Service prior to marriage

Is it marital property?

All in the Family

Dan Stefani

Dan Stefani is a principal at Katz & Stefani. The firm’s practice is limited to family law matters. His work on behalf of mainly high net-worth clients, as well as spouses of high net-worth individuals, involves valuations of closely held corporations, partnerships and other entities, detailed analysis of complex financial transactions, child custody and support issues as well as paternity and domestic violence.
dstefani@katzstefani.com

October 2019

In a 2-1 decision, the 3rd District Illinois Appellate Court resolved, at least temporarily, a unique issue relating to the division and classification of pension benefits. On Feb. 20, the court issued its opinion of In re Marriage of Zamudio, 2019 IL App (3d) 160537.

The parties married in January 2000 and the wife, Louise, filed for divorce in May 2014. Her husband, Frank, worked for the Illinois State Police for 11 years before the marriage and retired in 2011 while the parties were married. At that time, Frank began receiving his pension. During the marriage, he used marital assets to purchase 48 months of permissive military service credit to enhance his pension at a total cost during the marriage of $9,626.40. He could buy the enhancement because of his active military service which occurred more than 20 years before the marriage.

The enhancement resulted in additional monthly annuity payments of $1,363.33 throughout the payout period. The parties agreed that the wife was entitled to 50% of the marital portion of the pension, however, they disagreed on how much of the pension was classified as marital vs. nonmarital.

At trial, Frank said Louise was entitled to reimbursement for the contribution of marital funds to purchase the service credit, but not to share in any interest in the enhancement that resulted.

Conversely, Louise argued the enhancement was marital property because it was purchased with marital assets. When dividing a pension of this nature, the court identifies the marital portion by creating a fraction with the numerator being the number of months during the marriage the husband accrued the pension benefit and the denominator being the total number of months the participant accrued pension benefits.

Here, it was uncontroverted that the participant accrued pension benefits approximately 11 years before the marriage and 11 years after. The issue was the classification of the additional four-year credit that was purchased during the marriage. The trial court entered an initial order siding with Louise stating that the 48-month credit should be added to the numerator in the fraction as being accrued during the marriage because it was purchased with marital property.

Upon Frank filing a motion to reconsider, the trial court changed its order and agreed with him. The ultimate court order stated the enhancement was purchased during the marriage, but it was not purely derivative of the husband’s right to receive his pension because the enhancement was only available because of his military time served.

The 48-month enhancement portion was not included in the numerator and, therefore, was nonmarital property. The trial court ordered him to reimburse the wife 50% of the total marital funds used to purchase the enhancement. The appellate court reversed, siding with Louise and saying the trial court erred in finding the 48 months of permissive service credit was not marital property. The appellate court found the husband’s entitlement to the enhanced value of each pension payment flowed not entirely from his years of military service, but from his participation in the plan itself, which occurred in part, while married.

The appellate court viewed that because Frank’s entitlement to the enhancement accrued while he participated in the pension plan, and in part during the marriage, the entire four-year military service credit should be part of the marital estate.

The court further stated that the fundamental error in the trial court’s position was viewing military service as “property.” The court held that Frank’s years in military service were not property, but simply conditions precedent which the Illinois Pension Code allowed him to use to enhance the current value of his pension.

The dissent endorsed the trial court’s simple solution and pointed out why it was fair to Louise. Not only did the marital estate receive reimbursement of the marital funds used, but the calculation of the marital portion of the pension was multiplied by the total enhanced value of the benefit, not the reduced amount. As such, pursuant to the trial court’s order, Louise would receive her marital portion of the enhanced pension vs. sharing only in the nonenhanced portion with Frank receiving the total enhanced amount as his nonmarital property.

The dissent further points out that the majority essentially awards the wife the same benefit she would have received had she been married to her husband while he served in the military by judicially adding four years to the marriage. The dissent points out the 11 years of service prior to the marriage likewise enhanced the pension which the majority’s opinion didn’t consider.

There will be more analysis of not only pensions, but deferred compensation, grants of restricted stock and classifying assets like whole life policies of insurance that were purchased well before the marriage, but premiums paid with marital funds.