Co-Counsel Bulletins

SEPARATION AGREEMENTS

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INTRODUCTION.  First of all, remember the basics:

ˇ              A separation agreement is a contract between a husband and wife when they separate from each other.  In this document they resolve such matters as property division, debts, custody and support.

ˇ              No law requires a separating couple to execute a separation agreement; however it is a wise idea if there are debts, children, support claims or property involved and the parties want to settle these matters in writing.

ˇ              A separation agreement is not valid in North Carolina unless both parties have signed and their signatures are notarized.             

ˇ              For it to be valid, the agreement must be signed at or after the parties' separation.

ˇ              No one can compel a spouse to sign a separation agreement.  An "agreement" means that both parties sign voluntarily.  Coercion, fraud, undue influence or lack of knowledge will void the terms of a separation agreement.

ˇ              A separation agreement is not proof of the parties' separation.  It is not required for a divorce in North Carolina, and it doesn't make a divorce in North Carolina easier or more difficult to obtain.

          CHILDREN AND TAX ISSUES.  A separation agreement can specify who claims the children as exemptions for            income tax purposes.  Without a written agreement, the parent who has physical custody of a child for more than one-half the year will get the dependency exemption.  The child tax  credit, $500 per year for 1999 and later, cannot be separately allocated; it goes to the parent who has the dependency exemption for the child involved.  Consider the following issues:

1.            Should the exemption be "traded" (instead of given) to the other parent -- in exchange for an increase in child support, for example?  Even a small increase in support would help offset the tax increase that will be paid by the custodial parent upon losing the exemption and the credit.  And the other parent can often afford such an increase due to the taxes he or she saves by claiming the exemption and the tax credit.

2.            Should you alternate the exemption between parents?  For example, the father could claim the exemption in even-numbered years and the mother could do so in odd-numbered years. Or the father could claim one child and the mother could claim the other.  Such alternation would lessen the impact of higher taxes on the custodial parent.

3.            Should you condition the transfer on the other parent's regular and full payment of support?  Instead of transferring the exemption permanently without regard to payment of child support on time, some custodial parents agree to a transfer of the dependency exemption only if the other parent is current on child support payments by December 31 of each year.  Perhaps "support" should be written broadly as "any payment for the support of a child, including college expenses, medical costs and insurance premiums."

          COLLEGE EXPENSES.  Although a North Carolina judge cannot order a party to pay child support for a child in college, a separation agreement can create promises for college expenses which will become a binding, enforceable contract.  Since college is less of a luxury and more of a necessity these days, it would be a good idea to consider which items should be in the college clause.  For example, consider the items on the following list.

ˇ              How long should the obligation last?  4 years?  8 semesters?  Until the child attains age 23?   Some termination point or date should be set.

ˇ              What costs will be covered?  The usual ones are room and board, books, tuition and fees.  Some parents also agree on a monthly allowance for the child, funds for travel to and from home, or summer expense money.

ˇ              What are the expenditure limits?  Few parents want to agree to finance a college education for a child at any college or university.  The cost of some private colleges and universities would bankrupt the average parent.  Consider putting a ceiling or "cap" on the college expenses, such as by specifying that the maximum shall be "the then-prevailing rate for in-state tuition at N.C. State University" or some other nearby public institution.  Such a provision is fair to everyone and does not force either parent to go broke financing a college education.

ˇ              What other limits should be set?  For example, some agreements state that the child must attend an accredited institution, in pursuit of a generally recognized undergraduate degree, on a full-time basis, while maintaining at least a "C" average.

ˇ              What part of the college costs will each parent pay?  Be sure to set some specific percent or amount so that it will be enforceable in court if you need help in the future.  Clauses that provide for the other side to pay a "reasonable share of the child's college expenses" are worthless since they don't say exactly what the other parent has to pay, and a judge is not going to guess what the parents meant by this language.  When in doubt, spell it out!  Even if you just divide the college costs 50-50 between both parents, it's still better than a vague and unenforceable clause.

