pension division a Generally b The 10 year marriage “requirement” c Jurisdiction to divide the military pension d Equitable Distribution and Military Pension Division e Variations in pension division f Pension division and disability g Pension Division and Concurrent Receipt. h Calculating the dollar value of the military pension. 11 Former Spouse Eligibility for Federal Benefit a b Medical benefits c 12 Generally Commissary and exchange privileges Survivor Benefits a b 13 Generally Former spouse coverage Equitable distribution of debts a Generally b c 14 Effect of court order/separation agreement on creditors Allocation of debts in a Separation Agreement Tax Matters a Filing status b Dependent exemption c Child tax credit d Tax treatment of alimony and child support e Property transfers between spouses f Sale of residence 15 Child Support a b Child support amount c 16 Generally Duration of child support Child support enforcement a. b Obtaining a court order for child support c 17 Enforcement through the armed forces Enforcing existing child support orders Medical coverage for children a Generally b c 18 Health Insurance Co-Pays and Uncovered Expenses Life Insurance for Children a Generally b Military versus civilian life insurance policies c Beneficiary designation 19 College Expenses for children 20 Child Custody and Visitation a Legal custody b Physical custody c What factors go into the custody decision? d Visitation e Removal of the children by parent/parental kidnapping f Uniform Child Custody Jurisdiction and Enforcement Act (UCCJEA) g Parental Kidnapping Prevention Act. 21 Finding and hiring a lawyer a What types of family law cases require hiring private counsel? b Bar referral services c Family law specialists d Military law consultant e Getting the other side to pay your legal fees 2. Grounds for Divorce. There are only two grounds for absolute divorce in North Carolina. First, divorce may be granted in those exceedingly rare cases where one or both of the parties is incurably insane and the parties have lived apart for three years due to such insanity (N.C. Gen Stat 50-5.1). The only other grounds for absolute divorce, and the grounds used in the overwhelming majority of cases, is that the parties have lived separate and apart in excess of one year (N.C. Gen 50-6). There is no requirement that there be a written separation agreement, only that the parties live in separate places continuously for a year with the intent not to resume the marital relationship. Resumption of cohabitation starts the clock all over again. Example: The parties live separately from January 1 through June 30, 2005, a period of six months. They reconcile and live together in the marital home for the month of July, then split up again on August 1, 2005. The earliest they can get a divorce in North Carolina, assuming they continue to live separately, is August 2, 2006. It is noted that, by statute, “isolated incidents of sexual intercourse between the parties shall not toll the statutory period required for divorce predicated on separation of one year”. 3. Separation Agreements. a. Generally. A separation agreement is a contract between the estranged spouses setting forth their rights and obligations concerning the marital relationship, such as: distribution of assets and debts, spousal and child support, child custody and visitation. If one of the parties fails to meet his/her obligations, that party may be sued for breach of contract for the damage thereby caused. As stated above, parties who have lived separately in excess of one year meet the grounds for divorce in North Carolina, regardless of whether they have executed a formal, written separation agreement. However, a separation agreement is extremely useful in two general ways. (1) First, the agreement sets out in writing what each party must do during the period of separation. Having such an agreement is far preferable to the alternative: ambiguity as to obligations and the high potential for constant bickering as to who pays which bills, what financial support is owed, when visitation may be exercised, and so on. (2) Secondly, if the parties are able to reach agreement, divorce can usually be obtained after the requisite separation period with a minimum of time, expense, and heartache. As stated above, if the parties have lived separately in excess of one year, they have grounds for divorce in this state. Further, North Carolina has jurisdiction over the case and the authority to enter a decree of divorce so long as at least one of the parties has been a North Carolina resident for at least a continuous six months immediately preceding the filing. (NC Gen Stat 50-8). One of the parties can file a divorce petition asking the court to incorporate the separation agreement into the decree; that is, to make the terms of the separation agreement the terms of the courts divorce order. Presumably, since the parties agreed to the terms in arriving at the separation agreement, the petition would go unopposed for an uncontested divorce. After the agreement is incorporated, it becomes a court order, enforceable through contempt of court penalties. [In addition, if all the requisite language is present, and certain other qualifications are met, the court order may be submitted to the Defense Finance and Accounting Service (DFAS), which can enforce pension division provisions through direct payments from DFAS to the former spouse. Additional information concerning this topic is available at the DFAS web site www.dfas.mil/dfas/ Look under the sections on Garnishment and USFSPA. Additional information concerning direct payment is also available on the web site of the North Carolina State Bar’s Committee on Legal Assistance for Military Personnel (LAMP) at www.ncbar.com/home/lamp.htm. The articles in the category “Take 1” provide an overview of the topic in easy to read format. The “Silent Partner” articles provide much more detailed information and are generally geared towards attorneys. See paragraph 10 of this article concerning pension division and paragraph 16c concerning child DFAS direct payments for child support. ] b. Separation Agreement Terms. There are two ways to get a divorce, the hard way or the much, much harder way. The parties can fight each other in court, pursuing a long, expensive, gut wrenching contested case. When all the evidence is in and all the hearings are finally over, a judge decides what is reasonable and makes a judicial order to that effect. Or, the parties can avoid all that time, expense, and heartache by themselves deciding what is reasonable, signing a separation agreement, and getting that agreement incorporated into a divorce decree. In a separation agreement, the parties may include all the items that a divorce court judge would otherwise have to decide. A separation agreement will address issues concerning alimony/spousal support, marital assets (who gets what property), marital debt (who pays what debts) child custody and visitation, and child support. The separation agreement may include terms addressing the division of military retired pay, life and health insurance, and the survivor benefit plan (SBP). The separation agreement may even include an agreement concerning the child tax exemptions and college expenses for children. c. Separation Agreement Worksheet (Doc). After consultation with counsel, the legal assistance office will provide clients with a separation agreement worksheet. Essentially, the worksheet lists items that the parties must address and agree upon in order to have a useful separation agreement. Once the parties agree on the terms, the client may return the completed worksheet to the legal assistance office-no appointment is necessary for this