There are many questions regarding property division during the divorce process. From what is considered non-marital or marital property, to how the court divides up property, Sean Sullivan, Illinois Family lawyer discuss the intricacies of property division during the divorce process.
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Divorce Magazine Podcast: Elmhurst, Illinois family layer Sean Sullivan discusses property division during the divorce process
Hosted by: Diana Shepherd, Editorial Director, Divorce Magazine
Guest speaker: Sean Sullivan is a family lawyer practicing in the Elmhurst, Illinois area at the law offices of Laura M Urbik Kern specializing in child custody and dissolution in divorce. With a degree in psychology as well as a Juris doctor, Sean is able to help his clients with the most difficult family law issues. Visit his website, www.laurakern.com to learn more.
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Read the Transcript of this Podcast Below.
What is the difference between an equitable distribution state and a community property state? Which kind of state is Illinois?
Sean Sullivan: First, Illinois is considered an equitable distribution state. What equitable distribution state means is when the judges are looking at the marital assets as a whole, they will start at 50/50, and then may go up or down from there as they see fit in order to arrive at an equitable division of the estate. Rarely do they go past 60/40, but there can be some variation and change in there, and again, it’s very fact specific and it’s what the judge thinks and the factors he looks at.
A community property state is a separate community property state in which it’s 50/50 and everything is viewed as just split down the middle.
What is the difference between marital property and separate property? Why is it important to know the difference between the two?
Sean Sullivan: Marital property is any property that’s acquired during the course of the party’s marriage; separate property would be more appropriately called non-marital property. Non-marital property is any property that’s listed by statute in the Illinois Marriage and Dissolution of Marriage Statue. There are specific categories of non- marital property. Generally, non-marital property is property that’s received through an inheritance, received as a gift, excluded by a specific agreement, or through a prenuptial agreement. Or perhaps, premarital property, something the party entered the marriage with.
If someone enters the marriage with pre-marital property, would any growth on that – for example if the person entered it with $10, 000 in a bank account, and if he or she were earning interest on that during the marriage, would the interest be marital or separate property?
Sean Sullivan: The answer is it depends on the situation. If the party maintains it separate than any accumulation of wealth and if it’s a non-marital property, then the wealth that accumulates is non-marital property. There are situations in which if the other spouse contributes to the non-marital property, gives it time or effort or does their own money to contributes to that non-marital property to enhance the growth, then you could sort of have a situation where the growth may have a part that is not marital but, is marital. I’m sorry for that matter, but for the most part non-marital property or any wealth it accumulates remains non-marital.
Who decides what is marital and what is separate property? What if one spouse doesn’t agree?
Sean Sullivan: The law decides what is marital and what is non-marital. It’s set up according to the statute and it’s very clear. If you have a question of what is marital and non-marital, then you can contact someone like myself or other lawyers and they should be able to very quickly analyze the situation and tell you what’s marital and non-marital. Other than the statute, if there’s a specific question as to how to interpret the statute, then it would be up to your lawyer and his or her position and terms. The final matter would then be decided by the judge.
Is it possible for an asset to change character from separate to marital, or marital to separate, and if so, how would that happen?
Sean Sullivan: It is possible for assets to change character between marital and non-marital. And again, it is driven by the statute. Section 503 of the Illinois Marriage and Dissolution of Marriage Statute covers property [in a whole] and sets forth very specific categories. However, there are specific fact situations in which one party keeps his or her property and it may remain non-marital separate property. But if the person starts to put his or her property together or use marital funds to contribute to non-marital purposes, then we could have a change in the character of the property. That is, again,very fact specific and you’d have to look at what the facts of the situation are and have your lawyer analyze that. There can also be what’s considered contribution to the marital estate or to non-marital estate.
What about a case in which somebody had premarital funds or inherited some money. Instead of keeping it seperate, the person used that money and took the whole family on a dream vacation, or contributed significantly towards renovating the family kitchen. Would that be an instance where it might have changed from separate to marital?