          ALIMONY.  Alimony is spousal support -- it is money paid by one spouse to the other to help with food, shelter, transportation, clothing and other living expenses.  When the parties have agreed on some measure of temporary or permanent support, you should definitely put that in the separation agreement.  Such a provision might state, for example, that the husband shall pay the wife alimony of $500 per month until he or she dies or until she remarries, or it could state that the wife shall pay the husband alimony of $100 per month for a total of four years, at which time it will terminate forever.  Some other alimony tips:

1.            If the alimony clause is drafted properly, alimony can be deductible for the payor and therefore taxable to the recipient.  In order to be deductible by the payor, it must end at the recipient's death.  It is also acceptable to make the alimony nontaxable to the recipient if it is nondeductible for the payor.  This is a particularly important term, and the agreement should clearly indicate how alimony payments shall be treated for tax purposes.

2.            Alimony usually ends at the death of either party or the remarriage of the payee/recipient (usually the wife).  Sometimes clients have a provision added to the alimony terms in a separation agreement that alimony will also end at such time as the recipient starts living with an unrelated person of the opposite sex on a regular basis as if they were husband and wife.  With today's societal changes, it would not be a bad idea to say stop payments upon recipient's romantic cohabitation with any person, whether of the opposite or same sex.

3.            Alimony can be waived.  It is always best to set out such a term clearly in the agreement.  Don't just leave it out or let the agreement be silent on this issue.  A waiver of alimony is such an important term that it should be clearly spelled out in the agreement so that there is no misunderstanding.

4.            What if mrs. Smith asks, "Am I entitled to alimony?"  Be careful - you can't answer that question.  In North Carolina, non-consensual alimony is only granted by the court.  While you can't predict what the court will do, you can tell Mrs. Smith that the court would grant her alimony if:

a.            She files a lawsuit requesting alimony (and usually postseparation support);

b.            She is the dependent spouse - she is financially dependent on Major Smith, her husband, or in need of support from him or her;

c.            Her husband is the supporting spouse; and

d.            An award of alimony is equitable under the circumstances after considering numerous factors set out in the statute (or, in the case of postseparation support, her financial resources aren't enough to meet her reasonable monthly needs and personal living expenses).

           Be sure to inform her that an absolute defense to alimony exists when the parties have waived alimony in a separation agreement or premarital agreement.  Alimony is also barred  when a divorce has been granted before an alimony claim is filed, or when only the dependent spouse has committed adultery or some other form of "illicit sexual behavior."

            There are no guidelines for alimony in North Carolina, so there is no way of predicting what the court would have done to set an alimony award if the case had gone to court.  Alimony awards of $300-500 per month are not uncommon, and some spouses who make a great deal of money could pay more than $1,000 per month.            

            The best way to figure how much alimony a client needs is to calculate the difference between the dependent spouse's reasonable monthly needs and her current net income.

ˇ              To do this, first of all figure out how much the total monthly needs of Mrs. Smith.  Make sure you have deducted any monthly expenses that belong to Major Smith or that he'll be paying.

ˇ              Next figure out which ones are "reasonable" and discard the rest.  A monthly budget that includes huge car payments or expensive weekly trips to the beauty salon and clothing stores may be frowned upon by the judge.

ˇ              Then subtract the net income of Mrs. Smith - the result is "her gap" between reasonable monthly expenses and net income.  This is her unmet needs.

ˇ              Next compare this figure to the difference between the supporting spouse's income and his reasonable monthly expenses.

            Her gap should be equivalent (under ideal circumstances) of the "extra" money he has left over from his paycheck after he pays for his own reasonable monthly expenses.   Since these "gaps" seldom exist in reality and everyone is usually spending a lot more than he or she is making, it is often a question of haggling, discussion, bargaining and horse-trading as to how much alimony should be paid in any individual case.  For more information on alimony, see the CO-COUNSEL BULLETIN on that subject.

          WHAT A SEPARATION AGREEMENT CANNOT DO.  There are several limitations on what a separation agreement can do:

1.            Since it is a contract between spouses, it cannot bind third parties (such as banks or finance companies) that have not signed it.  If, however, one party promises to pay a bill and then breaks that promise, then the innocent party may sue the other for breach of contract for the amount of money paid.  It's a good idea to use an indemnification clause to ensure this.  The clause should state that the breaching party will defend, indemnify and hold harmless the other party from any costs, expenses or damages incurred because of the breach.

