This past January 1st over 250 new laws took effect for Illinois, including several sweeping changes to Illinois’ divorce laws. Here are some of the major changes to the Illinois Marriage and Dissolution of Marriage Act that have taken effect this year:

I. Maintenance (750 ILCS 5/504)

As of January 1, 2019, maintenance is no longer tax-deductible to the payor spouse, and no longer includable in the gross income of the recipient spouse. In light of this new federal tax reform, numerous changes were made to Illinois’ maintenance statute effective January 1, 2019, and are summarized below:

  1. Maintenance Barred if Award is Not Appropriate (750 ILCS 5/504(b-1))
    Unless the court finds that a maintenance award is appropriate, the court shall bar maintenance as to the party seeking maintenance regardless of the length of the marriage at the time the divorce action was commenced.
  2. Guideline or Non-guideline Maintenance Awards (750 ILCS 5/504(b-1))
    Only if the court finds that a maintenance award is appropriate, shall the court order guideline maintenance or non-guideline maintenance. However, if the application of guideline maintenance results in a combined maintenance and child support obligation that exceeds 50% of the payor’s net income, the court may determine non-guideline maintenance, non-guideline child support, or both.
  3. Guideline Maintenance Awards (750 ILCS 5/504(b-1)(1)(A))
    If the parties’ combined gross annual income is less than $500,000, and the payor has no obligation to pay child support or maintenance or both from a prior relationship, the amount of maintenance shall be 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.
  4. Modification of Maintenance Orders Entered Before 1/1/19 (750 ILCS 5/504(b-1)(1)(B)) and (750 ILCS 5/504(b-4))
    Modification of maintenance orders entered prior to 1/1/19 that are and continue to be eligible for inclusion in the gross income of the payee for federal income tax purposes and deductible by the payor shall be calculated by taking:

    30% of the payor’s gross annual income minus 20% of the payee’s gross annual income, unless both parties expressly provide otherwise in the modification order. The amount calculated as maintenance, however, when added to the gross income of the payee, may not result in the payee receiving an amount that is in excess of 40% of the combined gross income of the parties.
    For any order for maintenance or unallocated maintenance and child support entered before 1/1/19 that is modified after 12/31/18, payments thereunder shall continue to retain the same tax treatment for federal income tax purposes unless both parties expressly agree otherwise and the agreement is included in the modification order.
  5. Maintenance Findings (750 ILCS 5/504(b-2)(3))
    The court shall state whether the maintenance award is fixed-term, indefinite, reviewable, or reserved by the court.

  6. Gross income for Maintenance Purposes (750 ILCS 5/504(b-3))
    Gross income means all income from all sources, except maintenance payments in the pending proceedings shall not be included.
  7. Net income for Maintenance Purposes (750 ILCS 5/504(b-3.5))
    Net income has the meaning provided in Section 505 of the Act (i.e., Child Support), except maintenance payments in the pending proceedings shall not be included.
  8. Maintenance Designation (750 ILCS 5/504(b-4.5))
    1. Fixed-term maintenance (750 ILCS 5/504(b-4.5)(1)) – If a court grants maintenance for a fixed term, the court shall designate the termination of the period during which this maintenance is to be paid. Maintenance is barred after the end of the period during which fixed-term maintenance is to be paid.
    2. Indefinite maintenance (750 ILCS 5/504(b-4.5)(2)) – If a court grants maintenance for an indefinite term, the court shall not designate a termination date. Indefinite maintenance shall continue until modification or termination under Section 510.
    3. Reviewable maintenance (750 ILCS 5/504(b-4.5)(3)) – If a court grants maintenance for a specific term with a review, the court shall designate the period of the specific term and state that the maintenance is reviewable. Upon review, the court shall make a finding in accordance with 504(b-8), unless the maintenance is modified or terminated under Section 510.

II. Child Support (750 ILCS 5/505)

The Illinois child support statute was amended to align with the federal tax law changes concerning maintenance, and to create uniformity with the new Illinois maintenance statute outlined above.

