Tracing assets in an Illinois divorce

Russell Knight

Russell D. Knight has been practicing family law as a Chicago divorce lawyer since 2006. Russell D. Knight amicably resolves tough cases while remaining a strong advocate for his client’s interests.

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Tracing and Commingling Assets In An Illinois Divorce

Tracing assets in an Illinois divorce

Almost all states allow property brought into the marriage to remain non-marital. Thus, divorce law allows the person who brought the property into the marriage to take that property out at the end of the divorce. Illinois is no exception. 

The rules for determining what assets have remained non-marital throughout the course of a marriage are far more strict in Illinois than in other states, however.

The concept of “tracing non-marital assets” or “tracing non-marital contributions” may be common in other states like Florida. In Illinois, hardly any tracing is allowed as commingling pre-empts tracing claims. But, if you use the Illinois law effectively, you can still carve out your premarital assets despite any commingling of funds.

What Is Tracing In An Illinois Divorce?

Tracing is the concept whereby a divorce litigant can show the court that certain assets value stemmed originally from a non-marital source. Therefore, that asset should be declared non-marital and returned to the person who made the original non-marital contribution.

In Illinois, non-marital assets get returned automatically to the original owner.

“[T]he court shall assign each spouse’s non-marital property to that spouse.” 750 ILCS 5/503(d)

But, most assets acquired during the marriage shall be deemed marital.

“‘[M]arital property’ means all property, including debts and other obligations, acquired by either spouse subsequent to the marriage” 750 ILCS 5/503(a)

Marital assets are divisible in an Illinois divorce.

“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)

This is all very simple. If an asset was acquired before the marriage, that asset is non-marital. If an asset was acquired after marriage, that asset is marital.

But what happens when a non-marital asset is used to buy an asset during a marriage?

If it is a pure transaction where a non-marital asset is used to buy 100% of an asset during the marriage, that newly acquired asset will remain non-marital per the exception outlined in the statute.

Property remains non-marital if it is a “property acquired in exchange for property acquired before the marriage;” 750 ILCS 5/503(a)(3)

The hard part is proving this tracing to an Illinois divorce court.

“The court shall make specific factual findings as to its classification of assets as marital or non-marital property, values, and other factual findings supporting its property award.” 750 ILCS 5/503(a)

To prove the non-marital nature of an asset acquired after the date of marriage, you must prove the non-marital nature of the asset which was used to purchase. Then you must prove that the original property was used to purchase the new property. This is largely done with bank statements tracing the transactions.

Commingling Assets In An Illinois Divorce

Transactions post-marriage are rarely so clean as to do a simple tracing analysis.

Money is fungible. Money is used to buy and sell things in any proportion. This means items are often purchased using a mixture of non-marital money from before the marriage and marital money that was earned or acquired after the marriage.  This mix of non-marital and marital money is called “commingling.”

“Commingled marital and non-marital property shall be treated in the following manner, unless otherwise agreed by the spouses:

(1)

(A) If marital and non-marital property are commingled by one estate being contributed into the other, the following shall apply:

(i) If the contributed property loses its identity, the contributed property transmutes to the estate receiving the property, subject to the provisions of paragraph (2) of this subsection (c).

(ii) If the contributed property retains its identity, it does not transmute and remains property of the contributing estate.” 750 ILCS 5/503(c)

This part of the statute identifies one type of commingling, a gift to the non-marital portion of the parties estate.

For example, if one party owned a garden and the other party installed a sprinkler system under the garden, that sprinkler system would just blend into the garden as a whole.  Therefore, after divorce, the party that owned the garden would keep the garden including the sprinkler system.

If, however, the non-garden owning spouse donated a statue for the garden, that statue could be deemed to have retained its own identity.  Thus, after divorce, that spouse could take back the statue.

But, if the statue was enormous and cemented into the ground to the point where the garden became “That garden with the big statue” then it could be argued that the statue had transmuted its identity into the garden’s.

This stuff can get weird, huh?  

These incidences of commingling via gift to the non-marital property are rare though. In this case, the marital property is transmuted into non-marital property.

It is far more common is that money gets mixed together via buying a new asset with both marital and non-marital funds. When this type of clear commingling occurs, any non-marital portion of the property is deemed to be transmuted into marital property.

