When marriages are good, you rarely think about what could happen if you two separate with regard to the division of marital assets and debts, known as equitable distribution. One common issue we see that often comes as a shock to people is what happens when one party invests their separate funds (such as funds they inherited, acquired before the date of marriage or was a gift from a third party) into real estate titled in the names of the husband and wife (also known as a Tenancy by the Entirety.) Such a transaction is presumed to be a gift to the marital estate absent a showing by the party that the influx of separate funds was expressly not a gift to the marriage at the time of a transfer. Because this is a gift between spouses, a written conveyance stating the funds are not a gift would be required.
As you can imagine, in a happy marriage, this idea would not necessarily be on the forefront of your mind to make an express statement that your inherited funds being invested in the new family home, for example, is not a gift to the marriage. Unfortunately, because of this, often people find themselves unable to recoup their investment other than arguing for an unequal division of the marital estate to compensate for the down payment. Unequal divisions, even if the court does choose to award them, may still not be enough of a difference to fully compensate the person for their separate investment. This principle is based on case law often referred to as the McLean presumption, based on the case that stands for this principle, McLean v. McLean, 323 N.C. 543, 374 S.E.2d 376 (1988). The equitable distribution statute was amended in 2013 to codify this principle by adding the following to N.C. Gen. Stat. §50-20(b)(1) “It is presumed that all real property creating a tenancy by the entirety acquired after the date of the marriage and before the date of separation is marital property. Either presumption may be rebutted by the greater weight of the evidence.” However, the definition of separate property was not changed with regard to a written conveyance being required to show that a gift between husband and wife is not intended as a gift. As a result, it is difficult to have any separate funds that were used to acquire tenancy by the entirety property be classified as a separate property (see citation below.)
How can you avoid this from happening to you? You can consider entering into a post-nuptial agreement (contract entered into after the marriage) that states, for example, that the $___________ being used to acquire the real estate to be held as tenants by the entirety located at (address) is not to be deemed a gift to the marriage but is the be deemed the separate property of ____________. You can go on to address how these funds will be returned in the event of a separation, etc. An alternative would be to include a similar statement on the deed to the property that is being acquired, and perhaps consider doing both to be safe. Any attorney can discuss these options, and other options, in detail to determine what would best fit your needs. If you are not married, you may want to consider entering into a prenuptial agreement to address this type of scenario in the future.
It is not a comfortable conversation to have with your spouse, but if you are planning to invest a significant amount of money into real estate being held as tenants by the entirety, you must have this conversation to protect your investment. Unless, of course, you are agreeable with the money being deemed a gift to the marriage and understand that if you two separate, the equity acquired due to the influx of your separate funds will be divisible as marital property with your spouse.
Also, consider this issue when you are refinancing a home you owned prior to your marriage and the home is titled in your own name. If your closing attorney insists on putting your spouse on the deed, you are facing this same issue. Be very careful when investing separate funds or adding your spouse to the title of your property. We would encourage you to consult with one of our attorneys before taking this action to discuss what options are available to protect your investment.
Howell, Cheryl, Equitable Distribution Update: Tenancy by the Entirety, Postseparation Payment of Debt, and Defined Contribution Retirement Accounts, Family Law Bulletin, UNC School of Government, No. 26, March, 2014.
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