  1. Gross income for Child Support Purposes (750 ILCS 5/505(a)(3)(A))
    Gross income includes maintenance treated as taxable income for federal income tax purposes to the payee and received pursuant to a court orer in the pending proceedings or any other proceedings and shall be included in the payee’s gross income for purposes of calculating the parent’s child support obligation.
  2. Net Income for Child Support Purposes (750 ILCS 5/505(a)(3)(B))
    Net income includes maintenance not includable in the gross taxable income of the payee for federal income tax purposes under a court order in the pending proceedings or any other proceedings and shall be included in the payee’s net income for purposes of calculating the parent’s child support obligation.
  3. Spousal Maintenance Adjustment (750 ILCS 5/505(a)(3)(F)(2)
    Obligations pursuant to a court order for spousal maintenance in the pending proceeding actually paid or payable to the same party to whom child support is to be payable or actually paid to a former spouse pursuant to a court order shall be deducted from the parent’s after-tax income, unless the maintenance obligation is tax deductible to the payor for federal income tax purposes, in which case it shall be deducted from the payor’s gross income for purposes of calculating the parent’s child support obligation.

III. Modification and termination of provisions for maintenance, support, educational expenses, and property disposition (750 ILCS 5/510)

An order for maintenance may be modified or terminated only upon a showing of a substantial change in circumstances. The court may grant a petition for modification that seeks to apply the changes made to Section 504 by these amendments to an order entered before the effective date of these amendments only upon a finding of a substantial change in circumstances that warrants application of the changes. The enactment of the amendment itself, does not constitute a substantial change in circumstances warranting a modification. 750 ILCS 5/510(a-5).

IV. Disposition of Property and Debts – Designation of Life Insurance Beneficiary (750 ILCS 5/503)

A large aspect of divorce is the division of property and debts, including life insurance policies and proceeds. Newly enacted Section 503(b-5)(2) addresses treatment of a life insurance beneficiary designation upon entry of a divorce judgment, and is summarized below:

If a divorce judgment is entered after an insured has designated the insured’s spouse as a beneficiary under a life insurance policy in force at the time of entry, the designation of the insured’s former spouse as beneficiary is not effective unless:

  • The divorce judgment designates the insured’s former spouse as the beneficiary;
  • The insured re-designates the former spouse as the beneficiary after judgment entry; or
  • The former spouse is designated to receive the proceeds in trust for, or on behalf or, or for the benefit or a child or a dependent of either former spouse.

If a designation is not effective under one of the foregoing examples, the proceeds of the policy are payable to the named alternative beneficiary, or if there is not a named alternative beneficiary, to the estate of the insured.

An insurer who pays the proceeds of a life insurance policy to the beneficiary under a designation that is not effective under the above examples is liable for payment of the proceeds to the person or estate, only if:

  • Before payment of the proceeds to the designated beneficiary, the insurer receives written notice at the home office of the insurer from an interested person that the designation is not effective under the statute; and
  • The insurer has not filed an interpleader (i.e., a lawsuit to compel two parties to litigate a dispute).

Note:  the provisions of the new statute do not apply to life insurance policies subject to regulation under ERISA, the Federal Employee Group Life Insurance Act, or any other federal law that preempts application.

V. Visitation by Certain Non-Parents (750 ILCS 5/602.9)

With certain exceptions, certain non-parents may bring an action requesting visitation with a child.

