Commingling Non-Marital and Marital Property: Reimbursement for Contributions?

Illinois property law provides for a binary classification: property is either marital or non-marital. 750 ILCS 5/503(a). Non-marital property and marital property are treated completely differently, and thus their classification is of paramount consideration. Non-marital property most commonly includes "property acquired by gift, legacy or descent" and "property acquired before the marriage". 750 ILCS 5/503(a)(1) and (a)(6). The court shall assign each spouse's non-marital property to that spouse, and marital property is to be distributed "in just proportions considering all relevant factors, including [delineated factors omitted]". 750 ILCS 5/503(d).

What then is the legal result when non-marital and marital property are commingled? For example, a party may have owned a (non-marital) bank account prior to the marriage, and may have contributed non-marital funds toward the purchase of a house (marital) during the marriage. Or perhaps a party has received a "gift" (non-marital) from a parent, and during the marriage contributed that gift toward the purchase of a house or business (marital). A spouse may have contributed significant personal efforts (marital) into a (non-marital) home, farm or building of the other spouse. All of these examples demonstrate how non-marital and marital property might be commingled.

This presents our first issue: now that one type of property has been contributed to the other type of property, how is the receiving property classified? 750 ILCS 5/503(c)(1) provides that "when marital and non-marital property are commingled by contributing one estate of property into another resulting in a loss of identity of the contributed property, the classification of the contributed property is transmuted to the estate receiving contribution, subject to the provisions of paragraph (2) of this subsection …".

The second issue (probably the first question a client might ask is: do I get my money back?) is: does the contributing estate receive "reimbursement" from the receiving estate, or a more nebulous "credit" for contribution? 750 ILCS 5/503(c)(2) states that "… the contributing estate shall be reimbursed from the other estate receiving the contribution notwithstanding any transmutation; provided, [1] that no such reimbursement shall be made with respect to a contribution which is not retraceable by clear and convincing evidence, or [2] was a gift, or, [3] in the case of a contribution of personal effort of a spouse to non-marital property, unless the effort is significant and results in substantial appreciation of the non-marital property. Personal effort of a spouse shall be deemed a contribution by the marital estate.

750 ILCS 5/503(c)(2) contains a restriction on reimbursement that may appear innocuous, but greatly impacts almost every reimbursement issue raised by our clients, namely: was it a gift? Before a party can seek "reimbursement", he or she must first rebut the statutory presumption that such "contribution" is a gift. If it is a gift, no reimbursement is authorized. See IRMO: Durante, 201 Ill.App.3d 376, 147 Ill.Dec. 56, 559 N.E.2d 56 (1st. Dist. 1990), where the wifes testimony that she expected the home that she had inherited from her father to stay in the family and never intended it to be gift to marital estate. That was insufficient evidence to rebut the presumption of transmutation which arose as result of wife transferring home to wife and husband into joint tenancy.

Factual permutations abound. What if the non-marital home is never transferred into joint tenancy, but the parties use "marital" funds to pay for the "non-marital" mortgage? IRMO: Leisner, 219 Ill.App.3d 752, 763, 162 Ill.Dec. 277, 284, 579 N.E.2d 1091, 1098 (1st. Dist. 1991) provides that "non-marital property is not transmuted into marital property merely as the result of the use of marital funds to reduce the indebtedness on the property". However, the matter was remanded to determine reimbursement issues. Clearly traceable mortgage principal payments (made from marital funds) were transmuted into non-marital property, but reimbursable to the marital estate.

Classification and reimbursement cases are fact driven, and can appear to be contradictory. For example, in IRMO: Raad, 301 Ill.App.3d 683, 704 N.E.2d 964 (Ill.App. 2 Dist.,1998), the wife contributed the majority of the money in her IRA prior to her marriage. When the parties married, petitioners IRA account was valued at $24,446.37. Petitioner contributed $6,257.42 during the marriage. The marital contributions did not transmute the non-marital IRA into marital property. But the $24,446.37 of non-marital property and the increase in value attributed to that amount is subject to the right of reimbursement. If the increase in value of the $24,446.37 of nonmarital property resulted from a contribution of the marital estate, the marital estate is entitled to reimbursement.

Contrast IRMO: Raad with the case of IRMO: Mouschovias, 359 Ill.App.3d 348, 831 N.E.2d 1222, 294 Ill.Dec. 897, (4th Dist. 2005). In Mouschovias, the husband opened a Vanguard Prime Money-Market Fund and a Vanguard 500 Index Fund prior to the marriage; the latter fund was opened five days prior to the marriage. The trial court ruled that the two Vanguard funds were marital, but awarded them to the husband. The appellate court held that the distribution of marital assets was proper even if its classification of the two accounts was not. In explaining its ruling the appellate court stated that [non-marital] " 'property,' however, must have some identity, some integrity. A mere receptacle (a bucket?), owned by the party before the marriage, into which he places marital property, is not sufficient to invoke the rule that 'contributing one estate of property into another resulting in a loss of identity of the contributed property' transmutes the classification of the contributed property to that of the estate receiving the contribution. 750 ILCS 5/503(c)(1). We believe that to hold that those funds were transmuted to non-marital property would contravene the intent behind Section 503(c). A party should not be allowed to defeat the fundamental concept that all property acquired during the marriage is marital property by opening a checking account in his name and placing a meager amount in that account before the marriage, then depositing all his paychecks into that account after the marriage. We recognize that Henke did not employ this precise analysis. We should ignore the receptacle and look to the funds.

In IRMO: Hegge, 285 Ill.App.3d 138, 674 N.E.2d 124, 220 Ill.Dec. 853, (2ndDistrict 1996). The wife sold her non-marital home and used proceeds therefrom to apply toward the purchase of a home in her name only. However, the wife purchased this home during the marriage. The husband told the wife that he would never take the home from her. Both parties were listed as mortgagors on the home, and they paid mortgage payments from a joint (marital) account. Later, husband made the payments while wife was not working.

At trial the husband argued that because the house was purchased during the marriage and because non-marital assets were commingled with marital assets to purchase it, the wife did not overcome the presumption that the house is marital property. The only issue for us to consider is whether the wife overcame the presumption that the house was marital property. . . we conclude that [the wife] has not demonstrated 'by clear and convincing evidence that the [house] should be considered non-marital property.

When marital assets are commingled with non-marital assets to purchase a marital home, the home is presumed to be marital property." IRMO: Parr, 103 Ill.App.3d at 207, 58 Ill.Dec. 624, 430 N.E.2d 656.

There are numerous other cases, involving family farms, business interests, and personal (marital) efforts contributed to non-marital property. Usually commingling and reimbursement issues arise within the context of real estate, business interests or financial accounts. In other words, these issues tend to affect the finances of the parties, and financial outcome of the case, more than all of the other Section 503 factors combined. Accordingly, they may cause a given case to cost substantial sums in attorneys' fees and costs.

The two major hurdles to reimbursement, namely [1] overcoming the statutory presumption that the contribution was a gift, and [2] documenting that the contribution is retraceable by clear and convincing evidence, can readily be resolved by a pre-nuptial agreement. A valid pre-nuptial agreement that costs a proverbial $1,000 can readily prevent unintended property entanglements that may cost many thousands in attorney's fees and cost, and much more in lost property rights.

Attorney Matt Shaw is the founder of Shaw Sanders, P.C., in St. Charles, Illinois, which concentrates its practice on divorce and family law matters. Contact us today at 630-584-5550.