Sean Sullivan: That’s possible. You would have to look at it in the sense in which the person contributed in terms of the dream vacation.Ultimately, the money’s already spent and the person chose to contribute to the marital estate at that point, and so there’s probably not any reimbursement that’s entitled. But in the situation where the person took non-marital property, such as the inheritance, and used it for a renovation on the house or something that contributed to the marital estate, it’s then possible that he or she would be entitled to a reimbursement back to his or her separate estate. So, it’s kind of a twofold answer.
If one spouse received annual bonuses during the marriage, which he put into a savings account with only his name, are these funds considered marital or separate property?
Sean Sullivan: Since the bonus was received via income earned during the course of the marriage, the answer is it’s most likely still marital property. However, I would still need some facts specific to this situation to inclusively answer this question and give you the most accurate answer. Real life scenarios like this also hinge on multiple facts such as whether he’s co-mingled it, has contributed, if there’s interest, if he’s kept it entirely separate, or anything like that. You’re better off speaking with your lawyer and discussing the separate facts pertaining to your case.
What does co-mingling mean in this instance?
Sean Sullivan: Co-mingling is again, when money changes hands or it changes character in nature. It’s usually when you combine non-marital property or non-marital income with marital property, and then the line becomes blurred. Or when it is earned and when it is paid becomes that issue.
If only one spouse worked outside the home during the marriage, are contributions to that spouse’s retirement accounts considered marital or separate property?
Sean Sullivan: As a general rule, contributions to retirement accounts that are earned during the course of the marriage are considered marital property.
What if some of it was earned before the marriage and some of it during?
Sean Sullivan: Then you would have a situation where some of it would be considered a non-marital portion, and some of it would be considered a marital portion. You would then determine that at the time it’s divided up in pursuant to the property division. You would have some expert do this.
In Illinois this is often done in procedure, which is through what’s called a qualified domestic relations order. And this is usually prepared by a third party who is an accountant or a tax keeper, or it can be an attorney, but it’s a third party who is not exactly representing one of the sides. This third party looks at the estate and then divides it. The person looks to see if any money was earned before the marriage, and then that would constitute being non-marital income portion or non-marital earnings of the retirement accounts. Any money that was earned during the marriage would be considered into the marital portion.
There is a formula which is specifically known as the Hunt formula. This is applied by specific rules and you look at it. Again, anyone who is familiar with this type of thing would understand that and know that it’s pretty standard. But again, it’s all fact-specific and fact driven, and if you have questions as to whether that applies to your case or not, then I would say address your questions to me or another experienced family lawyer like myself.
Can you give us an example of non-marital property that was received as a gift during a marriage?
Sean Sullivan: We mentioned it several times today already. Money inherited from a relative is almost always considered a gift of non-marital property. In the case in which the relative who was dying or deceased had left it to the one spouse over the other, that is always considered non-marital property. There are situations in which then it can become that but again, that’s fact specific and you have to look at each specific case. You could then make that into marital property, but if you keep it separate and it was received via the bequest or will in that sense then, it would most likely remain non-marital.
What about that diamond engagement ring? Is that marital or non- marital?
Sean Sullivan: Diamond engagement rings are usually tricky. It’s an old school answer– it’s often a law school answer. But the general rule is that it’s considered a gift and so it’s usually not given back.
So, if the gift was given by the spouse, does that make any difference as to whether it’s marital or non- marital property?
Sean Sullivan: You mean if the gift was given during the marriage, is that what you mean?
Yes from one spouse to the other.
Sean Sullivan: If the gift was given during the marriage and it was intended in the true sense of the word to be a gift, as in there are no strings attached and there is no contribution consideration or anything like that, then it doesn’t matter who gave the gift. All that matters is the fact that it is a gift.
Let’s say someone owned a mutual fund account valued at $100,000 proper to marriage and kept it solely in his or her name. At the date of separation, the account had grown to $150,000. How much of that would be separate property and how much is marital property?