The list of “appropriate persons” includes grandparents, great-grandparents, step-parents, and siblings of a minor child age 1 or older. These individuals may bring a petition for visitation and electronic communication if there has been an unreasonable denial of visitation by a parent and that denial has caused the child undue mental, physical, or emotional harm, and one of the following qualifying conditions exists:

  • The child’s other parent is deceased or has been missing at least 90 days;
  • A parent of the child is incompetent as a matter of law;
  • A parent has been incarcerated in jail or prison for more than 90 days immediately prior to filing the petition;
  • The child’s parents have been granted a divorce or legal separation, or there is a pending dissolution proceeding or other action involving parental responsibilities or visitation of the child and at least 1 parent does not object to the grandparent, great-grandparent, step-parent, or sibling having vitiation with the child; or
  • The child is born to parents who are not married to each other, the parents are not living together, the petitioner is a grandparent, great-grandparent, step-parent, or sibling of the child and the parent-child relationship has been legally established.

The newly amended Section 602.9(c)(E)(iv)-(v) clarifies that if the petitioner is a grandparent or great-grandparent, the parent-child relationship need be legally established only with respect to the parent who is related to the grandparent or great-grandparent. If the petitioner is a step-parent, the parent-child relationship need be legally established only with respect to the parent who is married to the petitioner or was married to the petitioner immediately before the parent’s death.

Work with a Chicagoland Attorney and Mediator

Getting a Divorce is a difficult time of life, choosing the right attorney should not be! For over 4 decades Alan Pearlman, Ltd. has been serving Chicagoland and the surrounding Suburbs in obtaining solutions to these difficult matters. Contact my office at 847-205-4383 for your free 1/2 hour consultation and see how we can be of service to you.

A QDOT is a specific type of marital deduction trust that is designed to ensure that non-citizen spouses will eventually pay any taxes that may be due upon distribution of the principal from the trust, even if the surviving spouse resides outside of the United States. Without a QDOT, an estate would be immediately taxable. More specifically, the marital deduction typically allows the assets of an estate to be passed to a spouse without tax consequences.

The marital deduction for property passing to a non-citizen spouse is generally not allowed without the existence of a Qualified Domestic Trust (QDOT).

Special Requirements

To ensure the taxes are eventually paid, there are certain required provisions:

  • The trustee of the trust, or one of the co-trustees, must be a U.S. citizen or a domestic corporation of the U.S.
  • The trust must contain a restriction that no principal will be distributed from the trust unless the U.S. citizen or domestic corporation trustee has the right to withhold any tax due from the distribution.
  • The trust must comply with Treasury Regulations to ensure the collection of any tax.
  • The trust must satisfy the applicable rules for marital trusts for U.S. citizen surviving spouses.
  • A QDOT election must be made on the decedent’s estate tax return.

If a trust fails to qualify as a QDOT, under certain circumstances a QDOT can be created by the use of a reformation (correction or change of an existing trust document). Some foreign countries prohibit trusts or prohibit a trust from having a U.S. trustee. In recognition of these situations, the Secretary of the Treasury has the authority to prescribe regulations allowing exceptions to the above requirements for qualifying as a QDOT. However, such regulations may only allow a marital deduction for nontrust arrangements or for trusts without a U.S. trustee under circumstances where the U.S. would retain jurisdiction and where there is adequate security to impose a tax on transfers by the surviving spouse of the property transferred by the deceased spouse.

Estates of $2 Million or Less

For estates of $2 million or less, the trust must either require that real property located outside of the U.S. accounts for no more than 35% of the fair market value of the trust property or meet the requirements for an estate that exceeds $2 million in assets.

Estates Exceeding $2 Million

For estates that exceed $2 million in assets, the QDOT must provide one of the following:

  • Require that at least one trustee is a U.S. bank
  • Post a surety bond in favor of the Internal Revenue Service (IRS) in an amount equal to 65% of the fair market value of the trust assets
  • Provide a letter of credit from a domestic bank or U.S. branch of a foreign bank, or issued by a foreign bank and confirmed by a domestic bank, in an amount equal to 65% of the fair market value of the trust assets

QDOT Property May be Subject to Estate Tax if:

  • Any principal distributions (except distributions made on account of hardship) to the surviving spouse will be subject to estate tax
  • The surviving spouse’s death prior to December 31, 2009 will cause the remaining property in the QDOT to be subject to estate tax as if it were included in the estate of the first spouse to die
  • If the QDOT ceases to meet the requirements under the regulations, an estate tax is imposed as if the surviving spouse had died on the date when the trust failed to qualify as a QDOT

Work with a Chicagoland Attorney and Mediator

Getting a Divorce is a difficult time of life, choosing the right attorney should not be! For over 4 decades Alan Pearlman, Ltd. has been serving Chicagoland and the surrounding Suburbs in obtaining solutions to these difficult matters. Contact my office at 847-205-4383 for your free 1/2 hour consultation and see how we can be of service to you.

