A hybrid asset is something that is partially "separate" (belonging to that spouse individually) and partially "marital" (belonging to the marriage). This occurs when part of the asset was earned during the marriage, and part of it came from a gift, inheritance, or before or after the marriage.
Source of Funds Rule
North Carolina uses the "source of funds" rule, which just means the marital (belonging to the marriage) and separate (belonging to the individual) portions of an asset depends on how much of the money used to purchase the asset came from a marital or separate source. The court starts from a position of giving the separate and marital portions based on the percent of their contribution.[1] Say a piece of jewelry was bought 50% with income earned during the marriage, and 50% with a gift from a family member, that jewelry is going to be 50% marital and 50% separate. Meaning, the other spouse will be owed 25% its value.
However, this presumes the asset did not increase or decrease in value over time. Many blended assets like stocks and houses fluctuate in value greatly and involve contributions over time. The return on investment from those contributions are divided proportionally amongst the marital and separate portions.[2]
Tracing
The source of funds rule works hand-in-hand with a concept called "tracing". Even if marital and separate money are mixed into the same account, the court will still determine how much of that money is marital versus separate, so long as the party claiming a separate property interest can trace the money back to the deposit.[5]
If part of the asset's purchase can be traced to separate property, that spouse will be able to claim a proportional interest as their own separate property, even if they put their own money into something that was titled to both parties.[3] The exception is if, when the property was put into the marriage's name, it was clearly indicated in a contract or sale document that the separate property was being gifted to the marriage.[4]
In most cases, if someone uses an inheritance, gift, or pre-marital asset to buy something for the marriage, the married spouses are not drawing up formal contracts saying it is a gift to the marriage. Therefore, this issue arises mostly just for real estate, because the standard "tenants by the entirety" title realtors use for married couples constitutes sufficient evidence that the parties intended the marriage to own the home.
Examples
House: A house that was purchased before the marriage is pre-marital (separate property), but then the parties pay down the mortgage during the marriage, using marital income. The reduction in the balance of the mortgage is marital, because the money used to pay down the mortgage balance was earned during the marriage. However, each month when the marriage made a mortgage payment, it also gained a small interest in the home's appreciation each subsequent month.
Pension: A spouse works at the same job from 1990 to 2020 and earns a pension. They get married in 2010 and separate in 2020. The pension earned from 1990 to 2010 is separate property, because it belongs to the spouse that earned it before the marriage. However, one-third of the pension, earned during the marriage, is marital.
Retirement Account: A 401k is started before the marriage. Those contributions are pre-marital (separate property). Then the spouse continues making contributions during the marriage. That portion of the contributions was earned during the marriage (marital property). The spouse continues making contributions to the 401k after the date of separation (separate property). However, the marital property gained a lot of value in a short time due to fluctuations in the stock market, whereas the contributions after separation haven't gained much value.
This becomes very complicated to calculate, because even if the spouse's monthly contributions into the 401k are consistent, the contributions made a long time ago gained more value on the stock market than the payments made more recently.