Separation
Agreement

Entering into a Separation Agreement is a good alternative to litigating issues in Court. The technical name for these agreements in North Carolina is Separation and Property Settlement Agreements. For purposes of this article, we will refer to them as Separation Agreements. They are contracts between spouses which resolve the issues arising out of ending the marriage. You can settle all issues of the divorce without going to court if both spouses consent. You can agree on a child custody schedule, the amount of child support, the terms of alimony, and divide financial assets and debts. Separation Agreements are entered either when separation is imminent or after actual separation when you are living in two separate homes. In North Carolina, you must be separated one year prior to filing an action for divorce, but you can settle all the issues of your divorce in a Separation Agreement. Many people are confused by the terms. In order to for a divorce judgment be entered, the judge must find that spouses have lived separate and apart for one year. This is referred to as an absolute divorce. If you do not enter a separation agreement or file a court action preserving financial issues, then you will lose certain rights upon the entry of an absolute divorce. Many people are able to resolve custody and financial matters prior to the entry of an absolute divorce by a Separation Agreement or by a court order. If you are thinking of entering a Separation Agreement, you need to consider the following issues:

Alimony only comes into play when one spouse is a supporting spouse and the other spouse is a dependent spouse.

Alimony and Post Separation Support

Post Separation Support is another name for temporary Alimony. Alimony only comes into play when one spouse is a supporting spouse and the other spouse is a dependent spouse. The supporting spouse is the “breadwinner” and the other spouse, even if he or she is employed, relied on the supporting spouse’s income during the marriage to meet his/her needs and expenses. If both spouses’ incomes are relatively close, then alimony may not be a consideration. Even if one spouse makes more money, there may not be enough money to pay alimony once the “supporting spouse” pays child support, if any, and his/her reasonable living expenses. If one party agrees to pay the other party support, then the amount, the duration, and the reasons for termination should be set out. If the parties agree that alimony should not be paid, then the separation agreement should waive this claim. Marital misconduct is often a factor in determining whether one spouse will receive alimony. It is defined in the North Carolina Statues with specific examples – but for simplicity purposes we will refer to marital misconduct as “bad behavior.” Marital Misconduct may not be a huge factor if it is committed by the supporting spouse; however, certain types of marital misconduct committed by the dependent spouse can be an absolute bar to an award of alimony. Marital Misconduct by the supporting spouse can increase the award or justification for an award of alimony.

Equitable Distribution

Equitable Distribution is the term used to divide the marital assets the parties have accumulated during their marriage. It is most commonly an equitable division of marital assets and debts, meaning each party is entitled to roughly one half – or fifty percent of the assets and debts. There are factors that your attorney can argue to the court which will allow the court to divide assets unequally. In a separation agreement, the parties decide how they are dividing their marital assets and debts.

Marital Home

For most couples, the marital residence is a major asset for consideration. Often times, there is an emotional attachment to the marital home. There is also the financial consideration of the marital residence. The following questions often arise: Who gets to live in the home? Who is paying the mortgage? When will the house be refinanced? When will the house be sold? Can one spouse buy out the other spouse’s equity in the home? How do we agree on a sales price and when to accept an offer? How will the proceeds from the sale of the home be split? If the spouse staying in the marital home is not able to refinance and remove the other spouse’s name from the loan, how will that impact the other spouse’s ability to purchase a home to live in? The financial ability of each spouse and the alimony issue will be factor into how this will be handled. It may be necessary to list the house for sale and divide the net proceeds between the spouses.

Retirement Accounts

Another major decision when dealing with equitable distribution is how to divide retirement accounts. There should be a provision outlining this division in a separation agreement. Sometimes, parties waive their rights to the other spouse’s retirement account. Parties are entitled to an equal division of retirement accounts that have accumulated during the course of the marriage. For ERISA accounts such as 401(k)’s, there are other documents that need to be entered. You may see references to these documents as QDRO’s (qualified domestic relations orders). If you have an ERISA plan that needs to be divided, then it is not enough to divide them just by a separation agreement. A court action will need to be filed so that a QDRO can be entered. QDRO’s are more complicated in that you need to first obtain the plan administrator’s approval prior to having a judge sign the Order. Even for retirement accounts that do not require a QDRO, there are documents that will need to be signed to divide that retirement account and/or remove the other spouse as a beneficiary. The separation agreement will set out how the parties intend to divide the accounts and have language in the agreement that the parties will cooperate with each other to sign other documents necessary for the division or distribution. It could take months after entering a separation agreement for the retirement account to actually be divided. The value in the retirement account may increase or decrease due to market conditions prior to the division and it is important to deal with the change in value of the accounts in the separation agreement. If you are receiving a portion of your spouse’s retirement account, there are tax consequences if you liquidate the account or if you do not set up a financial account properly to transfer the asset. You will need to work with an attorney, a financial advisor and/or a representative of a financial institution to ensure the account is properly divided.