purpose. At that time, a follow- up appointment will be scheduled for the client to meet with a legal assistance attorney. By the time of that appointment, the questions and answers in the worksheet will have been converted into a draft separation agreement. Client and counsel will review the draft agreement to ensure the client understands its terms. Any desired changes will be made. Two unsigned copies will be printed out. In order for the document to become a valid separation agreement under North Carolina law, both spouses must sign it and both signatures must be notarized. [NC Gen Stat 50-20d, NC Gen Stat 52-10.1] The parties need not sign the agreement at the same time. The desired end state is that each spouse will have one of the two signed, notarized originals. After a period of separation in excess of one year, the legal assistance office can then assist in making a petition that asks the court to incorporate the separation agreement. d.. Coming to Agreement. The separation agreement, like any other contract, is a meeting of the minds, an agreement as to what should occur. There is likely to be some give and take between the parties in the negotiating. Making unreasonable demands is one way to ensure that there is no agreement. On the other hand, it is unwise to make unreasonable, major concessions merely to obtain agreement. By learning the rules, the parties can estimate what a court would do if the case were contested and will be better able to determine what is a reasonable. There will always be a few cases destined for trial-for example, a case where each party demands sole custody of a minor child. But in most cases, the parties should be able to negotiate a fair separation agreement and then cause that agreement to become the court’s order. The bottom line is that the parties can either be reasonable, negotiating a fair settlement amongst themselves, or they can have an expensive, contested, time consuming, aggravating case, wherein a judge will decide for them what is reasonable. Persons engaging in a contested divorce should obtain civilian counsel for legal representation. 4. Marine Corps Dependent Support Order. Informed negotiation of alimony and child support in military cases requires an understanding of the interplay between North Carolina law and chapter 15 of Marine Corps Order P5800.16A (Legal Administration Manual). This order requires all Marines to provide financial support to their dependents. Failure to understand the pertinent military order often leads the military spouse to provide less (or more) support than is required and civilian spouses either to give up payments they would otherwise be entitled to or to demand unreasonably large support. Click here for the complete text of the Order. Or go to the Camp Lejeune legal assistance site at http://www.lejeune.usmc.mil/legal/ Click on “Domestic Relations,” then “Information,” then “USMC Dependent Support Regulation (pdf)” a. USMC Interim Support Standards. The Marine Corps requires all of its members to provide adequate and continuous financial support to their dependents. This support requirement extends to children as well as to a spouse the Marine is separated from. The support requirement is codified at chapter 15 of the Legal Administration Manual (LegAdminMan). The order is a punitive general order, meaning that violating it. is specifically made punishable under the Uniform Code of Military Justice. Put even more plainly, a Marine may receive non-judicial punishment or court-martial punishment for violating the Order. The Order provides that Marines must obey any separation agreement or court order for support. If and only if there is no such agreement or court order, and if there has been a nonsupport complaint made to the Marine’s command, the Marine must provide support as indicated in the order. The Marine must provide, per supported dependent, the amount in the second column below, or the percentage of Basic Allowance for Housing (BAH) indicated in the third column (if the Marine is actually receiving BAH) whichever is greater, up to a maximum of one third of the service member’s gross pay; i.e., pay before taxes and deductions. Note that if both spouses are in the armed forces, neither is entitled to spousal support under the Order, although the custodial parent may be entitled to support on behalf of the child. The baseline BAH is supplemented by additional amounts depending on the location of the service member. Servicemembers that live in zmore expensive areas generally receive more BAH. The exact amount can be determined by reviewing the service member’s leave and earnings statement (LES). If the LES is not available, BAH can be found through the web site of the Defense Finance and Accounting Service (DFAS). http://www.dod.mil/dfas/money/milpay/pay/ Click on the “BAH information page. Be prepared provide the rank of the service member and the zip code of the area that you want to find BAH rates for b. Support Table: Legal Administration Manual . # of Dependents Minimum Amount of Share of Monthly Entitled to Support Monthly Support Per Requesting Family Member BAH/OHA Per Requesting Family Member 1 $350 1/ 2 2 $286 1/3 3 $233 1/4 4 $200 1/5 5 $174 1/6 6 or more $152 1/7 Example: Sgt H is married to W, a civilian, and has one child of the marriage (X). Sgt H lives off Base in Jacksonville, NC and has a gross monthly pay of $2,000, of which $600 is BAH. (BAH and pay amounts in this example are used only for illustration and ease of calculation and may not reflect an E-5’s actual pay and BAH). The center column yields a minimum support requirement of $572 ($286 for each of two family members entitled to support). The right hand column yields a support amount of $400 (1 / 3 of the $600 BAH per family member entitled to support.) The greater of these amounts is $572, which is the interim support obligation for Sgt H. This amount does not exceed 1 / 3 of Sgt H’s $2,000 gross monthly pay and need not be reduced for that reason. c. Reduction of Interim Support Amounts. The Marine can request that the Commanding Officer reduce the support obligation. The Marine has no authority to himself waive or diminish any requirements of the Order. It is up to the Marine to provide the Commander with sufficient information and documentation to establish a basis for reduction of the interim support requirement. The Commanding Officer may, but is not required to, reduce the interim support obligation in only four very narrow circumstances, as follows: (1) The spouse requesting support has an income greater than that of the supporting spouse. (2) The service member has already provided such uninterrupted financial support for twelve months or more and has not attempted to delay divorce proceedings by evading service of process; (3) The service member is the victim of a substantiated instance of spouse abuse. (Such substantiation may be in the form of a criminal conviction, a permanent restraining order, or determination by the Base Case Review Committee that the incident is substantiated at a severity level of II or higher.); and (4) The service member is paying recurring monthly expenses of the dependent such that reduction of the support requirement is appropriate. For example, a Marine who is making a monthly car payment of $200 for a car that is used exclusively by his spouse may request a reduction in the support amount by the $200 that he/she pays directly to the lender to satisfy the car loan payments. In the first three instances, support to a spouse, but not to a child, can be reduced. by the Commander. The burden is on the Marine to show that grounds for the exemption exist. d. Typical Separation Agreement Alimony Provision. In many of the cases