Prior to filing for divorce, various federal tax considerations should be reviewed due to their potentially profound implications. Among the major issues commonly covered in a divorce decree or agreement are: alimony, sometimes referred to as “spousal” or “separate maintenance” support; division of property; and child support. Each has its own tax treatment and implications.

Division of Property

Most divorces involve a division of the property owned by the couple. Such a division of property is not usually a taxable event, i.e., neither owes taxes nor gets a deduction from income because he or she receives certain property as a result of the divorce.

There are, however, tax implications following divorce that affect future taxes. More specifically, selling personal and real property in the future may require spouses who received such property (pursuant to a divorce) to pay taxes in connection to that property.

Personal and real property have a “basis” for federal tax purposes. The basis is usually the purchase price of the property. When the property is sold later, the amount by which the sales price exceeds the basis is called “capital gain.” Capital gain is usually taxable at special rates. Thus, when property distributed pursuant to a divorce decree is subsequently sold by the receiving spouse, the receiving spouse may be required to pay taxes on the proceeds of the sale.

For example, in a divorce, the wife may receive the family home while the husband might receive stock or other investments equal in value to the house. If the house has a lower basis than the stock, when both are sold, the husband could end up with significantly more money, because he owes less capital gains tax.

On the other hand, under tax law applicable at the beginning of 2004, the first $250,000 (for individuals) or $500,000 (for couples) of the taxable gain on the sale of a qualifying personal residence is exempt from tax. In light of these tax issues, selling the house before the divorce, then dividing the proceeds, might make more sense.

Child Support

The parent who is granted custody of the child or children from the marriage, usually receives a set amount of money per month as “child support.” Child support payments are not includable in the taxable income of the receiving spouse and are not tax deductible by the spouse making the payments.

If the written agreement or divorce decree orders both child support and alimony and the spouse making the payments pays less than the required total amount, for tax purposes, the child support obligation is deemed paid in full first. Only money exceeding the amount of the child support obligation is treated as alimony.

Alimony or “Spousal Support”

In general, for federal income tax purposes, alimony and “separate maintenance payments” are “deductible” from the income of the spouse paying and includable in income for the recipient. Keep in mind that ALL THIS changes on January 1, 2019 according to the new tax laws signed into law this past December when Alimony i.e. Maintenance will no longer be deductible by the payor nor includable in the income of the recipient for Federal Tax Purposes. A word to the wise is simply if you are contemplating and/or are presently in the process of Divorce and you are going to be paying Alimony/Maintenance then if at all possible try to complete your matters prior to 1/1/2019. In that way you will be able to claim the deduction in all future years and you will not lose this benifit to you. “Deductible” for federal income tax purposes means it is subtracted from a taxpayer’s gross income before taxes are calculated, resulting in lower taxes. Taxpayers with a threshold amount of deductions must file a particular form with the IRS when paying income taxes and list such deductions.