2.            A separation agreement cannot stop one spouse from harassing the other.  While separation agreements usually have a nonharassment clause in them, please advise your clients that no piece of paper -- be it agreement or court order -- is going to stop a person from doing something he or she wants to do.  If the problem is one of physical violence, a court order would be better than a separation agreement and could be used to punish the wrongdoer if he or she then violated the order.  If it is some other form of harassment, it may be possible to go to court for an injunction or to sue the spouse for money damages, but these may not be very effective remedies in most cases, and they certainly will not be cost-effective.

3.            The terms for child custody, visitation and support are not binding on the court; they can always be modified by the court, if in the best interest of the children.  In the absence of proof to the contrary, however, there is a presumption that the terms concerning the children in the agreement are fair, reasonable and necessary for the best interest and welfare of the children.  If you really want binding and enforceable terms for custody, visitation or support, get a court order.

            INCORPORATION.  You may include in your separation agreement a clause that requires its incorporation into a decree of divorce.  Or your clause can bar the incorporation, or only bar it unless the parties later agree to this in writing.  You may also leave out any reference to incorporation, so that it will have to be decided at the time of divorce.  So what's the low-down on incorporation?  Here are the points you need to know about North Carolina law regarding incorporation of an agreement into a court decree:

1.            It makes the clauses enforceable as a court order - by garnishment, wage assignment, contempt, seizure of property, etc.

2.            It also makes the executory promises modifiable if there's been a change of circumstances since entry of the order.  Executory promises are those which are incomplete or not yet fulfilled, such as when the husband promises to finish making the payments on the wife's car, or when he promises to pay her alimony.  When the agreement hasn't been incorporated, these can only be changed by the consent of both parties.  Incorporating the agreement, however, lets the judge decide whether to change them.

3.            Remember -- unlike the terms concerning children, which are always modifiable by the court, the terms that pertain to adults cannot be modified by the court except in very limited circumstances.  For example, if the separation agreement has been incorporated into a court decree, the court has the power in North Carolina to modify the support terms (alimony or child support) based on a change of circumstances.  If the terms involve property division and the agreement has been incorporated, the court can only modify an executory promise (i.e., one that has not yet been completed, such as the transfer next year of a car title to a spouse).  Compare this to a promise which has already been executed by the parties (such as the deed to the house that was signed over to a spouse at the same time the separation agreement was executed).  The court can overturn a separation agreement if it was signed due to fraud,            coercion, or lack of mental capacity.  In most cases, however, this is a hard case to prove.

          PROPERTY DIVISION.  The parties can also agree on a division of property in their separation agreement, and that agreement will be binding on them.  The property to be divided consists of real property (land and the buildings on it), tangible personal property (cars, jewelry and furniture, for example) and intangible personal property (such as bank accounts, stocks and bonds, pensions and life insurance.)

          In North Carolina there is a presumption that all property acquired during the marriage is equally divisible.  This is presumed to be fair.  Other divisions, such as 60-40 or 75-25 are certainly legal if the parties agree that the division is fair and equitable, or if the judge makes findings in the property division order that justify an unequal division.  The property that is divisible in North Carolina is called marital property.  With certain exceptions, this is anything acquired during the marriage and before the separation.  The exceptions are separate property, that is, property which cannot be divided by the court and belongs to only one party as his or her exclusive property.  Examples of separate property are:

          a.  Pre-marriage property                     

          b.  Gifts or inherited property             

           c. Business or professional licenses   

          Except for these items, everything else owned either individually or jointly is marital property if it was acquired during the marriage.  The title to the property -- that is, whose name is on the deed or title -- does not matter.  So long as it was acquired during the marriage and does not fit into one of the above exceptions, it is marital property and subject to division

          Another category of property that can be divided is "divisible property."  This is property which derives from marital property, but which isn't in existence at the date of separation (DOS).  Examples of this include interest and dividends on financial assets after DOS, post-DOS appreciation (or depreciation), and compensation received after DOS for services before DOS.

          Pensions and retirement rights can also be considered marital property.  This type of property is often very valuable.  It is an important aspect of equitable distribution.  As of October 1, 1997, all pensions may be considered marital property and divided, whether they are vested or unvested.  Often a spouse's pension is the most valuable asset of the entire marriage, and this should certainly be considered in doing a separation agreement.            