seen at the Legal Assistance Office, neither spouse will have much of a claim for post divorce alimony given the statutory factors to be considered. The marriages are often of short duration and/or both spouses are capable of supporting themselves. There may be suspicions of infidelity, but they can’t be proved in court or else the aggrieved party does not desire to go through the time and expense of a contested case for an uncertain award. (Further, even if the court is convinced that the supporting spouse committed preseparation Illicit Sexual Behavior, the amount and duration of the award is up to the judge.) The bottom line is this: the military service member does not want to agree to post divorce alimony because the court probably won’t order it anyway, nor does s/he desire to pay more than required by the military regulation. The civilian spouse does not want to waive payments s/he would otherwise be entitled to under the Marine Corps Legal Administration Manual. Therefore, a reasonable resolution of this problem would be to agree to alimony in the amount and duration dictated by the Order with no post divorce alimony, in other words, to engraft the military regulatory requirements into the separation agreement. Example: Sgt H is married and has no children. He receives a base pay of $2,060, BAH of $624, and Commuted Rations of $267. He is obligated to pay spousal support under the Order of $350 or ½ BAH (in his case $312) whichever is greater: i.e. $350. The alimony provision of the separation agreement might therefore typically provide that Sgt H will provide his wife with $350 per month for twelve months, or death of spouse, or court decree of absolute divorce, whichever comes first. 5. Alimony. a. Generally. Alimony is another term for spousal support; i.e., an amount of money, usually paid in monthly installments by one spouse to support the other spouse. NC law (N.C. Gen Stat 50-16.3A) lists factors in determining whether and how much alimony will be ordered, and for how long. Given the population base of military clientele, many legal assistance clients are young, and have been married a relatively short period of time to a healthy, reasonably employable person of like age. Long term alimony is highly unlikely. Any alimony at all is not particularly likely, except in cases of pre-separation sexual misconduct, which will be discussed later. As listed in the above mentioned North Carolina statute, the factors a judge will look at in determining whether, how long, and how much alimony will be paid are as follows: (1) The marital misconduct of either of the spouses. Nothing herein shall prevent a court from considering incidents of post date-of-separation marital misconduct as corroborating evidence supporting other evidence that marital misconduct occurred during the marriage and prior to date of separation; (2) The relative earnings and earning capacities of the spouses; (3) The ages and the physical, mental, and emotional conditions of the spouses; (4) The amount and sources of earned and unearned income of both spouses, including, but not limited to, earnings, dividends, and benefits such as medical, retirement, insurance, social security, or others; (5) The duration of the marriage; (6) The contribution by one spouse to the education, training, or increased earning power of the other spouse; (7) The extent to which the earning power, expenses, or financial obligations of a spouse will be affected by reason of serving as the custodian of a minor child; (8) The standard of living of the spouses established during the marriage; (9) The relative education of the spouses and the time necessary to acquire sufficient education or training to enable the spouse seeking alimony to find employment to meet his or her reasonable economic needs; (10) The relative assets and liabilities of the spouses and the relative debt service requirements of the spouses, including legal obligations of support; (11) The property brought to the marriage by either spouse; (12) The contribution of a spouse as homemaker; (13) The relative needs of the spouses; (14) The federal, State, and local tax ramifications of the alimony award; (15) Any other factor relating to the economic circumstances of the parties that the court finds to be just and proper. (16) The fact that income received by either party was previously considered by the court in determining the value of a marital or divisible asset in an equitable distribution of the parties' marital or divisible property. b. Effect of Illicit Sexual Behavior on Alimony Award. North Carolina law [N.C. Gen Stat 50-16.3A(a) ] provides that, if the supported spouse engages in preseparation Illicit Sexual Behavior (ISB) and the supporting spouse has not, than alimony shall be barred, regardless of other factors. If the supporting spouse engaged in preseparation ISB, and the supported spouse has not, then alimony shall be awarded. The amount and duration of the alimony award is at the discretion of the court. If both parties engaged in ISB, then alimony, if any, is at the discretion of the court, based on all the above-mentioned factors. Either side may elect jury trial on the issue of whether ISB occurred. 6. Health Care for the Spouse/Former Spouse. a. Generally. The spouses must determine who shall be responsible for health care expenses. The health care issue is composed of the following essential component questions: Will there be any requirement for one spouse to provide health insurance for the other spouse? Who is going to pay for any health care costs that are not covered by insurance? Are these costs to be born only by one party? If not, what percentage does each spouse contribute? b. Eligibility for Military Health Care. The dependent spouse is eligible for military medical and dental benefits until such time as a final decree of divorce is issued. In some cases, the former spouse continues to be eligible for such benefits under the Uniformed Services Former Spouse Protection Act (USFSPA) even after divorce. In accordance with 10 USC 1076 (doc), dependents of servicemenbers and retirees are entitled to medical care. The word “dependent” is defined at 10 USC 1072 (doc).As defined by statute, "dependent" includes a former spouse of a service member when all of the following conditions are met: (a) the former spouse has not remarried (b) the former spouse does not have medical coverage under an employer-sponsored health care plan (c) the service member served creditably for at least twenty years (d) the former spouse was married to the service member for at least twenty years, and (e) the marriage overlapped military service by at least twenty years. (Conditions c, d, and e, are sometimes called, collectively, the 20/20/20 test.) Former spouses who meet conditions (a) and (b) but do not meet the 20/20/20 test may be entitled to permanent medical benefits if they meet the 20/20/15 test.; i.e., the service member performed at least 20 years of creditable service, the marriage lasted at least twenty years, and the marriage overlapped military service by at least 15 years, and, the final decree of divorce was entered prior to April 1, 1985. If the 20/20/15 test is met but the divorce was after April 1, 1985, then the former spouse is entitled to temporary transitional medical benefits and the right to convert to a private health plan set up by the Department of Defense [10 USC 1072 (doc) [. See also www.tricare.osd.mil concerning Tricare eligibility See paragraph 17 below for a discussion of health care for the minor children of the marriage.] 