Marital Property

            A.  The Marital Estate and The First Steps In Preserving It

 What is the marital estate?  Simply put, the marital estate is composed of property and funds which were either acquired by one or both of the spouses during the course of the marriage, or which a spouse contributed funds towards (such as equity in property through paying a mortgage) even if the other spouse established a sole interest in that property before the marriage.  It also can include retirement funds which were started before the marriage, but have been building up since the date of marriage.

The first question, of course, is what can be done to prevent “dissipation” (in other words, transfers or spending of funds) of the marital estate by the other spouse at the outset of the case.  The filing of a divorce case alone will not automatically protect dissipation.  Typically, if a client is afraid that the other spouse will try to drain a bank account, or quit-claim deed title in a house over to a relative, the first step is to simultaneously file a petition for dissolution, along with an emergency motion to impose a temporary restraining order (TRO).  The emergency motion is typically filed as an ex-parte motion (in other words, the other spouse does not need to get adequate notice of the motion).  However, the order will have to be sent to the spouse afterwards, and the order IS only temporary.  It is possible to try to rectify pre-filing dissipation, but that would require a normal motion.

As far as protection before the filing itself, common sense should apply.  The client should put aside some money in a separate account; however, it should be an amount which the court would view as fair and reasonably necessary (in other words, don’t just drain a bank account entirely, and leave the spouse with nothing).  Keep an eye on whether a spouse with sole title to a house is trying to deed it to a friend or relative.  A client should carefully read all documents that the other spouse presents, especially real estate documents.  Signature requirements for title transfer offer some protection, but only as much as the client’s unwillingness to sign documents can provide.

B. The General Basics of What Does Constitute, What Does Not Constitute, and What Can Dilute Marital Assets

At its most basic level, the concept of the marital estate seems simple.  Property acquired during the marriage is marital property, and therefore part of the marital estate to be divided during a divorce.  Of course, sometimes assets can be part marital property and part non-marital property, in the case of things such as retirement benefits.  In such a case, the date of marriage is the dividing line, as a rule of thumb.  750 ILCS 5/503 sets forth many of the basics of the marital estate.  One basic point to remember is that a valid prenuptial agreement can explicitly exclude specified assets from the marital estate.

The first question is whether the mere act of physical separation stops the accrual of marital property.  This of course, comes down to the concept of “normal” separation versus legal separation.  Simply put, the mere act of physical separation does NOT stop new property acquisitions or accrual from becoming part of the marital estate.  However, it may still affect it, especially in cases where whether property was bought with “marital income” is a factor.  Obviously, if two spouses live completely separate and apart, the income is no longer being “pooled”.

If property is considered non-marital, generally the increase in value in the property remains non-marital property (such as an increase in equity in a house bought long before the marriage).  However, if a spouse contributes income leading to said increase in value (e.g. mortgage payments), that spouse can be reimbursed via a reimbursement of said monies to the marital estate.  What constitutes a “contribution”?  Contribution does not have to be monetary; in other words, “personal effort” can be considered contribution.  However, that “personal effort” must be significant, and reimbursement can be denied if the results of the effort contributed to something which is already part of the marital estate.  For example, in In Re: Perlmutter, the court decided that the wife’s assistance with her husband’s business (which was NOT part of the marital estate) was not reimbursable to her, because the result of that assistance was her husband’s income, which was already part of the marital estate. 

If a spouse is thinking of transferring an asset to a third party to keep the other spouse from getting it, he or she should think again.  Fraudulent transfers to a third party can be undone to preserve the marital estate.  If something shows an intent to defraud, this can be used as evidence that the transaction should be undone.  For example, the court in In Re: Frederick decided that the fact that the husband consulted a divorce attorney while planning a real estate trust which would keep property from the wife, showed that there was an intent to defraud.  The trust, of course, was overturned to keep the marital estate intact.