Personal Property

Typically, it is not necessary to itemize personal property or household items unless it is valuable or has sentimental attachments, or if you and your spouse cannot agree on a division. Often included in a separation agreement is a provision that the parties have agreed and already divided household items and each party keeps what is currently in his/her possession. This is not a rule, but it is the general practice. Of course, there are always exceptions and sometimes it is necessary to list all or most of the personal property that you are dividing.

Bank Accounts

Most of the time the parties have separate bank accounts by the time they enter a separation agreement. However, the money should be equally divided as of the date of separation. Sometimes a party will liquidate or transfer an account prior to separation. This does not make that account nonmarital property, and it will still need to be a factor when you are settling equitable distribution.

Vehicles

The Agreement should state 
who is receiving which vehicle. The Separation Agreement will also need language requiring the parties to sign any documents necessary to transfer the titles to vehicles and should have a time deadline once documents are provided. You also need to determine which spouse will be responsible for the loan on the vehicle and who will be financially responsible for insurance.

Debts

The agreement should set out who will be responsible for each marital and non-marital debt. If both parties are on the debt (i.e. a joint credit card), it will not matter to the creditor what the separation agreement states. If the spouse does not pay as set out in the separation agreement, the creditor will look to both parties to pay. If possible, there should be terms as to when the debts shall be paid, or the other spouse’s name removed.

Child Custody

Technically, child custody schedules should be in a Court Order and not just in separation agreements to be enforceable. However, many couples set out a custody schedule in a separation agreement and follow the schedule without any problem. If a problem arises, then one parent will need to file a complaint to establish custody. If custody is set out in an Order, then that Order is enforceable and cannot be modified unless there is a substantial change of circumstances that affect the child or children. Even if you decide to enter a Custody Order, it can be done in a “friendly” manner where the parents enter an order by consent.

Child Support

If both parents are W-2 employees and earn less than $360,000 together per year, then the amount of child support is set out by the North Carolina Child Support Guidelines. You can find the information at:

Generally, you need to know the gross income of each parent, the cost of health insurance for the children and the amount paid for child care. It is more difficult to determine the income for self-employed parents since there are tax deductions that are legitimate for tax purposes but will be added to income for child support purposes. An example of this is car payments that are made through business. It may be acceptable to do this for tax purposes, but often those car payments are considered income for child support calculations.

Finalizing Separation Agreement

Both parties must execute a separation agreement in the presence of a Notary Public. It is not necessary to file a Separation and Property Settlement Agreement. In fact, there is not really a place to file the agreement. It is a private contract entered into by the parties. It can be incorporated or filed with the divorce judgment if one party wants to make it a court order if the agreement allows for it. Otherwise, a separation agreement is not filed with the Court. You can file it with the Register of Deeds (the office that is the repository for deeds and other documents relating to real estate), but it is not common practice to do so because of privacy considerations. By filing it with the Register of Deeds, the public is on notice that either spouse may (if the agreement says so) engage in real estate transactions without the consent of the other spouse. If this is an issue for either spouse, then usually a document called a Free Trader Agreement is filed that provides this notice but does not set out the actual terms of the Separation Agreement. Once the spouses obtain a divorce judgment, it is no longer necessary to have the signature of the other spouse for real estate transactions unless it involves real estate in which they are both on the title to the property.

Can one attorney just represent us both and draft the separation agreement?

One question we often hear is, “Can one attorney just represent us both and draft the separation agreement?”

One attorney cannot represent both parties in a separation agreement. The North Carolina rules governing the ethical conduct of attorneys do not allow one attorney to represent both spouses in drafting a separation agreement. Spouses may believe that they have agreed to everything and all an attorney needs to do is draft the agreement. In order to understand the North Carolina rule, you need to understand that there are a variety of issues with even drafting a separation agreement. An attorney is not allowed to represent parties that are adverse to each other. You and your spouse may not consider it “adverse”, but you each have conflicting interests as far as resolving your marital issues. You may choose to resolve your differences amicably, but one attorney cannot give you each conflicting advice.

Sometimes one spouse will hire an attorney to draft the Separation Agreement. The attorney represents only one spouse and sends to the other spouse to review. The non-represented spouse may review the agreement with an attorney if they desire, but it is not required by North Carolina law. We suggest that the other spouse review the agreement with an attorney so he or she has a clear understanding of the terms of the agreement. Other times both spouses hire attorneys to negotiate the terms of their separation agreement. It is a good option if spouses believe they can agree on terms without filing a court action. Typically, it is more cost efficient compared with the alternative option of litigation. Unlike litigation, with a separation agreement, you are not at the mercy of court rules and procedures, and both spouses can address issues that are important to them but may not be important in court. Spouses retain control over the decisions that are made in a Separation Agreement. However, when a judge decides, both parties are letting go of any control and may be stuck with a custody schedule or other terms that both do not prefer.