Dividing retirement accounts in a divorce can be contentious and somewhat tricky. The source of the contention is obvious. One spouse may feel like he or she made significant personal sacrifices to accrue his or her savings and that the other spouse did not participate or help. On the flip-side, the non-saving spouse may feel as though his or her personal or domestic sacrifices aren’t being appreciated and but for his or her support, the saving spouse would not have amassed what he or she did.
The trickiness of dividing retirement accounts depends on the type of retirement account and on the desired accuracy. In this blog series, I will discuss how retirement accounts are valued and divided in a divorce and include some explanatory examples.
As an initial disclaimer, this blog series will only discuss Illinois law and is not designed to constitute legal advice of any form.
Defining Non-Marital Property And Its Relation To Retirement Accounts
Illinois is a marital property state. Marital property is a legal concept that courts use to categorize property. In short, marital property is equitably divided up in a divorce while non-marital property is not. Domestic relations courts have broad discretion to apply the law to achieve a fair split of all marital debts and assets. As you might imagine, it’s important to clearly delineate what is and is not marital property.
What Is Marital Property?
Marital property is defined in Illinois statute as “all property, including debts and obligations, acquired by either spouse subsequent to the marriage” (750 ILCS 5/503(a)). Generally, if you obtain it after you’re married and before you’re divorced, it’s marital. Even if a title is held in only one spouse’s name, the property is still presumed to be marital. This includes non-physical property like stock options or even life insurance policies. This definition can even include pets!
If you believe that something obtained during the marriage should be classified as non-marital, you have to prove “through clear and convincing evidence ” that it falls under a permitted exception. If there’s any doubt about its status, the property defaults to being marital. The broadness of the law both simplifies proceedings and protects spouses who may have accumulated fewer assets during the marriage.
What Isn’t Marital Property?
Here’s where things get a bit tricky, and all exceptions have some form of exception. That said, some exceptions to marital property are straightforward, and we’ll start there. Any property acquired as a gift to one spouse is non-marital, as is property inherited by “legacy or descent” and property acquired prior to the marriage. Property obtained in exchange for gifted property, inherited property, or for property acquired before the marriage is also non-marital, even if that exchange happens during the marriage. Property obtained after a judgment of legal separation, but before a full-fledged divorce, is non-marital. If the spouses agree to a prenuptial or postnuptial contract, they can exclude property from being or becoming marital. Additionally, property acquired before a marriage is non-marital, with one exception that I’ll come back to later.
If one spouse sues another and receives any kind of property in the judgement, this is typically non-marital property. However, this exception has its own exception: If a spouse is required to sue the other to recover from a third party, such as obtaining insurance coverage, and this recovery is directly related to marital property, the judgment award is marital.
Non-Marital Debt Repaid With Marital Property
Sometimes a spouse acquires property through a loan with the use of entirely non-marital collateral. This loaned property is then non-marital. If marital property is used to repay any part of the loan, the property is still non-marital, but the repayment can often be reimbursed, although the source of the repayment will have to be proven to be marital. If this sounds like something that might happen with a 401(k) loan, you’re right.
Of course, there are some caveats. Let’s say Spouse A takes a loan from his non-marital 401(k) during the marriage and uses it to buy a new car. Even though the new car was purchased during the marriage, it was done with a non-marital loan (the collateral was non-marital). There is an initial presumption that the purchased vehicle is non-marital.
If, subsequent to the purchase, the car is transferred to both spouse’s names, it may likely be deemed a gift to the marital estate. As such, despite the non-marital collateral used to secure the car, the vehicle itself could be marital.
What Happens If I Mix Marital And Non-Marital Property?
If marital and non-marital property is mixed or “commingled,” the status of the property can be confusing. The main factor in analyzing the resulting property is the “identity” of the commingled properties, or the ability to tell them apart. In an extreme hypothetical, imagine that you had “marital” and “non-marital” sand, and you mixed the two types together. It would be extremely difficult to tell whether each grain of sand was marital or non-marital, and so the sand grains would lose their identities. However, if there was a clear way to trace which grain was which (perhaps marital sand is magnetic, or you had intensive sand documentation), then the sand grains would retain their identities.