          For more about property division and equitable distribution, see the CO-COUNSEL BULLETIN on that subject.

          If there is to be no division, the agreement should say so.  If the decision on pension division is to be put off or deferred until the divorce because there is no present agreement, that also should be stated clearly.  Make sure the agreement is very specific and plain in this area.  The parties' intent as to dividing a pension or waiving this should be explicitly stated. A poorly worded agreement may be challenged in court as vague and unenforceable, or it may result in a loss of any rights to pension division because they weren't preserved properly in the agreement.

          The division of pension rights in a separation agreement can be done in two ways,  a present-value offset or a future percentage of payments.  The former of these involves calculating the present value of the pension right now and setting it off (or trading it) against the value of another asset, such as the other spouse's pension or the marital residence.  The second approach puts off the division until whenever the employed spouse starts receiving pension payments.  At that time the nonpensioned spouse would receive a share of each check equal to one-half (or some other percentage) of the marital portion.   The marital share is that which accrued during the marriage.  The marital share can be calculated by dividing the years of marital pension service by the entire number of years of pension service.  If the latter is unknown, the marital share is expressed as a formula, such as: "19/x, where 19 represents the years of military service for Husband during his marriage to Wife, and x represents his total years of military service."

          DEBT DIVISION.  A good separation agreement also contains terms for allocation of marital debts.

          You should set out a schedule for who pays what debt in the agreement, including the creditor's name, account number, purpose of the debt, approximate balance and monthly payment amount.  This will not stop the creditor from suing both parties if payments are not made by one spouse and both names are on the obligation, but it allows the innocent party to ask the court to hold the wrongdoer accountable for the debt as set out in the agreement. 

          As to who should get what debts, there is no "right" answer to this question.  In one case, the husband may take on payment for all the debts because his is the sole source of income in the family or because he created the debts in the first place.  In another case, the wife may take over certain debt payments for things she charged or purchased or for things that she is being given in the property division.  For example, if the husband is getting the station wagon and the wife is getting the washer and clothes dryer, it might seem fair that each should assume the debt payment for the items he or she is receiving.

          "DATING CLAUSES."  There is no such thing as a "dating clause" that allows adultery.  Any sexual relations with a person who is not your spouse is adultery, and so no "dating clause" will serve to make legal something that is illegal.  Most separation agreements do, however, contain a clause that allows each spouse to be left alone as if single and unmarried, and forbids each spouse from harassing, molesting or interfering with the other.

          TAX CLAUSES.  You should include a clause about tax filing.  This is a very important provision which can save the parties a lot of money in taxes if prepared properly.  A good example would be a clause that required the parties to file jointly so long as they are eligible to do so (usually up until the year they are divorced) and to divide the refund or liability for taxes in a specified way, such as 50-50, or 75-25, depending on the incomes of the parties.

          PREPARATION OF THE AGREEMENT.  No single attorney can represent both husband and wife in a separation agreement.  It is best to have two attorneys involved, one to advise each partner.  In this way, the husband and the wife both know that they have received independent legal advice for their individual situation from a lawyer who does not have a conflict of interest in trying to represent two clients with different goals and needs.

          HOW TO RESERVE PENSION DIVISION [OR ALIMONY].   When the parties cannot agree on pension division, alimony or some other item, don't just leave it out!  In this area, it's not "Silence is golden" -- it's "Silence is dangerous!"  Omitting an item for which there is no agreement means that it's waived.  The reason?  Every good separation agreement contains a general release clause.   This states that any rights or claims not set out in the agreement are waived.  And that kills pension division (or alimony or whatever item is still in dispute).  A good legal assistance attorney will always include a reservation clause such as:  "The parties cannot agree on military pension division.  This issue is reserved for later agreement between them or for court decision."

          However, that may not solve the problem.  What if Mrs. Jones doesn't know what "reservation" means?  What if she thinks it means that "she's got it" and she needs to do nothing more?  Such a view, for a non-lawyer, isn't too unrealistic.  If this is her interpretation, then you can just bet that, when the divorce complaint and summons arrive several weeks or months from now, she'll just ignore them instead of getting an attorney to draft a counterclaim for pension division and alimony (which is what she must do to keep these alive after the divorce).  If there's no claim pending for alimony or equitable distribution (including pension division) at the time of divorce, then these are lost.  And that's an expensive mistake for Mrs. Jones to make-- and one that can be prevented.