While the rule regarding marital property generally sets the date of marriage as when the marital estate begins, there is a specific exception for real estate.  In Re: Jacks sets up a narrow exception for a home bought “in contemplation of marriage”.  That’s right- if you buy a home shortly before you get married, there is a chance it will still be part of the marital estate.  However, this exception is very dependent on the circumstances surrounding the transaction.  There is no real “rule”, but it appears that both parties need to be substantial participants in the process of buying and owning the home, and the home purchase must be close to the date of marriage.  How close?  There’s no statutory period, but courts have held that buying a home 2 months before the marriage can trigger this exception, while, on the other hand, 15 months is too long of a wait to trigger the exception.

Finally, one should note that “reimbursement” does NOT mean the spouse will get directly reimbursed, but rather that said reimbursement will go to the marital estate.  This means that contributions made by a spouse to another’s non-marital asset worth will not necessarily be refunded in full to that spouse, but may still be subject to the normal process of property division.

C.  The Major Factors Looked At When Dividing the Marital Estate

So now that we’ve looked at what makes up the “marital estate”, the next question is how the marital estate is to be divided.  While there are specific issues for each category of property, some general rules can be applied across the board.  When a court seeks to divide marital assets, there are a number of factors which it will look at to make sure the division is “equitable”.  Saying that each party is entitled to half is far too simplistic, and in many cases, simply wrong.

The factor of contribution by a spouse has been expanded to currently include non-economic contribution (sometimes referred to as “services rendered by a spouse”, in more archaic terms).  Historically ignored, non-economic contribution now is a factor in division of assets.  However, non-economic contribution is much more a factor if the contributing spouse did not work at all.  If both spouses work outside the home (which of course can include work at home businesses nonetheless), there is a greater burden required to assert non-economic contribution.  One must show that he or she made a greater non-economic contribution than the other spouse (In Re: Tatham).  A spouse asserting non-economic contribution may find the assertion unsuccessful if the marriage was of short duration (In Re: Siddens and In Re: Zwart).  Even if one succeeds in this, economic contribution is still a greater factor in any case.

Contribution as a factor takes on more importance due to the fact that marital misconduct in itself is not a factor.  However, marital misconduct does sometimes affect the applicable factors.  For example, adultery in itself is not to figure into giving the offending spouse less property; however, if the adultery led to the offending spouse to leave the household and shack up with his girlfriend, then the factor of contribution is affected by the living situation.

The factor of dissipation is applicable when property is improperly used for the sole benefit of one spouse during or after an irreconcilable breakdown of the marriage.  In other words, draining a bank account, or selling off all the housewares after the marriage has fallen apart can be dissipation, and may work against the spouse who causes the dissipation.  It is important to note that the initial burden of proof is on the party making the accusation. 

Dissipation isn’t always clear cut.  For example, gambling losses are patently dissipation.  However, things like bona fide investment losses are not dissipation if they are legitimate, and not purposeful.  Use of marital funds for attorney’s fees can be considered dissipation, but are also viewed as advances from the marital estate.  If spouses are separated, the resultant living expenses are NOT dissipation if they are NECESSARY expenses.  The failure to properly maintain property can be dissipation, even though it really doesn’t necessarily equal improper use for the sole benefit of one spouse.  However, a pattern of gift-giving is not necessarily dissipation, depending on whether one can argue the act of giving was for the “sole benefit of a spouse”.  Importantly, dissipation is only an existing factor for acts (or omissions) after the irreconcilable breakdown occurs.

The value of non-marital property assigned to each party is yet another factor.  If one party has a significant            amount of non-marital property, this may influence the court to award most of the marital property to the other spouse.  In the absence of non-marital property, an equitable allocation might be, not considering other factors, a 50/50 split.  With a proportionally much greater amount of non-marital property held by one spouse, it could be considered equitable to give the other spouse 100% of the marital estate.  Note that when the marital estate is the bulk of the couple’s holdings, the non-marital property won’t be considered on a dollar-for-dollar basis in allocation.  Finally, contingent non-marital assets, such as inheritances, may or may not be considered when allocating property, depending on the court.