Transmutation is “a doctrine in property law which allows the conversion of a separate property interest into marital or community property by agreement between spouses or by contribution of marital or community assets to the separate property” Merriam-Webster’s Dictionary of Law ©1996 (for other legal nerds, “transmute” and “transmutation” are, oddly, not included in Black’s Law Dictionary, therefore I had to resort to Merriam-Webster)

If marital and non-marital property are commingled into newly acquired property resulting in a loss of identity of the contributing estates, the commingled property shall be deemed transmuted to marital property, subject to the provisions of paragraph (2) of this subsection (c).” 750 ILCS 5/503(c)(1)(b)

“The principle of transmutation is based on the presumption that the owner of the nonmarital property intended to make a gift of the property to the marital estate.” In re Marriage of Olson, 451 NE 2d 825 – Ill: Supreme Court 1983

So, when the money gets mixed, it is presumed that the non-marital portion was a gift to the marriage as a whole.

But, tracing can still be allowed for a carve-out of the non-marital contribution.

When one estate of property makes a contribution to another estate of property, the contributing estate shall be reimbursed from the estate receiving the contribution notwithstanding any transmutation.” 750 ILCS 5/503(c)(2)(A)

This means you can ask for reimbursement of the non-marital contribution… but it does not mean you’re going to get every last penny back.

“No such reimbursement shall be made with respect to a contribution that is not traceable by clear and convincing evidence or that was a gift.” 750 ILCS 5/503(c)(2)(A)

How do you prove that the contribution was not a gift to the marriage when the presumption is that every instance of commingling is a gift to the marriage?

It’s an issue of proportion. “The commingling of marital and nonmarital assets, and the contribution of marital assets to nonmarital property must be sufficiently significant to raise a presumption of a gift of the property to the marital estate.” In re Marriage of Olson, 451 NE 2d 825 – Ill: Supreme Court 1983

When a spouse contributes personal effort to non-marital property, it shall be deemed a contribution from the marital estate, which shall receive reimbursement for the efforts if the efforts are significant and result in substantial appreciation to the non-marital property” 750 ILCS 5/503(c)(2)(B)

So, saying “I fixed the toilet in her non-marital house once. Therefore, my contribution to the house renders it marital” will not be sufficient. Building a deck, will probably not be sufficient. Paying for a complete rehab of the house probably would be sufficient.

After the presumption of a gift is established by the facts, the parties can testify as to how the contribution was or was not intended to be a gift.

Some actions, such as putting a non-marital property into both names via deed or mortgage create a rebuttable presumption of a gift to the marriage.

“[A] spouse owning separate nonmarital property performs the affirmative act of either transferring title into a form of joint ownership or augmenting the nonmarital property by commingling it with marital property, such act creates the “rebuttable presumption” of that party’s intention to change the character of the property to marital.” In re Marriage of Wojcicki, 440 NE 2d 1028 – Ill: Appellate Court, 1st Dist. 1982

“This presumption of transmutation may be rebutted by clear and convincing evidence that no gift to the marital estate was intended” Zito v. Zito, 554 NE 2d 541 – Ill: Appellate Court, 1st Dist. 1990

If you can overcome the presumption of the gift to the marriage, you need to prove with clear and convincing trancing, the court MAY award a reimbursement of your non-marital contribution.

The court may provide for reimbursement out of the marital property to be divided or by imposing a lien against the non-marital property that received the contribution.” 750 ILCS 5/503(c)(2)(A)

This is not easy! It often requires forensic accounting.

Mortgages And Marital Contribution To Non-Marital Property

You can see by now that most commingling arguments are about real estate. For most married couples, real estate is simply too massive to be exclusively paid for and maintained by one of the parties.

Most real estate has a mortgage against the property. The mortgage will typically be paid on an ongoing basis with funds earned during the marriage. Do those marital mortgage payments transmute a non-marital property into a marital property? No!

“[A] marital estate is not entitled to reimbursement for mortgage payments toward nonmarital property when the marital estate has already been compensated for its contributions by use of the property during marriage.” In re Marriage of Crook, 813 NE 2d 198 – Ill: Supreme Court 2004

The party that does not own the property but who is making some kind of contribution to the property via mortgage payments is already getting something in return for those mortgage payments…they get to live in the house!

“[T]he parties benefited from living in the house for a substantial period of time, [so] the court could reasonably have found that the marital estate had already been compensated for its contributions.” In re Marriage of Snow, 660 NE 2d 1347 – Ill: Appellate Court, 4th Dist. 1996

The One Thing That Never Gets Commingled: Tax-deferred Accounts.

Any retirement account that was started before the marriage will have a non-marital contribution. The contributions subsequent to marriage are marital.