Sean Sullivan: It depends. First, you’d have to look at how much was kept separate, if anything was contributed to that account during the marriage, what was earned under the interest, or is any marital property added to it or co-mingled? If there has been some marital property, again this would directly tie into what I was talking about before under division of assets and applying the Hunt formula and looking at non- marital property versus marital property. If there’s a title change or anything like that, those things can change it.
So, this one is a very difficult question to answer in this short of time without the specific facts. So, again if you have a question on this, then you certainly need to talk to a family law lawyer like myself or someone else who is experienced in dealing with asset divisions and divisions of retirement accounts in this sense.
Is a degree earned during the marriage a marital asset? I’m thinking about a medical license or license to practice law earned during the marriage. How would those be valued?
Sean Sullivan: That’s a very typical question a lot of people ask. And the professional degree itself is not a marital asset; it’s the degree that is earned by the one party over the other. So, those are not necessarily valued. They don’t have a value in the sense to the marriage, but they are earned by the one spouse.
In Illinois are assets typically split 50/50 on divorce? How does that work? For instance, you can’t really split a car right down the middle or a house.
Sean Sullivan: Again, the key word in Illinois is equitable, which does not necessarily mean equal, but it means what the judge considers to be fair and reasonable. A situation in which we have cars, well most marital families have two cars. One is typically thought of as the husband’s car and one is typically thought of as the wife’s car. Usually in those situations it’s pretty easy. The husband keeps the car he thought of as his, and the wife keeps the car that’s thought of as hers. Marital – the house is a little bit different. That is a joint property you would have to have a value to that and then you’d have to ask and ascertain who wanted to remain in the house. For example, if they didn’t want to remain in the home or if they both did, etc., and then again, you’d have to look at each specific factor in the situation.
Can a pre-marital or a prenuptial agreement override normal property division rules?
Sean Sullivan: Yes it can. But the first thing to consider would be to look at the pre-marital agreement and you’d have to establish the fact that there was an actual valid pre-marital agreement entered into by the parties. Then yes, that would override the rules of property division because it’s a separate contract that those specific parties lays out how the property is divided or not divided.
What happens if both spouses want to keep 100% of the same marital property, like the family home for example?
Sean Sullivan: In real life both spouses cannot keep possession of the same marital property. The law views it as there’s two rights to property in a sense. There is the physical possession of the item such as a home, and then there is the property value, which is the cash value or the fair market value of the home.
Obviously it’s impossible for both parties to retain both. In a situation in which both spouses wanted to keep the house, most likely the judge would probably rule that that’s not possible, and then the house should be sold. If the parties still can’t come to an agreement on how to sell the house, and one party is absolutely adamant that he or she wants to stay in the house over the other party, then that would be up to that other party to express it to his or her lawyer and have them negotiate it out. But in that sense, one party would be given the physical possession of the house, but then they would have to account to the other spouse the property value of the house and the equitable interest that that spouse would have in the house. So, the person would have to be accounted monetarily for the value of the house.
Can you get a divorce without having to divide marital assets and debts?
Sean Sullivan: No, that is not possible. There always has to be a division of marital assets and debts.
Does fault ever play a role in asset division?
Sean Sullivan: No. Unfortunately divorce is, at least from a lawyer’s perspective and the division of assets aspect, as a business proposition. Unfortunately, our clients often look at is as the emotional impact and we understand and look at that, but that’s why you hire someone such as ourselves. We’re experienced at divorce and detached emotionally as we look at the situation. A division of assets is approached in a very black and white mathematical only view. Fault would imply that there’s an emotional component to the division of assets and there isn’t. It is just simply, what is the law? What is the right? What is the equitable breakup and the distribution of the assets?
What if the fault was something like one of the spouses had an undisclosed gambling addiction and was using marital funds to pay for those gambling debts? Would there be any difference made in terms of property division if this was discovered upon divorce, that he or she had gambled away $50,000 or $100,000 of marital property?