The duration of the marriage is, by way of reference, closely related to the non-economic contribution factor for “homemakers”, as stated before.  A 50% division is more likely in a short marriage where both parties contributed finances equally, as opposed to a short marriage where one party contributed most or all of the finances (in which case the spouse responsible for the income would get a greater share).  The situation changes when a marriage is lengthy, and one party was responsible for the income, while the other raised children.  The division would be more on an equal basis, presumably because of the greater investment of time and effort by the non-working spouse in this situation, as opposed to a short marriage.  (See In Re: Davis).

The relative economic circumstances of the parties may also work in favor of a homemaker/non-working spouse, as the stronger economic position of the other spouse might lead a court to give a larger portion of the marital property to the non-working spouse.  There is no requirement that the spouse who receives said property liquidate it.  Obviously, this is a very general factor, which may take into account the needs of a spouse in improving or maintaining their position (e.g. awarding a jointly titled car to a spouse who needs it to travel in her position as a saleswoman or real estate broker).

The obligations and rights from a prior marriage is nominally a factor, but receives little weight.  There is barely any case law establishing the weight of this factor, but the trend is to assign minimal importance to this factor.

Antenuptial agreements (aka “pre-nups”) can alter property rights by designating specific property as non-marital assets of one of the spouses.  As long as the agreement is valid, it can specify either receipt of tangible assets, or a set amount of money (which can even be contingent in its amount depending on the length of the marriage).  In addition, post-nuptial agreements can also specify division of assets.

There are also a set of factors bearing on economic security.  This includes such things as whether one spouse is in ill health, or can’t work.  The criteria include needs, skills, and “station in life”.

In addition, the fact that a person is a custodial parent also may turn in their favor, as the marital home may be considered the best place to raise the child/children.  This preference is related to the economic circumstances factor, in that the reasoning is that keeping the child in the marital home will reduce emotional disruption.  Furthermore, even if the home is not awarded outright to the custodial spouse, there may be a contingency allowing that spouse to stay in the house.

The factor of spousal maintenance is applicable in that in cases where there is no spousal maintenance awarded, a court may award more property as a “replacement” for the lack of maintenance.  However, the tendency of excluding awards of maintenance has decreased since the maintenance statute’s 1993 amendment, thus reducing the importance of this factor.

Much as in determining maintenance, the economic potential of each spouse may result in one spouse receiving more assets to redress an imbalance in future capabilities to accumulate substantial assets (In Re: Atkinson).  Obviously, the future economic potential can be affected by such things as a spouse’s education, or debt.  The justification here is that the spouse with better economic potential will be able to re-accumulate assets after dissolution, while the receiving spouse may end up not being able to accumulate beyond what he/she receives at the time of dissolution.

Finally, the tax consequences to the parties are an explicit factor involved in the division of assets.  However, the only tax consequences to be considered are those “immediately and consequentially” flowing from the court’s actions in division (In Re: Emken).  One such applicable situation is when capital gains taxes will be imposed due to a court order to sell property.  Even so, many transfers pursuant to a judgment of dissolution are not taxable transactions (exceptions include subsequent sales of property to third parties or retirement plan withdrawals).

As one can see, there are no hard and fast rules as to the division of property.  However, these guidelines can give some indication as to what a court would find to be a just division of marital assets.

D.   Specific Types of Marital Assets

Many of the different types of marital assets are not specifically addressed by the code, but are rather effected by the factors of what constitutes marital property, and how it should be divided.  There are some types of marital assets that require more specific consideration (retirement accounts and contingent injury claims), but for the most part, common sense application of the factors applies. 