“For purposes of distribution of property pursuant to this Section, all pension benefits (including pension benefits under the Illinois Pension Code, defined benefit plans, defined contribution plans and accounts, individual retirement accounts, and non-qualified plans) acquired by or participated in by either spouse after the marriage and before a judgment of dissolution of marriage or legal separation or declaration of invalidity of the marriage are presumed to be marital property.” 750 ILCS 5/503(b)(2)

Despite everything else in this article, this commingling does not transmute the non-marital portion of a retirement account into marital property.

An exception to the qualification of marital property in Illinois is “property acquired before the marriage, except as it relates to retirement plans that may have both marital and non-marital characteristics” 750 ILCS 5/503(b)(6)

Financial software is so accurate now that the non-marital portion of a retirement plan can be determined to the penny. 

This division is done via a Qualified Domestic Relations Order (QDRO).

“The term “qualified domestic relations order” means a domestic relations order—

which creates or recognizes the existence of an alternate payee’s right to, or assigns to an alternate payee the right to, receive all or a portion of the benefits payable with respect to a participant under a plan”  26 U.S. Code § 414(p)(1)(a), ERISA § 206(d)(3)(B)(i)

A QDRO can then allocate the non-marital portion to the account holder and divide the marital portion. Usually the QDRO just includes language such as “50% of the marital portion.”

A QDRO shall allocate “the amount or percentage of the participant’s benefits to be paid by the plan to each such alternate payee, or the manner in which such amount or percentage is to be determined,” 26 U.S. Code § 414(p)(2), ERISA § 206(d)(3)(C)

How To Get Back Your Non-Marital Contribution Even If You Can Not Trace Or Prove It Wasn’t A Gift

Even if you’ve hopelessly commingled your non-marital assets with your spouse’s assets or your joint marital assets, you can still plead with the court for some kind of carve out or higher proportion of those now commingled marital assets.

Marital property does not get divided 50/50 in an Illinois divorce.

“The [Illinois Marriage and Dissolution of] Act does not require an equal division of marital property, but an equitable division” In re Marriage of Jones, 543 NE 2d 119 – Ill: Appellate Court, 1st Dist. 1989

Illinois divorce courts “shall divide the marital property without regard to marital misconduct in just proportions considering all relevant factors, including:

(1) each party’s contribution to the acquisition, preservation, or increase or decrease in value of the marital or non-marital property” 750 ILCS 5/503(d)

The mere testimony that one party overwhelmingly contributed to the acquisition of property can result in an equitable division of that property in their favor.  Usually this looks like a 60-40 or a 70-30 split of that marital property in lieu of a 100% award. 

Tracing And Dissipation Of Assets In An Illinois Divorce

Tracing is generally discouraged in the analysis of a divorcing couple’s marital assets. Unless the transactions were crystal clear and done through separate accounts, the presumption of a gift to the marital estate will almost always carry the day.

There is one area of Illinois family law where tracing is absolutely required: if a dissipation of assets is alleged.

“Dissipation is defined as the use of marital property for one spouse’s 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.

A notice of dissipation asks the court to make a finding that marital funds were spent on things like gambling, adultery, or drugs that otherwise would have been available for distribution. Therefore, the court should award the marital portion of the misused funds to the party that didn’t dissipate those funds.

Illinois law then requires that “a party charged with dissipation carries the burden of proving he did not, in fact, dissipate assets.” In re Marriage of Toole, 273 Ill. App. 3d 607 (2nd Dist. 2005)

This means all the expenses will have to be traced to be proven to be expenses not associated with a dissipation of marital assets. Accuracy will be necessary.

“If expenditures are not documented adequately by the person charged with dissipation, the courts will affirm a finding of dissipation.” In Re Marriage of Tietz, 605 NE 2d 670 Ill Appellate Court, 4th Dist. 1992.

If your spouse is forcing you to trace your expenses for the purposes of a dissipation claim, you might as well trace all the non-marital contributions.  What’s good for the goose is good for the gander.

If you are concerned about commingling assets, transmuting the character of non-marital assets or tracing your non-marital assets, then you’ve got a lot of work ahead of you. Contact my Chicago, Illinois family law firm to get a free, no-obligation consultation win an experienced Chicago divorce lawyer.

This was one of my more in-depth and technical articles. So, if you got this far, you deserve a little joke:

What did the rich, divorced guy who never learned his lesson say?

“I’m single and ready to commingle”