7. Life Insurance with the former spouse as beneficiary. a. Generally. The parties may want to make some provision to ensure that the former dependent spouse remains financially stable even in the event of the death of the other spouse. Thus, separation agreements or court orders may require one spouse to maintain a certain amount of life insurance with the other spouse as beneficiary. Such provisions may be appropriate where one spouse is obligated to provide long-term payments to the other spouse, such as where long term alimony is likely. Or, the parties may desire such a provision where the former dependent spouse will be entitled to a substantial portion of a military pension. Another potential stream of income that can be used to replace pay/benefits lost when the military spouse dies is the Survivor Benefit Plan (SBP). This tool can be used in place of or in conjunction with life insurance. Under the SBP, the military retiree pays a monthly premium (deducted from retirement pay) in exchange for a monthly cash amount to be provided to the SBP beneficiary after the death of the retiree. (See paragraph 12 below for additional information about SBP.) b. Enforcement. Parties electing to have a life insurance requirement as part of the separation agreement may want to consider additional provisions to ensure that the obligated spouse actually meets the obligation. Such assurances generally come in two forms: requiring the obligated spouse to provide appropriate documentation that the life insurance policy is in force, or giving control/ ownership of the policy to the benefited spouse. c. SGLI & the Ridgeway Problem. The most obvious source of life insurance, and probably the least expensive as well, is the Serviceman’s Group Life Insurance (SGLI). The SGLI home page is at www.insurance.va.gov/sgliSite/default.htm This is a low cost term life insurance plan available to service members and provides a death benefit of up to $400,000. However, a potential problem lurks when the obligor spouse is allowed to use SGLI to comply with the life insurance requirement. (1) The Ridgeway Problem. In Ridgway v Ridgway, 454 U.S. 46, 102 S.Ct 49, 70 L.Ed 2d 39 (1981), the U.S. Supreme Court considered the case of U.S. Army Sergeant Richard Ridgway, who violated a court order requiring him to keep his former spouse, April Ridgway, as the SGLI beneficiary. Instead, he remarried and filled out an SGLI election form giving the life insurance proceeds to his new spouse. When Sergeant Ridgway died, April asked the court to direct that she receive the SGLI proceeds, because that’s what would have happened had Sergeant Ridgway complied with the divorce decree. The U.S. Supreme Court disagreed, holding that Federal law gave the beneficiary designation authority solely to the service member. The court therefore had no authority to direct some one else as the SGLI beneficiary; i.e., the beneficiary designated by Sergeant Ridgway was entitled to the SGLI proceeds and no court could change that. April Ridgeway could make a claim against assets in the deceased’s estate, but she was not going to get the life insurance proceeds. (2) Responses to Ridgeway. The parties may attempt to cope with the Ridgeway problem by requiring the payor spouse to provide evidence of the beneficiary designation, or to authorize the beneficiary spouse access to records concerning SGLI. However, this method of protection requires constant vigilance by the beneficiary spouse. A more secure (and more expensive) method of enforcing the obligation is to require the obligor to purchase private, commercial insurance. A court may direct that the former spouse receive the proceeds of such private insurance even if the obligor spouse identified some other person as the beneficiary. The most secure means of enforcing the life insurance obligation is to require private, commercial insurance and to make the former spouse not only the beneficiary, but also the owner of the policy. Only the owner of the policy has authority to change the beneficiary. 8. Equitable Distribution of Property a. Generally. North Carolina General Statute 50-20 gives North Carolina judges authority to take property owned by the divorcing spouses and split it between the parties. The fact that property may be titled in the name of one of the parties has no effect at all on the judge’s ability to make an award. For example, an automobile registered and titled solely in the husband’s name can be allocated to the wife if the court sees fit to do so. Judges may divide both “marital” and “divisible” property of the spouses. These terms are discussed further below. The law directs judges to make a fair, or “equitable” distribution of property. The law presumes that an equal division of the property is equitable and the court must make an equal distribution unless the judge determines that an equal distribution is not equitable. In determining what is equitable, the court must weigh a variety of factors, including, but not limited to: the respective incomes of the parties, any child support obligations from a previous marriage, the length of the marriage, the age and health of the respective parties, the need of the spouse with custody of the child to occupy the marital residence, contributions of one spouse to help educate the other spouse, the tax consequences of property division, and acts of the spouse causing an increase or decrease in the value of marital property. b. Marital and Divisible Property. As noted above, the court may divide two categories of property, “marital” and “divisible.” (1) Marital Property. Marital property includes (with limited exceptions) all property obtained by either or both of the parties during the marriage and prior to the date of separation. Marital property does not include gifts from third parties solely to one spouse or property inherited solely by one of the spouses. (2) Divisible Property. North Carolina judges are also authorized to divide “divisible property.” Divisible property includes two types of property. First, it includes the change in value of marital property between the time of the separation and the time of the court’s order for passive reasons; that is, increases in value that did not result from the labor or effort of either of the parties. Example: H purchases 100 shares of XYZ stock during the marriage and prior to separation. After separation but before the court’s order dividing the property, the XYZ Corporation discovers a cure for cancer and its stock price skyrockets. The post separation increase in the value of the stock was passive; it was not created by any work completed by either of the spouses. The increase is considered divisible property. Secondly, divisible property includes receipts obtained after separation derived from labor of either of the parties prior to separation. Example: W is a real estate broker who earns a commission on a house she sold prior to separation. W actually receives the commission after the date of separation. The real estate commission is divisible property. c. Dividing Property in a Separation Agreement. Rather than requiring the court to c. divide property, the spouses themselves can reach an agreement concerning property division. Married couples usually own a long list of tangible items: furniture, appliances, kitchenware, vehicles, computers, clothing books, and many other items. The agreement should identify who is to receive these items. [The parties should be careful to include some disposition instructions concerning real estate, as well as intangible property, such as bank accounts, particularly joint accounts. Identify the accounts, then identify who is to receive the funds in the accounts.] Three general approaches to recording who is to receive various items of personal property are commonly used: (1) Listing Property. One method of specifying the distribution of tangible property