Valuation of the property is an evidentiary question, which can be addressed by either the owner of the property, or by expert testimony.  Expert testimony is not required, as it is assumed that the owner has some familiarity with the property.  Nonetheless, if the owner can be shown to be incompetent due to unfamiliarity with the underlying facts regarding the property’s valuation, expert testimony may be needed.  (In Re: Vucic).  Expert testimony is advisable for more complex situations, such as complex retirement accounts, or even for real estate (an appraiser or realtor).  The timing of valuation should be either the date of dissolution, or as close to trial as possible when valuation involves a fair degree of complexity (In re: Benkendorf- See also IMDMA 5/503(f)).  In cases where the value has increased substantially between the filing of the case and the trial, one must still use the increased value.  However, it can be argued that the other, non-working spouse did not contribute to the increase in value after the parties separated (with the rebuttal being that the increase would not have occurred without the other spouse’s contributions while still living together).

Tangible personal property division basically falls into two categories: what judges actually care about, and everything else.  Judges typically will only want to get involved in personal property division if it involves vehicles.  Obviously, vehicles are fairly major assets, which also bear upon factors such as the parties ability to work, or to effectively transport children to and from school/day care.  However, property such as end tables and chairs are considered to be “piddling matters”, and judges would rather have the parties work out those specific issues.

Bank accounts, of course, are particularly affected by such factors as dissipation, as the parties will have access to any joint accounts not only during the marriage proper, but potentially during the separation period if no one takes steps to close and divide any accounts.  The larger the account, the more likely a judge will want to be involved.  Obviously, that TCF account which has had a typical balance of $5.00 for the past 8 years is something the judge will consider beneath notice.

Real estate is usually the major point of contention.  Much case law regarding both what constitutes marital property, valuation, and how it should be divided, revolves around real estate.  It should be noted that the court can order the sale of real estate (5/503(i)); however, a party must ask for the sale of a marital home, even if the request is only vaguely worded.  For real estate which is not a marital home, judge-ordered sales are often threatened, but rarely actually executed.

A court may order the reorganization of marital debt in the context of assets.  Excessive credit card use by one party, evinced by the accumulation of assets on credit, can result in that party being ordered to shoulder the burden of that debt.  Accepting a benefit of a debt, however, may result in someone who did not take out the loan or debt still having to pay some of the debt.  Even though the court has the power to order debt reorganization, this does not alter any existing obligations between the parties and their creditors.  It is always important to remind the client that any order of dissolution and related settlement agreement does not in itself eliminate their existing obligations- the client must still make arrangements with the creditors to alter any existing obligations (if that is possible).  Any court orders are typically only effective against one of the parties to the divorce.

Professional licenses or degrees are NOT marital assets.  Instead, a spouse’s license or degree is a factor involved in the division of marital assets (e.g. the economic potential of a spouse may be higher due to having a law degree).  This position makes sense, as a license cannot be simply bought or sold (notwithstanding George Ryan’s running of the DMV).

If a spouse is an attorney, his/her contingent fees are not marital assets.  This is due to the fact that there are restrictions on the splitting of fees with non-attorneys.  However, said contingent fees may be considered in the setting of maintenance.

Workers’ compensation and personal injury awards which accrue during the course of a marriage are marital assets.  While this means that said awards are divisible between the parties, it should also noted that the pain and suffering of the injured spouse is a factor to be considered.  This typically means that the injured spouse will still receive the greater part of the contingent award.  Note that even if the injury occurred before the marriage, any part of the award which would replace wages lost after the marriage is still marital property (the thinking being that this money is a substitute for income which would have been part of the marital estate).

E.  Retirement Benefits And Closely Held Businesses/Stocks

The assumption is that retirement benefits acquired during the marriage are presumed to be marital property, regardless of whether the benefits are considered vested, matured, or contributory, per 5/503(b)(2).  While the presumption can be rebutted, the grounds for rebuttal are few, such as rollover from a premarital interest, designation in a prenuptial agreement, or inheritance of a pension interest.

Allocation of retirement benefits can be tricky if the plan is not vested, however.  Typically, the court will look at a “present value” calculation, in which the present value of the payments at the time of the divorce is multiplied by a fraction (determined by the years of the benefit accrual during the marriage prior to divorce, divided by the total years of benefit accrual prior to the divorce).  If the present value cannot be determined, the application of this formula will typically be delayed until it is determined whether there will be a benefit payment.

