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Interest and Dividend Income In An Illinois Divorce
“If you don’t find a way to make money while you sleep, you will work until you die.” – Warren Buffett.
Lots of people have followed Warren Buffet’s advice by saving and investing so their money can earn them an independent
income one day. These investments generate interest, dividends and other kids of income.
However, even the wisest investor will have a personal life and, sometimes, that means divorce. How is interest, dividend and other income treated in an Illinois divorce?
Asset Division In An Illinois Divorce
Assets that generate income are divisible in a divorce if the assets are marital property. After the designation of an asset being “marital property” the Illinois divorce court “shall divide the marital property” 750 ILCS 5/503(d)
Non-marital property is property that was acquired before the marriage or received as a gift or inheritance. Non-marital property stays with the spouse whose name the non-marital property is in. “[T]he court shall assign each spouse’s non-marital property to that spouse.” 750 ILCS 5/503(d)
Dividing the assets is not the end of the story, however. If those assets generate some kind of income via rents, interest, dividends, etc., then that income must be factored into any maintenance or child support calculations.
Income From Assets In An Illinois Divorce
In determining maintenance (formerly known as alimony) the courts will consider “the income and property of each party” 750 ILCS 5/501(a)(1).
Child support amount is similarly arrived at based on income in that child support in that the Illinois statute states its goal is “to allocate the amount of child support to be paid by each parent based upon a parent’s net income”
But what is “income” for the purposes of a divorce? Income is “[t]he money or other form of payment that one receives, usu[ally] periodically, from employment, business, investments, royalties, gifts and the like.” Black’s Law Dictionary 778 (8th ed. 2004)
The Illinois child support statute agrees that income can come from a broad range of sources. “”[G]ross income” means the total of all income from all sources” 750 ILCS 5/505(a)(2)(A)
The Illinois maintenance statute reads similarly and directs us back to the child support statute should there be any questions. “”gross income” means all income from all sources, within the scope of that phrase in [the child support section] of this Act”
For the purposes of both child support and maintenance gross income is a factor used to determine net income. “”net income” means gross income minus either the standardized tax amount…or the individualized tax amount…minus any adjustments.” 750 ILCS 5/504(a)(3)(B)
All income is income under Illinois law. So, income from assets such as stocks, bonds and businesses is income. Dividends, interest income, partnership and LLC income all qualify as income for the purposes of child support and maintenance.
Where Do I Find My Spouse’s Dividend Income, Interest Income and Business Income?
Business income, dividends and interest are all paid to your spouse by someone or some entity. That someone or entity is going to issue your spouse and the IRS a tax form indicating the money they paid your spouse and what it was for.
If your spouse doesn’t declare that money on their own taxes, the IRS is going to flag your spouse and he or she will be audited, penalized and possibly prosecuted.
Your spouse’s taxes will show this dividend, interest and business money on the front page of their tax return. 2020’s 1040 form is pasted below for reference.
Line 2, 3, 7 and 8 will declare this income. Additional schedules will be attached to the tax return and supporting documents such as K1s, 1099-DIV, 1099-INT will all detail these additional sources of income.
Imputing Income From Assets
Some assets generate very little income because their value is so stable. Treasury bills and other bonds generally return a lower return in exchange for less volatility in their price. Although, in today’s zero interest rate environment, bonds generate almost no return at all.
Some assets actually cost money and thereby reduce a party’s net income.
It will be tempting for both parties to hold their assets (at least temporarily) as one of the three categories above. After all, a reduction in one party’s income vis-à-vis the other party’s income.
Illinois divorce courts can impute income on assets in order to arrive at a reasonable income for either spouse.
“[A] court may take judicial notice of the fair earning powers of money or invested capital over a certain time period.” In re Marriage of Ryman, 172 Ill. App. 3d 599, 612 (1988)
There’s not really a rule or law for how to impute income from assets but in one case, the “court acted within its discretion in including interest income for [the wife’s] cash assets, charging her two-thirds of the historical rate of return and including only a portion of the cash assets [the wife] received” In Re Marriage of Lugge, 2020 IL App (5th) 190046
The spouse whose income is being imputed from assets can challenge any attempt by reminding the court that’s not how imputing income works.