in a separation agreement is simply to list everything the parties own and to designate which spouse is to receive each item. In writing such a list, the parties must be careful to describe the property sufficiently and not to take any shortcuts that would lead to ambiguity. For example, if the agreement said that the “bedroom suite” went to the Husband, the parties might later argue about whether a certain dresser is included in the term “bedroom suite.” If the agreement stated that the Wife were to receive all “antiques,” the parties might thereafter argue about whether a particular vase or chair was meant to be included in the term “antique.” If the agreement said that the Husband received all the vehicles, the parties might thereafter argue about whether the riding lawnmower or the boat were intended to be included in the term “vehicles.” Obviously, this method of making a comprehensive, list of every item owned is tedious and time consuming. (2) Listing by exception. One variant of the listing method described above is for the tangible property that is going to one party to be listed, with the other party receiving everything else. This method can be particularly useful when one of the spouses is to receive just a few items and the other spouse is to receive everything else. Example: “The Husband shall have and hold the following property as his sole and separate property free from any right, claim, or title of the Wife with the power to dispose of such property as if she was unmarried: the Gateway laptop computer and the 2003 Honda Civic automobile. All other items of tangible personal marital property not specifically listed above for the Husband shall be the sole and separate property of the wife, free of any claim, right or title of the Husband, with the power to dispose of such property as if she was unmarried. “ (3) Physical division of property. Often, the parties have already moved the location of their property such that the parties desire that all the property present in the Husband’s residence go to the Husband and all the property present in the Wife’s residence go to the wife. The separation agreement can make such a declaration. It can also be modified by exceptions. For example, the agreement might indicate that the Wife shall receive all property in her possession, except for the Husband’s Marine Corps officer sword, and the clothes washer and dryer, which will go to the Husband. The parties should be careful to include some disposition instructions concerning intangible property, such as bank accounts, particularly joint accounts. 9. Real Estate. a. Generally. In crafting a separation agreement, or in preparing for a contested divorce case, the parties must consider what disposition is to be made of any real estate that is marital property. If the real estate is a residence, as is usually the case, the parties must consider who will have the right to reside at the residence, who will pay maintenance costs, and who will pay the mortgage and related costs. If the house is to be sold, the parties still need to determine who will reside in the house prior to the sale, who will pay various costs prior to the closing, and how the proceeds from the sale will be divided. The parties should also consider that sale of the house may not yield sufficient proceeds to pay off the mortgage, in which case the parties must determine who will pay the deficit. b. Post Separation Real Estate Purchases. From time to time, one or both of the parties desires to purchase real estate after separation but prior to divorce. Such purchasers are concerned that the estranged spouse will somehow obtain part ownership or other rights in the property by virtue of the existing marriage. In general, marital property that the court can divide includes property “presently owned” and acquired after marriage but prior to separation. (NC GenStat 50-20). In other words, the general rule is that the real property purchased by one spouse after separation will belong solely to that purchasing spouse. However, it is possible that real estate, or any other property purchased after separation may be considered marital property if it is determined to have been purchased with marital funds. One method of ensuring that the other spouse is excluded from any rights in the real estate to be acquired is to execute and record an agreement to that effect. In such an agreement, authorized by NC GenStat 39-14.4 and NC GenStat 50-10, the spouses formally declare that each shall be able to convey property and transact business without the consent of the other. Such an agreement must be filed with the recorder of deeds in the county where the land to be purchased is located. People who are separated but not yet divorced and who desire to purchase real estate are cautioned and advised to consult legal counsel prior to such purchase. 10. Military Pension Division. a. Generally. Military members who serve honorably for twenty or more years are entitled to retire and to receive a pension beginning at that retirement; that is, such retirees receive monthly payments as a reward for such long and faithful service. These payments continue until the death of the retiree. A Federal Law, the Uniformed Services Former Spouse Protection Act (USFSPA) 10 USC 1408 (doc) gives the states the authority to make rules concerning if, when, and how much of the disposable military retired pay should be awarded to the former spouse of the service member. Every state has given their divorce judges authority to divide military pensions and has set out rules for doing so. Additional information concerning USFSPA can be found on line at www.ncbar.com/home/lamp.htm Consult the list of “Take 1” Articles and “Silent Partner” articles. See also the DFAS web page, sub-heading, “garnishment” at www.dod.mil/dfas/ b. The ten year marriage “requirement” Contrary to popular misconception, the Federal law does not impose a ten-year marriage requirement before a military pension can be divided. A court may award a former spouse a portion of retired pay even if the parties were not married for ten years. However, if the parties have been married for at least ten years, DFAS will be able to help enforce the pension division through direct payments if the following requirements are met: (1) the parties were married for at least ten years, and (2) the marriage overlapped military service by at least ten years, and (3) a state court issued a qualifying pension division order, and (4) that order is provided to DFAS. When these prerequisites are met, the military paymaster, DFAS, will take the required amount out of the retiree’s pay and send it directly to the former spouse. Detailed information concerning the requirements of a qualifying order can be found at the DFAS web page http://www.dod.mil/dfas/ c. Jurisdiction to Divide Military Pension. The Uniformed Services Former Spouse Protection Act (USFSPA) 10 USC 1048(doc), sets forth the circumstances under which a state court has the jurisdiction, that is, the authority, to divide a military pension. This Federal law overrides any state law concerning jurisdiction. Thus, it is possible to have a case wherein the state court has authority to make other sorts of orders; e.g., concerning custody, alimony, child support, but does not have authority to order a military pension division. Section (c) 4 of the USFSPA provides that state courts have jurisdiction to divide military pensions where: (1) the service member or retiree is domiciled in that state; (2) the service member or retiree resides in the state for reasons other than military orders; or (3) the service member or retiree consents to the jurisdiction of the court. (1) “Domicile” means legal residence. It