          When faced with this situation, you should do two things for your client, Mrs. Jones:

ˇ              First, include a statement in the separation agreement that informs her of what she needs to do, such as, "The reservation of [alimony/pension division] in this agreement does not mean that it has been decided.  Wife must file a claim for this with the court when a divorce is requested by either party.  If Husband serves her with divorce papers, she must file this at court in a timely response to the divorce papers for [alimony, pension division].  If she files for divorce herself, she must request this in her complaint filed with the court.  If she does not do this, then she will lose these rights."

ˇ              Secondly, put it in a follow-up letter to her.  Make it as plain and forceful as you can.  Be sure she knows that her rights will be lost if she doesn't ask for them at the time that the divorce petition or complaint is filed.  You should send it certified mail to be sure she gets it.  Keep a copy of your letter!

          ENFORCEMENT.  The violation of a separation agreement, when it's not incorporated into a divorce decree, is by lawsuit for breach of contract.  The remedies available include money damages, injunction and specific performance (that is, an order from the court directing a party to perform the promises he made in the agreement).  Contempt of court is not available for breach of an unincorporated agreement, since contempt is the failure to obey a court order without legal justification.  Contempt is available, however, when a party breaches an agreement that has been incorporated into a court order or decree.  When drafting a separation agreement, be sure to include a clause allowing  the court to award expenses and attorney's fees to the party who has to bring the enforcement action.

          SECURING PROMISES.  If you represent the intended recipient of monthly payments (child support, alimony, pension payments or property division installments), be sure to secure those promises!  Here are some suggestions:

          Getting life insurance to secure a promise will help the recipient if the payor dies while he's still making the payments.  Be sure to use private insurance, however, not SGLI.  That's because of a Supreme Court case, Ridgway v. Ridgway, 454 U.S. 46 (1981).  In that decision, the Court stated that a member's beneficiary for SGLI is whomever he has selected at his death, regardless of agreements or court orders to the contrary.  No private contract or state court order can supersede the federal statutes concerning SGLI.  Thus no agreement you prepare can bind the servicemember to keep the recipient as beneficiary for life insurance if you use SGLI - you'll need to look to a private policy of life insurance for this.

          Security for the recipient can also be found in a court order.  To learn how to prepare one without filing a lawsuit (a confession of judgment or a voluntary support agreement), see the CO-COUNSEL BULLETIN on "Getting Court-Ordered Support."

          MAKING PROMISES NON-MODIFIABLE.  Child-related promises, such as visitation, support and  custody, cannot be removed from the court's overview; a judge can always change the terms for these when it's in the child's best interest.  But what about alimony payments?  Or property division  promises?  Can those be made unchangeable so that the recipient doesn't lose the benefit of her negotiated bargain?  The answer is YES - and there are two ways to do this:

          First, you can make the promises part of an unincorporated separation agreement.  All you need to do is state that the agreement (or, if you wish, the specific clauses involved) may not be incorporated into a divorce decree or other court order.  This makes the promises unmodifiable without the parties' consent, as in a future amendment to the agreement.  You'll need a clause that says: This separation agreement [or Paragraph X of this separation agreement] may not be incorporated into a divorce decree or other court order; it shall remain non-modifiable without the express written consent of the parties.

ˇ              The disadvantage of this approach is that you usually cannot monitor whether the agreement is offered for incorporation by the other side once a divorce lawsuit is filed.

ˇ              In addition, it's usually impossible to predict where the divorce case will be filed.  What if it is filed in a state that requires incorporation, unlike North Carolina (where incorporation is optional)?

                      Alternatively, you can make the promises interdependent, as an integrated property settlement.  If you do this, then even if the agreement is later incorporated, it will not be modifiable (at least under NC law).  You'll need a clause that says: The terms herein for property division [and alimony if that's included] are an integrated property settlement.  They are interdependent and reciprocal, and they shall remain non-modifiable without the express written consent of the parties.

[rev. 3/17/00]

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