“In order to impute income, a court must find that one of the following factors applies: (1) the payor is voluntarily unemployed (In re Marriage of Adams, 348 Ill. App. 3d 340 (2004)); (2) the payor is attempting to evade a support obligation (Sweet, 316 Ill. App. 3d 101); or (3) the payor has unreasonably failed to take advantage of an employment opportunity (In re Marriage of Hubbs, 363 Ill. App. 3d 696 (2006)).” In re Marriage of Gosney, 394 Ill. App. 3d 1073, 1077 (Ill. App. Ct. 2009)
The rebuttal to this argument is that these imputation rules refer to earned income not investment income.
Still yet a “trial court [is] not required to apply various rates of return and make specific findings regarding the amount of income that [one party’s] assets could produce.” In re Marriage of Heroy, 385 Ill. App. 3d 640, 656 (2008)
The same court, however, elaborated that consideration of income from assets was completely optional. “[A] trial court may consider future income from retirement benefits in determining the proper duration or amount of a maintenance award.” In re Marriage of Heroy, 385 Ill. App. 3d 640, 656 (Ill. App. Ct. 2008)
It’s all in the discretion of the Illinois divorce court. So, if you don’t ask, you don’t get (this is my professional catchphrase)
When Income From Assets Doesn’t Matter
Sometimes there are so much assets and income that you effectively stop counting. “If the combined gross annual income of the parties is less than $500,000…shall be in accordance [with guidelines]” 750 ILCS 5/504(b-1)(1)
If the parties are generating over $ 500,000 of income, individually or together, the capacity to pay alimony no longer becomes an issue and the court does not insist on calculating maintenance based on the payor’s income.
Instead, the court will pick an amount of maintenance based on the following (this is an abbreviated version of 750 ILCS 5/504(a):
- The income and property of both parties
- The present and realistic future earning capacity of both parties
- Any reduction in the present and future earning capacity of the party seeking maintenance because that party devoted time to domestic duties or delayed education, training, employment or career opportunities because of the marriage
- Any reduction in the present or possible future earning capacity of the party against whom maintenance is sought
- The necessary time required to allow the party seeking maintenance to acquire appropriate education, training, and employment, and whether that party is able to support themselves through employment
- Any parental responsibility arrangements and its effect on the party seeking employment
- The standard of living during the marriage
- The length of the marriage.
- The age, health, station occupation, amount and sources of income, and sources of income, vocational skills, employability, estate liabilities, and the needs of each party
- All sources of public and private income including, without limitation, disability and retirement income
- Contributions by the party seeking maintenance to the education, training, career, or license of the other spouse
- Any valid agreement between the parties
- Any other factor that the court expressly finds to be just and equitable
This is how all maintenance was determined in Illinois before 2016 so veteran judges will be comfortable arriving at a number for maintenance without calculating incomes.
Asset Appreciation And Income In An Illinois Divorce
Not all assets pay income. Many assets such as some real estate and stocks which don’t pay dividends merely increase in value. Can this increase in value be considered income in an Illinois divorce?
It can be argued that the increase in value can indeed be considered income. An increase in wealth has been held to be a kind of income for the purposes of child support in Illinois.
“[The money received] represented a valuable benefit to the father that enhanced his wealth and facilitated his ability to support [the child]. [The money] therefore qualif[ies as “income”” In re Marriage of Rogers, 213 Ill. 2d 129, 137 (Ill. 2004)
Income includes “gains and benefits that enhance a noncustodial parent’s wealth and facilitate that parent’s ability to support a child or children,…normally linked to employment or self-employment, investments, royalties, and gifts.” Mayfield, 2013 IL 114655
Does this require the parties to return to court each year and share their respective net worth balance sheets for a possible true up of that year’s child support and alimony? Not that I’ve ever seen in my 15 years of practice.