is the state in which the member is physically present (except for temporary absences) and which he intends to remain (or return if absent). Intent is determined by such actions as: paying state taxes, voting, registering a vehicle, obtaining a driver’s license, and purchasing a home. (2) Consent to the court’s jurisdiction may occur expressly or inadvertently. Many separation agreements contain clauses wherein the parties expressly state that they consent to a particular court’s jurisdiction. One may also consent without even intending to. For example, some courts will hold that the service member consented to its jurisdiction for all issues simply by filing a responsive pleading to divorce petition. (3) Residence other than because of military assignment. The state court may also exercise jurisdiction over the pension of a service member who resides in the state for other than military orders. For example, let us assume that Colonel T is assigned to duty in state A. However, he lives in state B, just a few miles away, so he can be closer to his step-son and grandparents. He therefore lives in state B for reasons other than military orders. State B’s divorce courts have jurisdiction to divide his military pension. d. Equitable Distribution and Military Pension Division. Once you have determined that the court has the authority/jurisdiction to divide the military pension, the next question is to determine the rules it will use for doing so. Under North Carolina law (NC Gen Stat 50-20) all property (with very few exceptions, e.g., inherited property) acquired after the marriage and before separation is marital property and there is a strong legal presumption that an equal split of such property is the equitable and proper split. (White v White 312 NC 770 (1988). Therefore, courts are inclined to split the property equally or nearly so. However, in a contested case, the parties in an equitable distribution state (as opposed to a community property state) may attempt to persuade the judge that an unequal division is fair under the circumstances. The North Carolina statute lists factors for the court to consider in making this determination. Although Illicit Sexual Behavior (ISB) is relevant to the issue of alimony, as previously mentioned at paragraph 5b, ISB is NOT among the factors listed for the judge to consider in making a property award. The military pension is treated just like other property; the portion earned during the marriage is presumed to belong to both the married parties equally. As a very simple example, consider the following illustration: H (a service member) & W have been married eleven years, exactly ten of which overlap military service. H retired after exactly 20 years. W is therefore presumed to own half of that portion of the pension that was earned during the marriage. The former spouse’s presumptive share can be expressed as follows: ½ x # months marriage overlapped military service total # months creditable service In this example, W would receive a 25% share of the pension: ½ x 120/240 = 120/480 = 25% e. Variations in Pension Division. The parties to a separation agreement have broad authority to divide the military pension under whatever terms they can agree upon. A former spouse may waive any right to a portion of the military pension. This may be an acceptable option if the former spouse’s presumptive share is slight, or if the waiver is the result of informed negotiation; e.g., the former spouse is compensareceiving some other important benefit. If there is no waiver, the parties not only must consider what fraction will be provided to the former spouse, they must also consider the rank and years of service that the division will be based on. (1) Variations on Expressing the Former Spouse’s Portion of Retiree Pay. The portion of the pension provided to the former spouse may be expressed as a formula, as indicated above, a straight percentage (e.g. 43% of the service member’s disposable retired pay) or a whole dollar amount. The formula and percentage awards have the effect of increasing the dollar value of the former spouse’s share with cost of living or other increases. For example, a former spouse awarded 50% of the retiree’s disposable retired pay will receive an additional $100 if there is a $200 increase in pay due to a cost of living allowance increase. The parties may also choose a fixed dollar amount to provide to the former spouse. This method of pension division has the virtue of simplicity, is less prone to be rejected by DFAS for direct pay for failure to comply with technical requirements of a formula award, and provides the parties with a certain dollar value. A former spouse awarded such a fixed dollar amount will not share in any increases in retirement pay due to cost of living or other increases. Several “Silent Partner” articles at www.ncbar.com/home/lamp.htm provide additional information and insight concerning these options. See also DFAS information entitled “Attorney Instructions for Dividing Retired Pay and Sample language for court orders. “ Go to http://www.dod.mil/dfas/money/garnish/ and click on the Attorney Instructions. (2) Variations in Expressing Retiree rank and longevity. If a separation agreement or divorce decree only identifies the percentage of disposable retired pay the former spouse will receive, then the former spouse’s share will be based on the service member’s pay as of the date of retirement. For example, if the separation agreement provides that the former spouse shall receive 40% of the disposable retired pay, and the retiree receives $1,000 per month upon retirement, then the former spouse will receive $400 of that $1,000. However, service members are apt to argue that the former spouse does not contribute to the military career after the date of separation, and certainly not after the date of divorce. Therefore, goes this argument, the pension share of the former spouse should be fixed at the rank the service member held at the time of separation and that the former spouse share should be based on the number of years the member served at the time of separation. Example: At the time of separation, Major H had 15 years active duty service and was married to wife W for his entire military career. However, when H retired, he was a lieutenant colonel with 20 years active duty service. Under these circumstances, the parties might agree to a separation agreement containing language fixing the former spouse pension share based on a hypothetical major retiring with 15 years active duty service. (DFAS can compute this amount, even though, as we know, H would not be allowed to retire prior to serving for 20 years.) < non- sto argue that the service member’s higher earning years would not have occurred but for the preceding lesser earning years and that therefore the former spouse’ share should be based on the service member’s actual retired pay. Unless the parties themselves reach agreement on the rank and years of service upon which the former spouse pension share will be based, the court will have to determine it for them. If the issue is contested at trial, a majority of states, including North Carolina, will base the former spouse’s benefit on the actual retired pay received by the service member. f. Pension Division and Disability. Military retirees who are injured may be entitled to non-taxable disability pay (10 USC 1201 (doc)). However, the Uniformed Services Former Spouse Protection Act only allows state courts to award a former spouse a portion of a service member’s “disposable retired pay,” which does NOT include disability pay. Disability pay may result in a corresponding reduction of retirement pay. Disability pay can therefore have a very significant