A recent North Carolina Court of Appeals case, Washburn v. Washburn, adds a layer of complexity and the potential for malpractice to the already complicated area of property division under North Carolina’s Equitable Distribution Act. Washburn, an unpublished decision, makes clear that attorneys representing clients in contested equitable distribution cases involving pensions, survivor annuities or other defined benefit plans must present evidence of the plan’s present value at trial or risk losing their client’s right to share in the plan altogether.
At the conclusion of their five year marriage, Ms. Washburn sought division of Mr. Washburn’s military pension through an equitable distribution action in Onslow County District Court. At trial, neither party presented evidence to the trial court of the value of the pension yet the trial court awarded Ms. Washburn a portion of the pension using the following formula:
½ x A/B x C
“A” represents the number of months that the marriage coincided with military service creditable for retired pay purposes.
“B” represents the number of months of Plaintiff’s total creditable military service at retirement to be determined at the time of retirement.
This formula, labeled the “fixed percentage method” and approved as a formula for division of defined benefit plans by the North Carolina Supreme Court in Seifert v. Seifert, 219 N.C. 367, 354 S.E.2d 506 (1987), is commonly used by family law practitioners for the division of retirement benefits. The Court in Seifert explained,
[u]nder this method if, after valuing the marital estate [emphasis added], the court finds a distributive award of retirement benefits necessary to achieve an equitable distribution, the nonemployee spouse is awarded a percentage of each pension check based on the total portion of benefits attributable to the marriage. The portion of benefits attributable to the marriage is calculated by multiplying the net pension benefits by a fraction, the numerator of which is the period of the employee spouse's participation in the plan during the marriage (from the date of marriage until the date of separation) and the denominator of which is the total period of participation in the plan.
Although Seifert authorizes two methods of evaluating a pension, the first being to calculate the present value of the pension and make an in kind or monetary distribution which takes into account the anticipated pension and retirement benefits and the second being the application of the fixed percentage method as explained above, Seifert is commonly misunderstood as dismissing the requirement of valuation when the second method is used. As quoted in the text from Seifert italicized above, the pension must be valued regardless of which method of distribution is used.
Governed by North Carolina Gen. Stat. § 50-20, equitable distribution actions require the trial court to conduct a three-step process: (1) classify property as being marital, divisible, or separate property; (2) calculate the net value of the marital and divisible property; and (3) distribute equitably the marital and divisible property. Only those assets and debts that are classified as marital property and valued are subject to distribution under the Equitable Distribution Act. Grasty v. Grasty, 125 N.C. App. 736, 482 S.E.2d 752 (1997). The party claiming an interest in a defined benefit plan has the burden of proof as to the value of the plan on the date of the parties’ separation. Albritton v. Albritton, 109 N.C. App. 36, 426 S.E.2d 80 (1993). When the party claiming an interest in the plan fails to present evidence at trial of the present value of the plan on the date of separation, the trial court has no obligation to distribute the plan and it may be removed and excluded from the equitable distribution scheme. Id. The requirements that the trial court classify, value and distribute the marital and divisible property of the parties under N.C. Gen. Stat. § 50-20 exists only when evidence is presented to the trial court which supports the claimed classification, valuation and distribution. Grasty, 125 N.C. App. at 738-39.
Washburn serves as a warning to practitioners not to forget the foundational elements of any equitable distribution case. In Washburn, the trial court classified the pension as marital property and distributed the pension to the parties using the “fixed percentage method” but failed to make specific findings regarding the value of the pension. Mr. Washburn appealed the distribution, arguing that the trial court abused its discretion by distributing his military pension without first assigning it a value. On appeal, the Court vacated the distribution of the pension by the trial court stating that the application of the formula for division, without any findings of the plan’s value, does not comport with North Carolina case law requiring valuation of defined benefit plans. Furthermore, the Court held that because neither party presented evidence of the present value of the plan during the trial, the plan could not later be divided on remand.
Family law practitioners must understand that Seifert’s acceptance of the “fixed percentage method” of distribution does not eliminate the requirement that the pension be valued. The trial court must make specific findings regarding the value of any property classified as marital before it can distribute that property. Although Washburn directly addresses military pensions, the court’s holding can also be applied to survivor annuities and any other type of defined benefit plan. Following Washburn, it is essential that attorneys use an expert witness or some other method of presenting evidence of value at trial for each of those cases where the contested issue includes a pension, survivor annuity or other defined benefit plan.
Ashley L. Oldham practices at the law firm of Sullivan & Tanner, P.A. She was admitted to the practice of law in North Carolina in 2011 and has focused her practice on family law and criminal defense. Ashley has represented clients in a wide variety of family law cases across the state of North Carolina including pre-marital agreements, post-marital agreements, custody and visitation, support matters and property division. Contact Ashley at firstname.lastname@example.org.