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Katz & Stefani

Advice for Non-divorce Lawyers

Published in Chicago Lawyer Magazine, September 2008
by Daniel R. Stefani

It is a privilege and honor to be taking over for one of my true mentors, Joseph N. DuGanto. I learned very much form Joe during my 12 years with him and, now that my partner and I have our own firm of nine lawyers I find myself relying more and more on Joe’s words of wisdom.

My Practice in representing high-net-worth divorce litigants has evolved along with the law. Lawyers in each individual area of law are becoming more and more sophisticated and specialized in their areas of expertise. With this trend I have seen some fallout that could easily be avoided. One example is where individuals who are happily married seek advice of non-divorce attorneys for various issues, and there sis no discussion of the implications of a future divorce. Non-divorce lawyers should consider folding into their standard of care some discussion of “what if.”

The most common example involves estate planning lawyers and personal injury attorneys. Their clients usually enjoy a “liquidity event,” whether it be proceeds from a lawsuit resulting from an injury or an inheritance. These clients look to their attorneys, as well as wealth managers, to protect their money from creditors and invest wisely.

Attorneys often give good advice that advances their client’s interests at the time but with catastrophic effects later if there is a divorce (such as, placing an inheritance in both spouses’ names with the right of survivorship to avoid probate).

I am not suggesting that every client necessarily consult with a divorce attorney when they are happily married; however, I do believe attorneys in other specialized areas need to at least give some general advice as to the impact of the use of these funds received in this liquidity event.

By the way of background, in Illinois there are two types of property: marital property, which the court equitably divides between the litigants, and non-marital property, which remains the property of the owning spouse. Generally, marital property is all property acquired after the marriage, which includes any savings derived from a wage earner’s excess income. Non-marital property is generally property acquired before the date of marriage or after the date of marriage if it is acquired by gift or inheritance.

Placing non-marital property in some form of co-ownership with a spouse creates a presumption that the grantor made a gift to the marriage and the property becomes marital. Therefore, simply creating a joint account can convert large sums of money to marital property, costing a future divorce litigant millions of dollars.

Additionally, even if the non-marital property remains in the owner spouse’s name solely, if those dollars are commingled with marital property, the commingling could result in a ll of the funds being deemed marital.

The law clearly favors the finding of marital property and, if marital money is commingled with non-marital money, resulting in a new asset, the new asset is presumed to be marital.

An all-too-common example is when a happily married person receives an inheritance. The receiving spouse asks his or her wealth manager or estate-planning attorney what to do with the money. he or she receives appropriate advice for estate planning reasons, but there is no discussion as to what happens to the funds if there is ever a divorce. the person innocently deposits the inheritance in an investment account that already exists and contains marital funds. A period of years goes by and that person finds himself or herself in my office explaining the sources of funding the account.

He or she then gets the bad news from someone like me that the originally deposited inheritance was commingled and all the funds now are considered marital. This is true even if the account remains in the individual’s name only!

Similarly, I have had clients who received multi-million-dollar settlements as a result of personal injury lawsuits from incidents that occurred before the marriage. When those funds were received, the person was happily married and did not receive any advice from his or her attorney or wealth manager as to the implications of depositing the funds into a jointly titled account. Some litigants have the settlement check payable jointly, which creates a potential problem, even if the funds are later deposited into an account in the individual’s name only. More bad news for the divorce litigant.

A simple solution is for the person to simply transfer any funds received from inheritance, a personal injury award or any other non-marital source into a new investment account titled in that person’s name only (or a revocable trust with the individual as sole beneficiary, if that is the estate plan) and the person should thereafter never deposit any other monies into the account.

If assets are thereafter acquired with the segregated funds such as a house, the title of the house should remain in that individual’s name only and other funds should be used to acquire the asset.

In today’s competitive legal environment, identifying these types of issues at the time the funds are acquired with set non-divorce lawyers apart from their competitors.

Katz & Stefani

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