effect on the pension division award to a former spouse. Here’s an example: The divorce decree or separation agreement provides that the former spouse will receive a 25% share of the service member’s retired pay, expected to be $1,500 per month. However, prior to retirement, the service member becomes disabled. He therefore receives disability pay of $1,400.00 per month, which reduces his retired pay by that amount to $100.00 per month. The former spouse now receives 25% of $100.00 ($25) rather than the 25% of $1,500 ($375) that the former spouse was expecting. This result can be avoided by careful wording of separation agreements judicial decrees. For example, the following language may be used in appropriate cases: It is intended that the Wife shall receive her full share of Husband's military retired pay, calculated as set out below and without reduction for disability compensation (VA disability pay or military disability retired pay) or any other reason. Military retired pay is deemed by the court to include retired pay actually paid or to which Husband would be entitled based only on length of his creditable service. g. Pension Division and Concurrent Receipt. Federal Law, the Concurrent Receipt of Disability Pay (10 USC 1414 (doc)) provides that some military retirees may receive both their full disability benefits and full retired pay as well. Retirees with a 50%-90% disability rating will receive the benefit of a ten-year phased elimination of the VA offset to retired pay. The offset will be diminished each year until 2014, at which time covered retirees will receive complete disability and retired pay. As of January 1, 2005, in accordance with the Defense Authorization Act of 2005, retirees with a 100% disability rating should begin receiving full disability and retiy. As concurrent receipt is phased in, the military retired pay increases and so does the dollar value of any former spouse pension award expressed as a percentage of retired pay. If the court ordered award is already enforced with direct payments from the Defense Finance and Accounting Service (DFAS), this increase in the former spouse award should occur automatically, without the need for the former spouse to make any additional request to DFAS. However, if the retiree was totally disabled prior to January 1, 2004, any former spouse pension award would have reduced to zero and been entirely eliminated from the DFAS system. In such cases, the former spouse or his/her attorney should advise DFAS that the retiree is now receiving retired pay as a result of concurrent receipt and that the former spouse should receive direct payment of her court ordered portion thereof. h. Calculating the dollar value of the military pension. For service members who entered active dudty military service before 8 September 1980, Retired pay can be calculated by multiplying 2.5 times the number of creditable years of service times the member’s final basic pay. For example, on the last day of active duty, MSgt X received a monthly base pay of $4,000 after serving 22 years. His retired pay would therefore be calculated as follows: 2.5 x 22 = 55.0 55% x $4,000 = $2,200. MSgt X would receive retired pay of $2,200, exclusive of any cost of living increase (COLA). The maximum authorized is 75% of base pay, which is achieved upon attaining 30 years creditable military service. For service members entering active duty military service between 8 September 1980 and 31 July 1986, the retired pay is calculated using the “high three” method. 2.5 times years of creditable service times the average of the highest 36 months pay prior to retirement. Since the last years tend to be the highest earning years, the retired pay is usually based on the average base pay of the last 36 months. The DFAS web page provides prior years pay charts. Most retired pay will be calculated using one of the above methods. However, service members who entered active duty service after 1 August 1986 may elect one of two options. The service member may elect the “high three” method of calculating retired pay, described above. Or the service member may elect REDUX retirement. This entails the service member agreeing to serve a minimum of 20 years and the receipt of a cash bonus during active duty service. In consideration for the receipt of such bonus, the service member’s retirement pay is diminished Additionally, the REDUX COLA is also diminished. A REDUX retirement calculator can be found at www.dod.mil/militarypay/retirement/calc/03_redux.html 11. Federal Benefits Provided to Former Military Spouses a. Generally. In addition to authorizing state court divorce judges to divide military pensions, the Uniformed Services Former Spouse Protection Act (USFSPA) also provides certain former military spouses with government benefits: medical care, exchange, and commissary privileges. b. Medical Benefits. Paragraph 6 above outlines former spouse eligibility for military medical care. The governing statute is Title 10 U.S. Code 1072 (doc) c. Commissary and Exchange Privileges Commissary and Exchange privileges are extended to former spouses only under very limited circumstances, essentially the same circumstances under which full medical benefits are provided. To be eligible, the former spouse must be the unremarried former spouse of a member or former member who (i) on the date of the final decree of divorce, dissolution, or annulment, had been married to the member or former member for a period of at least 20 years during which period the member or former member performed at least 20 years of service which is creditable in determining that member's or former member's eligibility for retired or retainer pay, or equivalent pay. 10 USC 1062 (doc) and 10 USC 1072 (doc) 12. Survivor Benefits a. Generally. Military retired pay stops at the death of the retiree. The Survivor Benefit Plan (SBP), established by federal law (10 USC 1431-1460) provides an option to ensure that the retiree’s dependants continue to receive a stream of income after the retiree’s death. Like a life insurance policy, the benefits are purchased through a monthly premium payment. This payment is taken out of retired pay. Unlike a life insurance plan, the benefits are not paid in a lump sum; rather, a monthly sum is paid to the SBP beneficiary. The retiree may select the amount of pay the dependent should receive, from a minimum of $300/month to the full retirement pay. The greater the benefit, the higher the premium payment. At retirement, full SBP coverage; i.e., the greatest benefit and the highest premium, for spouse and children take effect automatically unless the retiree makes some other election. This amount can not be reduced or waived without the spouse’s written consent on the appropriate form. Additional SBP information can be found at http://www.dod.mil/militarypay/survivor/sbp/index.html b. Former Spouse Coverage. Federal law allows the retiree to elect a former spouse as the SBP beneficiary. If the retiree makes such an election, neither the current spouse nor children of the current spouse may be beneficiaries. Why would a retiree choose to make a former spouse the SBP beneficiary? First, such election may be the result of a negotiated marital separation agreement. A spouse who is likely to receive a significant percentage of the military retired pay may want some protection against early termination of that pay due to untimely death of the retiree. (The parties should also consider that SBP premiums are subtracted from retired pay and therefore diminish both the retiree’s monthly retired pay and the dollar value of the former spouse’s percentage share.) Secondly, the retiree may be electing former spouse SBP coverage because a court ordered him to do so. If the former spouse remarries prior to age 55, the SBP coverage terminates. 