A divorce with children often provokes selfless feelings by the parents. “So long as the kids are okay,” can quickly turn into, “So long as the kids get everything.”
Parents can find themselves transferring marital assets to children to either secure their children’s inheritance or to effectively keep those marital assets from being split in a divorce. No matter the motivations, it is a massive hassle when parents make significant gifts to children during an Illinois divorce.
Marital Assets And Gifts In An Illinois Divorce
Illinois divorce courts “shall divide the marital property without regard to marital misconduct in just proportions” 750 ILCS 5/503(d)
“‘[M]arital property’ means all property, including debts and other obligations, acquired by either spouse subsequent to the marriage” 750 ILCS 5/503(a)
“For purposes of distribution of property, all property acquired by either spouse after the marriage and before a judgment of dissolution of marriage or declaration of invalidity of marriage is presumed marital property.” 750 ILCS 5/503(b)
If the marital property is no longer in the control or possession of either spouse because it has been gifted to a child. Therefore, the gifted item cannot be divided by a divorce court.
It is not difficult to prove something was gifted. If it was physically delivered to the done or put in the donee’s name, the transfer of the gift is deemed effective.
“To constitute a valid gift, it is essential to prove the delivery of the property by the donor to the donee, with the intent to pass the title to the donee absolutely and irrevocably, and the donor must relinquish all present and future dominion and power over the subject matter of the gift.” Pocius v. Fleck, 150 NE 2d 106 – Ill: Supreme Court 1958
Gifts To Children During An Illinois Divorce
Gifts to children pose a particular problem. While children can accept gifts, they cannot do anything with them.
The whole point of having something valuable is so you can exchange that item of value for something else. Any such exchange would be a contract, which minors cannot enter into in Illinois.
“[A] minor…cannot enter into a contract which can be enforced against him” Severs v. Country Mutual Insurance Co., 434 NE 2d 290 – Ill: Supreme Court 1982
Because of this legal incapacity of minors, parents transfer money to their children via the Uniform Transfer To Minor’s Act. Any gift to a child made with the following form will transfer the property to the child…but the adult will still control the property while the child remains a minor (and possibly beyond).
“TRANSFER UNDER THE ILLINOIS
UNIFORM TRANSFERS TO MINORS ACT
I, …………… (name of transferor or name and representative capacity if a fiduciary) hereby transfer to ………. (name of custodian), as custodian for ……… (name of minor) under the Illinois Uniform Transfers to Minors Act, the following: (insert a description of the custodial property sufficient to identify it).
……………… (name of custodian) acknowledges receipt of the property described above as custodian for the minor named above under the Illinois Uniform Transfers to Minors Act.
……………………….. (Signature of Custodian)” 760 ILCS 20/10(8)(b)
While the gifting adult controls the property, the transfer is complete. The child owns the property under the management of the parent.
“A transfer made [under the Uniform Transfer To Minor’s Act] is irrevocable, and the custodial property is indefeasibly vested in the minor, but the custodian has all the rights, powers, duties, and authority provided in this Act, and neither the minor nor the minor’s representative has any right, power, duty, or authority with respect to the custodial property except as provided in this Act.” 760 ILCS 20/12(b)
Virtually every transfer to a child made under the formalities of the Illinois Uniform Transfer To Minors Act will be considered an effective gift, thereby exempting the property from division by an Illinois divorce court.
“[E]stablishing a bank account in a minor’s name in compliance with the provisions of the Uniform Gifts to Minors Act is highly probative on the issue of donative intent, it d[oes] not create an irrebutable presumption of intent.” Heath v. Heath, 493 NE 2d 97 – Ill: Appellate Court, 2nd Dist. 1986
Proving that a gift is not valid and that the property should, therefore, be divided by an Illinois divorce court is difficult.
“The burden [is] upon…the one questioning the creation of a gift, to overcome the presumption of donative intent by clear, convincing, unequivocal, and unmistakable evidence” In re Marriage of Agostinelli, 620 NE 2d 1215 – Ill: Appellate Court, 1st Dist., 1st Div. 1993
Gifts To Children As A Fraud In An Illinois Divorce
Gifts to children may be done with the best of intentions…but sometimes a transfer to a child can be a scheme to remove the property from the marital estate…only to have the property return to one parent by secret agreement or understanding. People take sides during a divorce…even children.
