The longer-term economic impact of COVID-19 throughout the United States may not be fully understood. However, there are already significant, immediate impacts felt by families, particularly those families who were already experiencing the stress of divorce or separation. Introducing job loss, market decline, debt accumulation and delays resulting from court closures into an already stressful relationship escalates anxiety.
Many are concerned about the value of their home or retirement investments. Dividing the marital home and retirement investments are often the most financially significant aspect of a divorce. These assets typically account for both spouses’ life savings—how they will provide for themselves in retirement and how they will continue providing for their children.
In the context of divorce and separation, North Carolina Statutes classify property as marital, separate or divisible property. Marital property is defined as property acquired after the date of marriage and prior to the date of separation. The Court is required to value all property as of the date of separation. A primary concern is the decrease in market value of property after the date of separation. This is where divisible property is a key factor in the wake of COVID-19.
Divisible property includes the passive increase or decrease in value of marital property between the date of separation and the date the property is actually divided. Thus, in valuing and distributing marital property between the parties, the Court must also consider post-separation changes in value. Here is a look at how North Carolina’s divisible property classification can be crucial in a post-COVID divorce action:
When parties separate it is necessary to value the marital home as of the date the parties separated; however, any passive increase or decrease in the value to the date of distribution must be considered. This is divisible property.
Hypothetical: Husband and Wife separate on February 1, 2020. At that time, the home is appraised at $400,000 with a mortgage of $100,000. Neither party takes action to change the value of the home. After filing suit, but following a series of delays in the hearing date as a result of court closures, the parties go to Court on April 1, 2021, at which time the home is appraised at $200,000 with a mortgage of $100,000. The reduction in appraised value of the home is due to passive real estate loss arising from an economic downturn caused by COVID-19.
Although the value of the home at the time of separation was $300,000 ($400,000 minus $100,000 mortgage), in distributing marital property the Court is required to consider the passive decrease in value of the home as of the date of distribution, now valued at $100,000 ($200,000 minus $100,000 mortgage). This provides a mechanism where neither spouse suffers an unequal loss or gain, solely because of market fluctuations.
RETIREMENT SAVINGS AND INVESTMENTS
As with any marital property, spouses are entitled to share in retirement savings or investments which accumulate after the date of marriage to the date of separation. Passive increases or decreases in retirement savings and investments due to market fluctuations are also divisible property.
Hypothetical: Husband and Wife have, collectively, $500,000 in retirement savings on February 1, 2020 when they separate. The market declines over the next several months resulting in a reduction in the assets to $200,000 by March 1, 2020, but then rebounds bringing the value of the retirement investments to $450,000 by the Court date of August 1, 2020.
At the date of separation, the parties had $500,000; however, the net loss of $50,000 is divisible property, which must be considered by the Court as it distributes the marital property. Thus, the Court is required to consider the real-world impact of events on market value even if it occurs after the date of separation, and distribute marital property accordingly. The divisible property statute helps prevent significant inequities from occurring while the parties are awaiting resolution of their cases.
Parties do not need to fear inequities in valuation of property due to economic loss in a post-COVID economy. However, understanding how these concepts apply to an equitable distribution of marital property, and mapping a route through this difficult terrain is necessary and possible with the assistance of an experienced and informed family law attorney.