13. Debts. a. Generally. Just as the court is authorized to divide marital property; likewise, the court is authorized to allocate marital debt. Or, the parties may allocate debt through a separation agreement. Generally, a marital debt is one that occurred after the date of the marriage and prior to the date of separation for the joint benefit of the spouses. The fact that a particular loan only has the signature of one spouse does NOT preclude it from being a marital debt. Example 1: After marriage and before separation, the Husband buys a suite of living room furniture. The Husband signs a contract and agrees to make monthly payments to the furniture store. The debt is marital notwithstanding the fact that the loan is solely in Husband’s name and is not signed by the Wife Example 2: Wife uses her MasterCard to make numerous purchases of clothes, groceries, household appliances, and other items. The MasterCard bill, though solely in the name of the Wife, is marital debt. Example 3: The Husband purchases a motor vehicle on credit. Both spouses have access to and use the vehicle. The car loan is marital debt, notwithstanding the fact that only the husband’s name is on the loan. b. Effect of Court Order or Separation Agreement on Creditors. Neither a separation agreement nor even a court ordered distribution of debts can be used as a shield against creditors. Example 1: Husband and Wife both sign a loan for the purchase of a car. In their separation agreement, the parties agree that the Wife will make all the monthly payments to pay off the loan. She fails to do so and the creditor pursues Husband for payment. The separation agreement does not protect the Husband against the creditor. The separation agreement merely gives the Husband a right to obtain reimbursement from the wife, a right he may have to sue her in court to enforce. Example 2: Same facts as above, except that this time, instead of a separation agreement, there is a court order directing Wife to pay off the car loan. Husband is still liable to the creditor. The Husband may sue the wife for reimbursement and may also attempt to have her held in contempt for failing to follow the court order. Allocation of Debts in a Separation Agreement. The separation agreement c. should identify all of the debts and designate which of the parties will pay these debts (or whether the parties will share a debt equally or some unequal distribution of a particular debt). The debt should be described sufficiently so that there is no ambiguity, although the parties should avoid listing credit card numbers on the separation agreement given the prevalence of identity theft and the use of bank and credit card information to make fraudulent transactions. It is often desirable to structure the debt such that whichever spouse whose name is on the debt instrument, and/or is entitled to possession of the asset; e.g. a car for which a loan was obtained, pays the debt. You may be asking for trouble, and tempting fate, by structuring a settlement whereby one spouse pays the debt and the other spouse gets the related asset. It is simply human nature to give a low priority to debts payable for assets the other party possesses; or for debts instruments for which the creditor can sue only the other party. If the debts and assets can not be structured equitably without requiring one spouse to pay the debts of the other, the parties may wish to consider means by which the non-paying spouse can be kept abreast of the account; e.g., a requirement that the payor spouse provide proof of payment by a certain date. 14. Tax Matters. Divorce usually results in the transfer of money or property between spouses. This section provides information concerning some basic tax rules that often come up in divorce cases. The section is not designed to be a comprehensive treatise on the complex issues of divorce taxation; it is merely offered to highlight some of the more common tax issues. a. Filing Status. Until the date of divorce, the parties have the option of filing state and Federal tax returns jointly as Husband and Wife, even though they live separately. In many cases it is financially advantageous to file jointly; resulting in either a greater refund or less tax owed. On the other hand, filing jointly requires the parties to cooperate with each other. They must both sign the return. They must decide which spouse will prepare the return. If there are expenses involved in preparing the return; for example, paying an accountant or tax return preparation service, the spouses must determine who will pay for such services. Whichever spouse is preparing the return needs W-2s and other tax related documents of the other spouse. In some cases, the administrative or logistical difficulties, or lingering animosity between the spouses may make filing jointly a less attractive option. b. Dependent Exemption. If the parties file jointly, they may claim each child of the marriage as a tax exemption on their joint tax return. The effect of each exemption is to reduce the filer’s taxable income by the exemption amount designated for that tax year. For 2004 returns, the exemption amount was $3,100.00. If the parties file separately- which they must do once a divorce decree is signed-only one party can claim a child of the marriage during any given year. In accordance with the general IRS rule, the custodial parent is entitled to the child dependency exemption. For purposes of this section, “custodial parent” is defined as that parent having physical custody for a greater portion of the year. However, the parties may, by written agreement, alter the usual rule and give the dependency exemption to the non-custodial parent. They may make such an agreement covering just one year, or multiple years, or all future years, or in accordance with some formula: e.g., non custodial parent gets exemption in even years, custodial parent in odd years. Providing the non-custodial parent with the dependency exemption is sometimes used when one spouse is employed and the other spouse is either unemployed or minimally employed. In such cases, it makes sense for the custodial spouse to give up the exemption for one or more years and to bargain for some other concession in its stead. IRS Publication 17 http://www.irs.gov/publications/p17/index.html provides that the parties may memorialize their written agreement to give the noncustodial parent dependency exemption rights by executing IRS form 8332 or through “a similar statement (containing the same information required by the form)…” IRS forms can be obtained on line at www.IRS.gov Go to www.irs.gov/pub/irspdf/f8332.pdf to go directly to form 8332. Of particular interest, go to IRS Publication 504 , “Divorced or separated individuals” http://www.irs.gov/publications/p504/ix01.html (Or work through the IRS site. Using search function provided, type in “Pub 504.” Click on the appropriate hyperlink. Click on “next” to get to hyperlinked index of publication 504.) . c. Child Tax Credit. In addition to claiming an exemption for dependent children, taxpayers may also claim a credit for each qualifying child. The exemption reduces taxable income. The credit is even more valuable, resulting in a dollar for dollar reduction in tax liability in the amount of the credit. In order to take the credit, the taxpayer must be entitled to claim the child as a dependent for tax purposes. The child must also be under the age of 17 at the end of the tax year for which the return is being filed. d. Tax treatment of Alimony and Child Support. Alimony is considered taxable income to the receiving spouse (26 USC 71 (doc)) and a deduction fro