If a gift to a child is believed to be a fraudulent transfer, the child must be included as a party to the divorce.
“If a complete determination of a controversy cannot be had without the presence of other parties, the court may direct them to be brought in.” 735 ILCS 5/2-406(a)
“The court may join additional parties necessary and proper for the exercise of its authority under this Act.” 750 ILCS 5/403(d)
Once the court has jurisdiction over the child who received the gift, the court can make a determination if the gift was really a fraudulent scheme and, if so, to impose a constructive trust on the “gifted” property to properly award the property via divorce.
“A constructive trust is imposed by a court of equity to prevent unjust enrichment. Such a trust arises when a fiduciary or confidential relationship has been established by clear and convincing evidence. And when such a relationship has been established, “the law presumes that any transactions between the parties, by which the dominant party has profited, is fraudulent. This presumption is not conclusive, but may be rebutted by clear and convincing proof that the dominant party has exercised good faith and has not betrayed the confidence reposed in him. The burden rests upon the dominant party to produce such evidence, and if the burden is not discharged the transaction will be set aside in equity.” Hofert v. Latorri, 174 NE 2d 866 – Ill: Supreme Court 1961 (citations omitted)
The creation of a constructive trust will force the child who received the fraudulent gift to become the trustee for the marital estate and subsequently return the property to whomever the divorce court allocates the property.
“[A] constructive trust requires any other party who receives the…proceeds, but who has an inferior equitable right to them, to hold the proceeds solely for the vested beneficiary.” Perkins v. Stuemke, 585 NE 2d 1125 – Ill: Appellate Court, 4th Dist. 1992
Dissipation Of Assets And Gifts To Children During Divorce
If a child receives a gift from a parent and does not keep the gift for possible return to the marital estate, there may be a possibility of a claim of dissipation of assets.
When the remaining marital assets are distributed between the divorcing parties, the Illinois divorce court “shall divide the marital property without regard to marital misconduct in just proportions considering all relevant factors, including:
the dissipation by each party of the marital property” 750 ILCS 5/503(d)(2)
“Dissipation is defined as the use of marital property for one spouse’s sole benefit for a purpose unrelated to the marriage at a time when the marriage is undergoing an irreconcilable breakdown.” In re Marriage of Tietz, 605 NE 2d 670 – Ill: Appellate Court, 4th Dist. 1992
It is going to be difficult to establish that a gift to a child is not “for one spouse’s sole benefit for a purpose unrelated to the marriage.”
Unless the child was an acknowledged drug addict who would certainly spend the marital property on a “purpose unrelated to the marriage,” a gift will likely not be considered a dissipation warranting a lopsided equitable division of marital assets.
In my experience, people are actually surprisingly good about not bringing their children into the financial machinations of the divorce process. It is usually a sibling or other relative who gets a strange gift before or during a pending divorce. Gifts to relatives who are not children are usually far more suspect and, therefore, subject to constructive trusts and dissipation claims than a gift to a child.
Gift Tax On Gifts To Children
A gift to a child during a divorce can incur a tax liability to one or both parents. Gifts get taxed. If you transfer your property to a child, expect to pay taxes on that transfer.
“A tax…is hereby imposed for each calendar year on the transfer of property by gift during such calendar year” 26 U.S. Code § 2501(a)(1)
Gifts up to a certain amount are not taxable, however.
“In the case of gifts…made to any person by the donor during the calendar year, the first $10,000 of such gifts to such person shall not…be included in the total amount of gifts made during such year.” 26 U.S. Code § 2503(b)(1)
The $ 10,000 gift tax deduction referenced increases based on an inflation/time calculation. In 2022, gift taxes only begin after $16,000 of gifts to any one individual.
That tax obligation, if incurred before the divorce is finalized, will be allocated between the ex-spouses like any other marital property. ”[M]arital property” means all property, including debts and other obligations, acquired by either spouse subsequent to the marriage” 750 ILCS 503(a) (emphasis mine)
Divorce is hard. Divorcing with children is even harder. Divorcing with children who are in receipt of your marital assets is problematic on so many levels. If this is happening to you, contact my Chicago, Illinois family law firm to learn to speak with an experienced Illinois divorce attorney.