Sean Sullivan: Sure, if the person had inequitably divided property or given it out, or the person had in that case what’s termed as dissipation. In that case, the spouse who had dissipated the asset or gotten/ unlawfully misappropriated funds that the other spouse wasn’t aware of, would then owe a contribution back to the marital estate to account for that.
What if one spouse doesn’t believe the property division is fair? Does he or she have any recourse?
Sean Sullivan: I’d have to ask in what context does the spouse not think the property division is fair? If the question is if the person doesn’t think it’s fair at the settlement stage or whether the parties are still in negotiation before the divorce has been finalized, then the party can instruct his or her lawyer that he or she doesn’t think it’s fair. The party can ask his or her lawyer to simply go to a hearing and have the judge decide what is a fair division or not. If you’re approaching this question from the sense that the judge was already decided and the judge has determined what the judge perceives to be a fair distribution of assets, and the client still does not think it’s a fair distribution of assets, then in that sense you’d have to appeal the judge’s ruling.
Are there any tax considerations to be aware of during property division?
Sean Sullivan: First and foremost, assets divided in divorce are tax free. However, each party may incur specific tax implications after they’re already divided up. Some of the most common ones are you have to look at in terms of the house and the house benefits, who gets the house. If one party is assigned the house as we discussed before, the physical possession of the house, then that party undertakes the mortgage payments and most of the federal tax laws prevent you from being able to deduct that tax. So, that spouse may get it, and one spouse then cannot take the tax deductions on the house because they’ve been given to the other spouse.
Another one is if there’s a division of retirement accounts, such as what I talked about before and the qualified domestic relations order; again, the reason we use that vehicle is because it allows transfer tax free. However, if one spouse then wants to take the money automatically or withdraws it, then the federal tax laws would imply taxes on that. And the party receiving the funds then may occur in taxes.
Are debts also divided during property division or is that, does that take place at a different time?
Sean Sullivan: No, debts are automatically considered during property division. You would look at it all as a whole. And to some degree, the most appropriate way to look at it is to incorporate the division of assets because you want to look at the debts and how the assets are divided. Is there is there enough assets to cover all the debts? If there is then that’s great and you can divide what is left over. If not, then you have to assign who is getting what proportion of the debt.
So, you assign who is getting what proportion of the debt and then let’s say that the divorce agreement calls for the wife to take all of the joint credit card debts. What happens if she defaults on payments afterwards? Is the husband or the now ex-husband protected because the divorce agreement stated that he was not going to be responsible?
Sean Sullivan: Maybe. The answer is it would depend on the divorce decrement. He would have in a court of law somewhat of a defence if he could go in himself and say he was supposed to take it. But in that sense, it would be up to the lawyer who is drafting his agreement to put in language strong enough that clearly gives him and resolves him of any liability. So, that would be something I would address and I often put in in my marital settlement agreements when I’m drafting them is if one party is agreeing to take on a certain amount of debt, I clearly put in that language that the other party has been absolved from any further liability to that debt. Then he could take that in the court of law and say I’m clearly not responsible. I’m off the hook. It is her problem.
And would that answer be similar in the case of the marital home if one person was keeping it and both of their names were on the title? How would you protect the client who was not keeping the assets?
Sean Sullivan: Yes, it is approached kind of the same way. The marital settlement agreement it is the art of drafting it. And when one spouse is keeping it and one spouse was getting the equitable interest or the money to share in the house, the spouse who’s retaining the actual physical possession is probably more than likely assuming the responsibility for paying the mortgages. So you would then put in language that the person is absolving the other spouse from any further liability of that. And usually the spouse who is getting the property value and getting paid out his or her share of equity in the house but is not retaining possession of the house, usually he or she will sign over the interest to the other spouse so their name can be removed from the mortgage documents to further inflate themselves from any further liability.