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The “Dos and Don’ts” of Wealth Transfer

The transfer of wealth to your children or grandchildren is a complicated subject that undoubtedly requires the advice of various professions including estate planners and accountants. It is also important to be aware of some of the “dos and don’ts” when transferring assets in connection with a future divorce of a child to whom assets have been transferred. Below are some initial areas to be aware of but we would recommend, before finalizing any transfers, that you or your estate planning counsel reach out to an attorney specializing in family law to discuss possible risks and concerns, especially if you think a child could be divorced in the future.

Gifts May be Considered Income! First, monetary gifts you make to a child could be considered part of that child’s income when support is calculated during a divorce. In re Marriage of Rogers, 213 Ill. 2d 129, 820 N.E.2d 386 (2004), is the seminal case on the subject in Illinois and there the Court determined that where a monetary gift confers a valuable benefit that enhances wealth, facilitates a payor’s ability to support, and represents a steady source of dependable annual income, the gift will be considered income for support purposes.

On the other hand, unlike gifts, loans that require repayment generally do not directly increase an individual’s wealth and therefore are not considered income for purposes of calculating support. Thus, a gift or a loan not requiring repayment will be considered income for purposes of calculating support whereas a loan, where repayment is actually required, will not considered income for purposes of calculating support.

So, when considering making gifts to your children, it is important to know that a Court may likely consider such gifts to be income available to your child for purposes of support payments. Discussion with estate planning counsel and a family law attorney may be helpful in thinking how you can restructure such wealth transfers to protect your child in the event of a divorce in the future. It must be noted that simply entitling a gift a loan will likely not be sufficient as evidence of required repayments including interest payments will need to be demonstrated.

Transfers to 529 Accounts May be Consider the Child’s Asset! Section 513 of the Illinois Marriage and Dissolution of Marriage Act governs the payment of education expenses for a non-minor child. In making such an award, pursuant to subsection (j), the Court considers the following factors: (i)present and future financial resources of the parties; (ii) the standard of living the child would have enjoyed had the marriage not been dissolved; (iii)the financial resources of the child; and (iv) the child’s academic performance. And subsection (h) specifically provides as follows:

An account established prior to the dissolution that is to be used for the child’s post-secondary education, that is an account in a state tuition program under Section 529 of the Internal Revenue Code, or that is some other college savings plan, is to be considered by the court to be a resource of the child, provided that any post-judgment contribution made by a party to such an account is to be considered a contribution from that party.

Thus, any college savings-type accounts established by a family for a child’s education, will be considered the child’s asset when the court looks to allocate the payment of education expenses between the parties. In essence, those funds- regardless of who contributed them- will be “taken off the table” in that they will be used by the child but not considered the contribution of the family or parent who created the account. For example, if you created a 529 account for your son’s daughter, in your son’s divorce, the court would not consider amounts in that 529 account to be contributed by your son- or your family- and the court could likely put additional obligations on your child for the grand-daughter’s education without regard to the amounts already contributed by you for your son’s daughter’s education. This would seem fundamentally unfair especially if your son’s wife or her family could contribute funds but did not do so during the marriage- and then did so after as part of the wife’s court-ordered obligation.

The statute also specifically provides that “any post-judgment contribution made by a party to such an account is to be considered a contribution from that party” so that the issue is resolved when contributions are made after a divorce but not for contributions made during a marriage.

Again, although the creation of college accounts may be a beneficial way to transfer wealth and to support the education of grandchildren, but it is important to know what kind of account to set up and how it should be titled and managed, in order to avoid a Court essentially disregarding a contribution made by your child or your family.

Exercise Caution in Connection with Family-Owned Businesses! The transfer of a business to the next generation is complicated and, in addition to tax and other considerations contemplated by your estate planning counsel, it is also important to understand how the means of transfer could impact the business and your child in the event of a divorce. Similarly, if a child is employed in a family business, careful consideration to compensation and other payment structures should be discussed with a family law attorney in order to be best prepared in the event of a divorce. A detailed analysis of these issues will be presented in a forthcoming article.

akatz@katzstefani.com

By P. André Katz

Katz & Stefani

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