On occasion, it may not be equitable to use a “straight” formula, as there may be variation between years as far as appreciation of the retirement fund/benefits.  Per In Re: Walker, if the majority of the pension is non-marital, the whole of the pension is considered non-marital, but the marital estate is entitled to reimbursement.  In other cases, it may be more equitable to use a year-by-year calculation (i.e. in situations where stock market fluctuations cause large increases or decreases in benefits during specific years).

Division of the benefits is slightly more complicated than other types of assets.  The most common way of doing it is to use a Qualified Domestic Relations Order (QDRO) to directly allocate benefits and remove the non-participant from the plan.  The value assignable to the non-participating spouse is transferred to him/her (either directly or into his/her own retirement plan) in a non-taxable transaction.  This removes the non-participant from the plan in whole.  A second alternative, typically used in cases where the employee spouse is almost retired, is the immediate offset.  This is simply the participant spouse’s “buying out” the other spouse with other assets.  However, this approach does not have the same tax-free benefit as a QDRO.  Third, a QDRO allocation of the existing defined benefit may be used to keep both parties in the plan.  The fourth alternative (which is a good option if underfunding puts the retirement plan in doubt)  is the reserved jurisdiction approach.  This is essentially a “pay as you receive” option, in which the participant makes payments to the non-participating spouse as he/she receives them, and the non-participant is no longer considered part of the plan.  The court maintains enforcement jurisdiction (much as it would for enforcing maintenance payments).

The issue of retirement benefits should not be “reserved”, even if valuation or whether the plan will be paid, is not settled yet.  Also, the spouses should be aware that any distributions from a plan are taxable to the participant, or the alternate payee, when the distribution is received.  If an option such as the reserved jurisdiction approach is used, those payments can be made as maintenance to allow the paying party to apply an “alimony tax” deduction.  This essentially shifts the tax burden to the payee.

A benefit plan which has a named beneficiary is subject to the named beneficiary’s rights as a priority (In Re: Smithberg).  This is in line with the typical preference given to existing contracts in the context of inheritance or family law (notwithstanding allegations of fraud or dissipation).  One must remember, however, that this priority will typically need to have its roots prior to any divorce settlement agreements, or even the divorce itself.

Finally, a few words about certain types of stocks, namely closely held businesses.  The valuation of closely held businesses is considered tricky, as the nominal stock is often rarely traded or moved about (as it is often more about shielding individuals from liability).  Revenue Ruling 59-60 is the statutory authority for determining the valuation of closely held businesses.  The fair market value of a business is often changing, due to the economics of the time.

As a result, the major factors for determining the value of a closely held business include the nature and history of the business, the economic outlook of both the country and the applicable industry, the book value of the stock, the financial condition of the business, the business’ earning capacity, its dividend paying capacity, the existence of “goodwill” or other intangibles, the nature of the specific stock sales (such as the size of the stock to be sold), and the market price of similar business’ stock.  Also to be considered is the presence of any restrictive agreements on stock sales (e.g. options).  It should be noted, of course, that the general factors for property division as a whole apply.  Whenever there is a closely held business to be valued, it is likely that expert testimony will be needed if there is going to be a dispute.

F.  Conclusion

In summary, when determining how property is divided during a divorce, the first thing to do is to protect any potential marital property before it is dissipated by the other party, while simultaneously avoiding taking action that could be considered dissipation.  One must then determine what qualifies as marital property, based upon the timing and nature of its acquisition.  The consideration of the general factors then enters the picture, as well as valuation.  Each specific type of property has its own sub-factors to consider.  Finally one should tackle the tricky aspect of any retirement funds or closely held businesses, as those may require in-depth expertise to divide.  Obviously, each judge will vary in his/her approach, but remember: the general rules do apply.

 

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