The “newness” of the resulting property is also considered. If one type of property is contributed to the other (that is, you mix your non-marital sand into your marital sand) and the contributed property loses its identity, then the contributed property “transmutes” to the other type (you now have a pile of entirely marital sand). In contrast, if the two types of property are commingled into newly acquired property and lose their identities , the newly acquired property is typically marital. This commingling is typically viewed as an intent to treat the property as part of the marital estate.
Of course, whenever possible, a party’s stated intent is highly persuasive. Commingling alone is not always sufficient to transmute, particularly if there was no intent to gift the asset to the marital estate. As with all aspects of marital and non-marital property, the case-specific facts are just as important as the broad rules provided by statute and case law.
How Do I Know If My Retirement Account Is Marital Or Non-Marital Property?
Retirement plans can have both marital and non-marital characteristics, which is why their division can be complicated. In general, the portion of the retirement plan accrued during the marriage is marital, and everything else is non-marital. Therefore, absent other extenuating factors, only the portion of the plan that accrued during the marriage can be divided up in a divorce. However, in the event of commingling or re-titling, a pre-marital retirement plan may become marital.
Dividing Retirement Accounts In A Divorce
There are two types of retirement accounts: defined contribution and defined benefit plans. Defined contribution plans, such as an IRA or Roth IRA, a 401(k), or a 403(b), are both more complicated and more common, so we’ll start there.
Dividing Defined Contribution Plans In A Divorce
As a general rule, non-marital portions of a defined contribution plan will be credited to the party with an interest in the non-marital portion. Thereafter, the marital portion is divided equitably, as determined by the court or as agreed by the parties. Where there are insufficient funds in the retirement account to repay a party for his or her non-marital share, an off-set from other aspects of the marital estate may be appropriate and may be possible, although this is very fact specific. Alternatively, the balance of an account can be divided pursuant to the ratio of marital and non-marital funds within it.
An essential component to dividing an IRA or 401(k) in a divorce is tracing the source of the funds. As an example, a pre-marital 401(k) may be contributed to after the date of marriage. Provided the pre-marital portion can be identified and valued, it will typically be treated as non-marital property. Even if that 401(k) is later rolled into a new 401(k) established during the marriage, provided that the original, pre-marital balance is known and can be shown by clear and convincing evidence, it will most likely be treated as non-marital property.
Dividing Defined Benefit Plans And Pensions In A Divorce
Defined benefit plans, whether they be pensions, annuities, or a similar plan, are commonly divided with the use of a coverture formula, often called the “Hunt” formula, named after the case that first used this method (In re Marriage of Hunt, 78 Ill.App.3d 653 (1979)). The purpose of the Hunt formula is to determine what percentage of the pension (or other defined benefit plan) is marital and what percentage is marital.
The Hunt formula is the number of months in which a person contributed to a defined benefit plan during the marriage divided by the total number of months in which the person contributed to the plan (inclusive of time during the marriage).
Hunt Formula = months contributed during marriage/total months contributed
The Hunt formula determines the marital amount of the payments. That marital amount is then divided equitably between the parties. So, if the Hunt formula equal .5 (or 50%), that does not mean that the non-pensioned spouse gets half of the monthly payments, but instead that half of the monthly payments are marital, subject to division.
As an example, let’s say you have a pension that has accumulated benefits for 20 years or 240 months, and the value of the monthly payments is determined to be $1,000 a month. You were married to your spouse for 8 of those years, equaling 96 months. 96 (number of months married) divided by 240 (total number of months benefits accrued pre-divorce) equals .4, or 40%. You are entitled to the non-marital $600 of the pension in its entirety and then you will likely receive part of the $400 marital amount.
Of course, Hunt has its shortfalls. For instance, the amount a pensioner contributes to his or her pension may vary due to a variety of circumstances. In those instances, the Wisniewski formula may be appropriate.
The Wisniewski formula, again named after its case (In re Marriage of Wisniewski, 286 Ill.App.3d 236 (1997)), is somewhat less common than Hunt. While Hunt uses the amount of time that benefits have accrued during the marriage divided by the total amount of time in order to value the marital portion of the account, Wisniewski calculates the amount of contributions during the marriage divided by the total amount of contributions. The Wisniewski formula is typically used when the amount of contributions over time varies widely, whereas Hunt implicitly assumes that the amount of any given contribution is substantially the same as any other contributed amount.
Dana Lurie, Northwestern 2021, contributed (significantly) to this post