Between the time a couple separates and a divorce decree is granted, one spouse may pay money for the support of the other spouse. These payments are deductible as long as they are made pursuant to a decree, court order or a “written separation agreement.” In order for alimony payments to be deductible, federal tax laws and regulations require the following:

  • The payments are made in cash, check or money order (no promissory notes, transfers or use of property, transfer of services, etc.) to the spouse, or to a third party in lieu of alimony at the written request of the recipient spouse, stating the payments are intended as alimony, and the request is received before the tax return is filed
  • The divorce decree, order or the written agreement of the parties does not identify the payments as something other than alimony
  • The spouses do not file a joint return with each other
  • The spouses are not members of the same household when the payments are made, if they are legally separated under a decree of divorce or separate maintenance – separation within the family home is not sufficient
  • There is no liability to make the alimony payments after the death of the recipient spouse – if part of the payment amount continues after death, that portion is not deemed alimony, and if all of the payment continues, none of it is alimony
  • The alimony payments are not treated as child support

 In most states, the age of majority (when a person is recognized by law as an adult), is 18 years of age or older. A “minor” is a person who is under the age of 18. When a minor breaks the law or causes damage or injury to another person, an animal or property, the minor’s parents may bear the liability. Many state statutes authorize courts to hold parents financially responsible for the damages caused by their minor children. Some states may even hold parents criminally liable for failing to supervise a child whom they know to be delinquent.

Parental Liability for Minors

In general, minors are liable for their misdeeds. However, when a minor acts intentionally or negligently in a manner that causes harm to another, it is difficult to collect damages from the minor. In such a situation, the minor’s parents may also be held liable for their child’s acts and/or ordered to pay for them. A “parent” can be anyone exercising parental authority over the child, but typically refers to the “custodial” parent. Although they vary widely by state, most parental liability laws target intentional, malicious or reckless behavior and exclude pure accidents. Parental liability stems from the custodial parents’ obligation to supervise and educate their children.

 

Continue Reading Parental Liability for Acts of Minor Children

 Several states refer to children who are born or adopted after the execution of a parent’s will and omitted from the provisions of the testamentary instrument as “omitted” or “pretermitted” children. In the interest of fairness, states that recognize the inheritance rights of posthumously born or adopted children have traditionally allowed “omitted” children to inherit under intestate succession (i.e., taking a share equal in value to what the child would have received if the testator had died without a will).

However, the law on the inheritance rights of posthumously conceived children (children conceived after the death of a parent) is less developed. This lack of any firmly established legal precedent for determining the inheritance rights of posthumously conceived children may be attributed to significant and ongoing advances in reproductive technology, which have made it possible for children to be conceived subsequent to the death of a parent.

Continue Reading Are Children Conceived After the Death of Parent Entitled to Benefits

 

Prior to filing for divorce, various federal tax considerations should be reviewed due to their potentially profound implications. Among the major issues commonly covered in a divorce decree or agreement are: alimony, sometimes referred to as “spousal” or “separate maintenance” support; division of property; and child support. Each has its own tax treatment and implications.

Division of Property

Most divorces involve a division of the property owned by the couple. Such a division of property is not usually a taxable event, i.e., neither owes taxes nor gets a deduction from income because he or she receives certain property as a result of the divorce.

There are, however, tax implications following divorce that affect future taxes. More specifically, selling personal and real property in the future may require spouses who received such property (pursuant to a divorce) to pay taxes in connection to that property.

Continue Reading Divorce and Federal Income Taxes

 Minors have no legal capacity to manage property. Thus, transferring property and other assets to minors can be problematic. For example, parents or other adults may wish to convey a small amount of property to a minor without investing the time and expense of establishing a trust.

Another option is to set up a custodianship for the minor. Under a custodianship, the transferring party names a custodian and transfers the property into an account in the minor’s name. The custodian holds and manages the custodial property for the benefit of the minor. A custodial account is irrevocable and belongs to the minor as the owner.

Uniform Transfers to Minors Act (UTMA)

The Uniform Transfers to Minors Act of 1986 (UTMA) was passed in order to eliminate some limitations of the earlier Uniform Gifts to Minors Act (UGMA). All states have adopted some form of the UTMA or UGMA. The UTMA provides a convenient method of allowing the transfer of property to minors without setting up a trust.

