Jack and Roma Walker had been married for 35 years when Roma filed for a divorce. During their marriage, Jack worked for his father’s company. When Jack’s father started the company, all 500 shares of stock of the company were issued to Jack’s father, who then gave Jack 100 shares as a gift. Jack subsequently purchased shares from his sisters at a purchase price of $200 per share.
Years later and several years prior to Roma filing for divorce, Jack acquired an additional 235 shares of his father’s stock for $47,000 ($200 per share), which was substantially less, according to Jack’s father’s attorney, than the fair market value of the shares, $117,500 ($500 per share.) When the sale of the shares closed, Jack’s father’s attorney recommended that Jack’s father file a gift tax return for 141 shares, as he viewed the transaction as a purchase of 94 shares at $500 per share ($47,000) and a gift of the remaining 141 shares ($70,500). Jack’s father, however, never filed a gift tax return.
A dispute arose whether the 235 shares were marital or non-marital property. There was apparently no dispute that the initial 100 share gift to Jack was non-marital property. Roma asserted the 235 shares were marital property and part of the marital estate subject to division by the court. Jack argued that 141 shares should be treated as non-marital property and not subject to division because he paid less than the fair market value of those shares, which shares he maintained were a gift from his father.
In determining whether the shares were marital or non-marital property, the court was confronted with the following two contradictory presumptions which arose under Illinois law: all property acquired during the marriage is considered marital property; and the transfer of property from a parent to a child is considered a gift and is non-marital property, unless the gift is made to both the child and the child’s spouse.
In finding that the entire 235 shares were marital property, the court stated that when two presumptions appear to “cancel each other out,” the court must look to the facts of the case to determine whether the property is to be considered marital or non-marital property. The court then noted that the stock was purchased with marital funds, i.e., funds acquired during the marriage; Jack’s father never demonstrated an intent by filing a gift tax return with respect to the 141 shares; Illinois law provides that property must be either marital property or non-marital property, not partially marital and partially non-marital; and Illinois law also requires that non-marital property commingled with marital property be designated marital property. Thus, the court ruled that the 235 shares were marital property, and were subject to division between Jack and Roma in the divorce proceeding.
If you are a parent considering the transfer of property, such as a family business or real estate, to a child and would like to prevent the transfer from being considered marital property so the property will remain in the family and/or not be subject to a division in the event of the child’s divorce, please contact a member of the firm so that the transfer can be properly completed.