What Is A True Up In An Illinois Divorce?
People’s incomes change after divorce. But, the obligations of child support and maintenance seem written in stone at the moment the divorce is entered. Of course, both child support and maintenance can be modified with good cause during later years. But, if one or both parties incomes are guaranteed to fluctuate every year, it is silly to file a motion to modify every single year. In lieu of constant modifications, most Marital Settlement Agreements include a “true up” clause for divorced parties who have expected fluctuating incomes. So, what is a true up clause in an Illinois divorce?
A true up clause in an Illinois divorce is anything you want it to be. There is no actual legal basis for a true up in Illinois. A true up is merely a term of art that would better be described as a reconciliation like they do in other kinds of accounting (but the word “reconciliation” word has other connotations in a divorce)
What Is The Legal Basis For A True Up In Illinois?
If you look up the phrase “true up” in the Illinois Marriage and Dissolution of Marriage Act you will not find it. If you search through Illinois divorce case law, you will also be left without a basis of law for a true up. The reason there is no law for true ups, is that a true up is a way to work around the statute.
The Illinois statutes regarding both child support and alimony are rigid and based on the incomes of the parties at the time the court enters the orders.
For child support, the Illinois statute requires an Illinois judge to monetize and ratify the “[d]uty of support. The court shall determine child support in each case by applying the child support guidelines unless the court makes a finding that application of the guidelines would be inappropriate, after considering the best interests of the child and evidence which shows relevant factors” 750 ILCS 5/505(a)(2)
Those child support guidelines “reflect the percentage of combined net income that parents living in the same household in this State ordinarily spend on their child.” 750 ILCS 5/505(a)(1)
The Illinois statute states that maintenance (formerly known as alimony) is “calculated by taking 33 1/3% of the payor’s net annual income minus 25% of the payee’s net annual income. The amount calculated as maintenance, however, when added to the net income of the payee, shall not result in the payee receiving an amount that is in excess of 40% of the combined net income of the parties.” 750 ILCS 5/504(b-1)(A)(1)
Both of these court-ordered obligations are based on the incomes of the parties at the moment the court makes these final determinations at the divorce prove up. A month, a year, certainly ten years later, the parties will have completely different incomes and, therefore, completely different child support and maintenance obligations.
This is why parties often forgo the statutorily mandated permanent obligations (until further court order). Instead the child support and/or maintenance is recalculated every year according the terms of the parties agreement…in their true up clause.
These terms get included in the Marital Settlement Agreement which gets incorporated in the final Judgment For Dissolution of Marriage. A Marital Settlement Agreement signed by both parties is a contract. A contract at least has a legal basis.
“A [Marital Settlement Agreement] is a type of contract, to which the normal rules of contract interpretation apply” In Re Marriage of Solecki, 2020 IL App (2d) 190381
What Does A True Up Clause Say In An Illinois Divorce?
Most true up clauses simply state that the parties shall exchange tax documents, 1099s, W2s, K-1s at a certain time of year. The tax documents will be compared and used to determine the parties incomes for the purposes of calculating child support and maintenance for remainder of the year until the next true up.
This all sounds well and good until the parties disagree.
If the parties are W2 employees with fluctuating incomes from bonuses or commission, W2s will not be enough because child support and maintenance in Illinois are determined by NET income. So, the actual taxes owed needs to be determined as well. This usually means that both parties must file their taxes at the same time. This will require the parties to file their taxes on a date certain…and determine a penalty if they don’t.
Taxes are determined not just by income and standard deductions but other deductions as well. Why should a parent or ex-spouse reduce their net income based on deductions that aren’t related to working? Like the mortgage interest deduction. Or the deduction for state taxes? Or the deductions for children born after the marriage?
This gets really complicated, really fast.
Usually, the parties have an accountant help them calculate the true up while the accountant is doing their taxes (this means you have to use the same accountant if you’re doing true ups)
The accountant must perform this calculation to determine net income when calculating income for the purposes of child support and/or alimony: ““[N]et income” means gross income minus either the standardized tax amount” 750 ILCS 505(a)(3)(B)
“[G}ross income” means the total of all income from all sources” 750 ILCS 5050(a)(3)(A)
“[S]tandardized tax amount” means the total of federal and state income taxes for a single person claiming the standard tax deduction, one personal exemption, and the applicable number of dependency exemptions for the minor child or children of the parties, and Social Security and Medicare tax calculated at the Federal Insurance Contributions Act rate. 750 ILCS 5050(a)(3)(C)
Furthermore, most people who have fluctuating incomes year-to-year are business owners. Business owners get a whole host of tax deductions that shouldn’t reduce their incomes for calculating child support and/or maintenance. A business owner may be driving a company car and even live on company property while dining on a company credit card…but still have not net income.
“For purposes of calculating child support, net business income from the operation of a business means gross receipts minus ordinary and necessary expenses required to carry on the trade or business.” 750 ILCS 5/505(a)(3.1)
If a company benefit that even barely resembles a gift or a perk, it will be counted as income. In re Marriage of Heil, 599 NE 2d 168 – Ill: Appellate Court, 5th Dist. 1992
Business owners who deal in physical equipment and real estate get a massive deduction called a depreciation expense. Depreciation expense is not a real expense, however. A depreciation expense’s purpose is to spread the cost of a depreciating asset evenly over the life of the asset so that business owners don’t have one massive tax expense when they trash an old truck or tear down a building.
So, the Illinois statute refuses to allow you to apply the depreciation expense when calculating income for the purposes of child support.
“The accelerated component of depreciation and any business expenses determined either judicially or administratively to be inappropriate or excessive shall be excluded from the total of ordinary and necessary business expenses to be deducted in the determination of net business income from gross business income.” 750 ILCS 5/505(a)(3.1)(A)
But, if you’re using a true up clause, you’re not bound to using the Illinois statute to determine income for the purposes of calculating child support and alimony. The default is the statute but a true up clause should say that to avoid confusion.
The true up clause should, in fact, repeat the statute if the parties intend to use the statutory definitions and calculations. It’s the only way to eliminate confusion. Otherwise, you’re back in court…and avoiding court was the whole point of the true up clause!
Is A True Up Clause A Good Idea In An Illinois Divorce?
It all depends. A true up clause can provide both parties with the flexibility that they need. It means both parties will celebrate each others’ financial successes and struggle through each others’ financial misfortunes.
Most people get divorced to get off that financial roller-coaster. They just want their check every month.
Most people, in reality, don’t want flexibility when it comes to paying an obligation. Even an obligation like child support or maintenance. You wouldn’t want to pay your electric bill based on your income that particular month. Why would you want to pay your child support or alimony that way.
The truth is that people enter into true up agreements as a way to avoid conflict. Wife wants $2000 a month and Husband wants to pay $1500 a month. So, instead of going to court or negotiating properly, they say “let’s just pay what we owe based on our incomes…next year.”
This sets off a chain reaction. Now the divorced couple has to be in each other’s financial business on a set time each year. This also means disclosing what their new spouses make and then dealing with that drama.
It’s a mess. Is it worth it? Hardly ever!
So, if someone is suggesting a true up to you, please consider carefully that the risks and rewards you’re sharing include additional risks you haven’t even thought about…like costly litigation when an Illinois divorce judge has to figure out exactly what you meant in your true up clause.
Some states, like Florida, don’t allow true ups. There’s a reason for that.