In a custodianship, an adult custodian holds and manages property for the benefit of a minor child until that minor is old enough to receive the property. A UTMA transfer is irrevocable, and the custodian must relinquish the property to the minor as soon as they reach the age of majority, which varies by state (usually 18 or 21, sometimes 25)

 

Continue Reading Keeping Assets in a Custodial Account for a Minor

An increasingly large portion of the assets of married couples consist of rights to payments and stock from pension plans.  In many states such assets are subject to division during a divorce.  Divorce and division of property are generally controlled by state law, but pension plans are controlled by federal law in many respects.

 
Pension Plans and ERISA
A major advantage of saving for retirement through a pension plan is that contributions from employees and employers for plans such as a 401(k) plan are not taxed as income until distributed by the plan, usually after retirement, at lower tax rates. However, under provisions of the Federal Internal Revenue Code, the assignment of pension benefits, including transfers to a spouse during divorce, may result in the loss of such tax benefits.
 
In 1984, Congress passed the Employee Retirement Income Security Act (ERISA), which governs most private pension plans (government and some other plans are not covered, nor are IRAs).  To remedy the anti-assignment problem, the Retirement Equity Act of 1984 (REA) amended ERISA to establish an exception to the anti-assignment bar to division of ERISA plan benefits during divorce. 
 
Federal Tax Treatment of QDRO Plan Distributions
To avoid adverse tax consequences, the plan participant/spouse must obtain a "Qualified Domestic Relations Order" (QDRO).  A QDRO is usually entered by the court, although under certain circumstances other entities may approve a QDRO.  The QDRO must also be approved by the administrator of each plan affected. 
 
The QDRO must contain certain information specified in ERISA, as amended by REA, including the names and addresses of the plan participant and the recipient(s) of the court award (the "alternate payee").  There are also certain provisions that are prohibited in a QDRO, including the authorization of plan benefits and payouts that are not allowed by the plan.
 
A QDRO creates or recognizes an "alternate payee’s" right to receive all or a portion of the plan benefits, or it may actually assign that right to the "alternate payee."  An "alternate payee" may only be a spouse, former spouse, child, or other dependent of the plan participant.  A validly created and approved QDRO allows the recipient spouse to be treated, for federal income tax purposes, as a plan participant.  In addition, the QDRO may allow the alternate payee to take a lump sum withdrawal (if allowed by the plan) or commence payments at the earliest time allowed for retirement, regardless of when the participant actually retires.
 
Consequences of Plan Withdrawals Absent a QDRO
If a court orders the division of an interest in an ERISA pension plan during a divorce and the plan participant simply pays the amount from the pension plan without obtaining a QDRO, the participant may become liable for an early withdrawal penalty of 10% (depending on age and method of withdrawal), plus income and/or capital gains taxes on the amounts distributed to the former spouse.  Federal courts have repeatedly upheld this principle, despite claims of plan participants that they were forced to comply with the court’s order and had no other source for the payments, and therefore should not be penalized.
 

Absent a QDRO, the amount withdrawn from the plan thus becomes income and/or capital gains to the plan participant, not the former spouse.  If a valid QDRO is in place, however, the distributions from the plan are treated as income and/or capital gains to the alternate payee/spouse.  However, if distributions from the plan are used to satisfy child support or payments to some other dependent of the plan participant/spouse, the distributions are still treated as taxable to the plan participant/spouse for federal income tax purposes, notwithstanding the existence of the QDRO.

Divorce mediation, an alternative to traditional divorce proceedings, is a means to resolve the complex issues of a divorce. Mediation involves the services of a trained and neutral person who works with the parties to facilitate the settlement of disputed issues. Such person is known as the "mediator."

In traditional divorce proceedings, the judge ultimately determines child support, child custody, spousal support and property issues. Mediation, on the other hand, allows couples to control the outcome of their divorce. Additionally, the mediation process is non-adversarial in nature, which is especially important for couples with children, as like-minded parents can establish parenting plans with minimum disruption to the lives of their children.

Continue Reading Successful Divorce Mediation