Divorce Attorneys Should Be Aware of the Many Ins, Outs of Real Estate Law
Discourse on Divorce
As featured in the August 8, 2017 edition of the Chicago Daily Law Bulletin
By Michael C. Craven
Welcome to the second edition of my Discourse on Divorce column, in which I explore areas of law that intersect with divorce law. After examining the connection between estate planning and divorce law in my last column on April 30, in this edition, I look at how real estate lawyers can keep their clients informed of their options to protect real estate assets in a divorce.
Unlike some states where all assets are considered community property to be divided evenly in a divorce, the state of Illinois is an equitable division state. That means that assets are divided into two categories: marital assets and nonmarital assets. Assets that are categorized as marital are then divided equitably — which does not necessarily mean equally.
When it comes to the division of property during a divorce proceeding, there is room to argue which category the property should fall under, but once a property is classified as a nonmarital asset, the court is obligated to award the property to the single owner. A property that is designated as a martial asset, however, may be divided between the two former spouses.
It is important for real property owners and their real estate attorneys to be aware of the difference between marital and nonmarital assets. Real estate lawyers may want to consult with or refer their clients to a divorce lawyer. Clients should be made aware of all of the possible legal ramifications involved with the ownership of real estate during marriage.
Even if they aren’t planning on getting a divorce, clients who are considering changing how title is held, refinancing a loan on a nonmarital residence or investing in improvements to a piece of real property should speak with a family law lawyer to learn the impact that any of these actions could have on rights to the property should divorce occur.
For instance, if a client owns a home before entering a marriage, he or she will continue to own that home as a nonmarital asset after the marriage ends if he or she remains the only name on the deed. This is true even if the couple lives in the home as a married couple and pays for the mortgage and taxes with joint funds.
However, if the name on the deed is changed to include both spouses, then the house could be considered by a judge to be a gift to the marriage and, therefore, designated a marital asset and subject to allocation among both spouses.
This often occurs when a property is refinanced. A lender may require, as a condition of a new loan, that both parties sign the note and mortgage. To ensure the lender’s loan is properly secured, the lender may also require that title be held in both spouses’ names. If the owning spouse does not intend the transfer of title to be a gift to the marriage, care must be taken to assure that the actual intent is known and memorialized.
Another important concern for real estate clients to be aware of is when joint money is used to enhance the value of a nonmarital home. For example, paying down a mortgage from a joint family account or using marital funds to finance an addition or remodel can lead to those joint or marital funds becoming absorbed into the nonmarital real estate.
Again, to avoid unintended results, real estate clients must be advised as to legal ramifications of their actions. If properly structured and documented, the marital estate can be reimbursed in whole or in part by the joint or marital funds that enhanced the value of nonmarital real estate.
In addition, if a client owns an income property before entering a marriage, additional complications may arise. Questions that should be addressed by real estate lawyers include whether or not a positive cash flow belongs solely to the owner of the nonmarital property or to the marriage.
The answer may depend on the amount of personal effort the owner invests into the real estate. If the rental income is nonmarital, the owner must keep that income separate from marital bank accounts if he or she doesn’t want it transmuted into marital money.
On the flip side, if the rental property operates at a loss and joint money is used to pay the bills, the marriage may be reimbursed if properly transacted.
Real estate lawyers representing clients selling nonmarital real property should also be aware that how the sales proceeds are handled impacts the designation of those monies. It is a good idea for a real estate lawyer to ask a married client who is selling a property when he or she purchased the property and how it was acquired (as property acquired during the marriage by gift or inheritance may also be categorized as nonmarital).
If the purchase came before the marriage or if the property was acquired during the marriage by gift or inheritance, the client may have a nonmarital claim.
Special care will need to be taken to ensure that the proceeds from the sale remain separate from marital accounts. Family law lawyers can advise on how best to handle those proceeds if the client wishes to keep the proceeds designated as nonmarital.
Real estate lawyers who represent unmarried couples who purchase property together before getting married may also want to advise their clients to reach out to a family law lawyer to discuss their options. Co-ownership agreements are always a good idea before a couple is married. However, if a client has a co-ownership agreement, the client should be advised to revisit that agreement before getting married.
When people are happily married, they rarely think about protecting their individual assets in case of divorce. However, once it is clear a marriage is ending, it is often too late for individuals to go back and claim full rights over those assets.
Making clients aware that the decisions they make now could affect their rights to real estate in the event of a divorce will allow those clients to be better informed about their future.