Still, if a spouse came into a windfall on paper, like an award of stock options, an upwards modification of maintenance or child support could occur. The problem is, you would never know because the appreciation of assets is not reported on anyone’s taxes.
S-Corporations and Income In An Illinois Divorce
S-Corporations are closely held corporations that do not release profits each year to the shareholders in the form of dividends. Instead, the S-corporation’s profits go straight to the owner who subsequently pays the tax on those profits as ordinary income.
For the purposes of determining income for child support and maintenance, S-corporations make things very easy. Gross income from the S-corporation goes straight to the S-corporation’s owner and is taxed like any other income. Net income is, thus, easily determined.
The only problem is the S-corporation’s owner also controls the distribution of that S-corporation’s profits. The S-corporation’s owner doesn’t answer to a board of directors so the S-corporation’s owner can reduce their income at any time…and they often do conveniently reduce their income during a divorce. This reduction in distributed earnings is called “retained corporate earnings”
“A subchapter S corporation monitors its retained corporate earnings using an account which is then used to determine each shareholder’s basis for taxed but undistributed corporate income. However, retained earnings and profits of a subchapter S corporation are a corporate asset and remain the corporation’s property until severed from the other corporate assets and distributed as dividends.” In re Marriage of Joynt, 375 Ill. App. 3d 817, 820-21 (2007)
Retained corporate earnings are not income for the purposes of child support and maintenance in an Illinois divorce unless there is “evidence to support that [the party] used retained earnings to shelter marital income” In re Marriage of Joynt, 375 Ill. App. 3d 817, 820-21 (2007)
Retained corporate earnings will be considered income when “were not used to pay dividends, nor were… used in connection with the corporation” In re Marriage of Lundahl, 396 Ill. App. 3d 495, 504 (Ill. App. Ct. 2009)
If your spouse has an S-corporation they are probably pretty smart. The S-corporation owner spouse will know that they can control their own income from the S-corporation. It is important that you understand how to show the court what their income should be.
Goodwill and Income In An Illinois Divorce
Income from a business is income for the purposes of child support and maintenance…unless the other spouse has already been allocated money for that future income.
A marital business’s value will be divided between the spouses in an Illinois divorce. That business’s value will be sum of the value of the physical assets plus something called “goodwill”
“The market value of goodwill is the amount a willing buyer would pay for a professional practice in excess of the value of the physical assets.” In re Marriage of White, 151 Ill. App. 3d 778, 780 (Ill. App. Ct. 1986)
“Goodwill represents merely the ability to acquire future income.” In re Marriage of Zells, 143 Ill. 2d 251, 254 (Ill. 1991)
So, under this theory, if a spouse gets almost any payout from the value of the business, they can no longer ask for maintenance or child support because they’ve already been paid the present value of that future income. Otherwise it would be double-dipping.
But, a later case said this only applies in regards to professional practices. For professional practices, the goodwill is associated with the professional’s actual work, not just the business itself. “Unlike a legal or medical practice, the goodwill of [another business] is not solely dependent on the owner’s professional skills…[M]ost corporate commercial enterprises, exist independently of their owners and continue to function as new owners come and go.” In re Marriage of Talty, 166 Ill. 2d 232, 245 (Ill. 1995)
Once again, lawyers have protected their own.
But in reality, it means that professional goodwill should never be divided and income should remain income for the purposes of child support and alimony. But, if professional goodwill was divided for whatever reason…the income from the business should probably not be considered.
The goodwill argument can also be used to ensure that any value-added sales be considered as income. If for example, an artist was turning $ 10 of plaster into $ 10,000 of statutes, you can use the goodwill argument to argue that each statute is definitely $ 9,990 of income to the artist and should not be diluted further.
If you or your spouse have significant assets, then there are assets that generate income which will affect your Illinois divorce. Contact my Chicago, Illinois family law firm to speak with an experienced Chicago divorce attorney.