An opinion from the 5th District was recently decided in the case of Sandra Schell v. Mark Schell regarding whether an inherited IRA was considered income for child support purposes.
The court was required to decide whether mandatory distributions or withdrawals taken from an inherited IRA – individual retirement account – containing money that has never been imputed against the recipient for the purposes of maintenance and child support calculations constitute ‘income’ under 750 ILCS 5/504(b-3) (West 2018) and 750 ILCS 5/505(a)(3) (West 2018). It was held that “gross income” and “net income,” as defined in sections 504 and 505 of the Illinois Marriage and Dissolution of Marriage Act (Act) (750 ILCS 5/504(b-3), 505(a)(3) (West 2018)), includes distributions or withdrawals taken from a party’s IRA when said IRA only contains money received via inheritance and said inheritance has not previously been imputed on the party as income for the purposes of calculating child support and maintenance.
Table of Contents
- Case Background
- Appeal on Inherited Mandatory Retirement Distributions
- Definition of “Income” for Purposes of Support Payments
- Money Withdrawn from Savings Accounts
- Inherited IRA Funds are Not Immune from Consideration for Child Support Calculations
- Different Courts Have Different Opinions on Distributions from IRAs as Income or Not
- Ruling in the Schell Case
- Seek Trusted Legal Advice on Income Used to Determine Child Support and Spousal Maintenance
During the parties’ divorce proceedings, Mark’s mother died and he inherited approximately $615,000. Because it was an inheritance, that money was Mark’s non-marital money. The majority of the inheritance he received was in two IRAs. After he inherited the money, the divorce was finalized.
At the time of the divorce, the court made findings that Mark earned a monthly gross income of $8,301.83 from his job, and $462.33 per month in dividends from the inherited IRAs, bringing his monthly gross income to $8,764.16 per month or $105,169.92 per year. When initially calculating child support and maintenance in its October 11, 2016, order, the trial court did not include his inheritance in the equation. Instead, the trial court only included Mark’s dividend earnings from the inherited IRAs.
Appeal on Inherited Mandatory Retirement Distributions
Both parties asked the trial court to reconsider its ruling. Sandra asked the court to reconsider its ruling not to consider Mark’s inheritance when determining the proper amount of child support and maintenance required to be paid to her. The trial court would not reconsider its prior ruling.
Before the trial court had ruled on the motion to reconsider, however, Mark file a motion to reduce the amount of child support and maintenance he was obligated to pay to Sandra. He alleged that his company reduced his income by 20% and also that one of the children was now 18 years old. Even though his company reduced his salary, with the dividend income, his distribution, and draws from the inherited IRAs, Mark was actually in a better spot financially than before.
On September 5, 2018, the trial court entered an order declining to include Mark’s inherited mandatory retirement distributions when calculating child support and maintenance. The case went up on appeal.
The issue of whether IRA distributions or withdrawals constitute “income” as it relates to child support and maintenance payments is currently unsettled in Illinois.
Definition of “Income” for Purposes of Support Payments
The term “gross income” has the same meaning in regard to both child support payments and maintenance payments under 750 ILCS 5/504(b-3)(West 2018). The term “gross income” is simply defined in the Act as “all income from all sources.” Id. § 505(a)(3)(A).
Our Illinois Supreme Court, In re Marriage of Rogers, 213 Ill. 2d 129 (2004), the court looked at the plain meaning of income. Income is simply something that comes in as an increment or addition, a “gain or recurrent benefit that is usually measured in money.” This includes employment, investments, royalties, and gifts. Even if the money is not taxed to you, it can be called income for child support purposes. Other courts have defined income as a gain or benefit that enhances the noncustodial parent’s wealth.
Money Withdrawn from Savings Accounts
If a parent is unemployed, they clearly are not receiving income. But if they have a source of money from which they draw income, would that be considered income? Our Supreme Court in McGrath held that “Money that a person withdraws from a savings account simply does not fit into any of these definitions. The money in the account already belongs to the account’s owner, and simply withdrawing it does not represent a gain or benefit to the owner. The money is not coming in as an increment or addition, and the account owner is not ‘receiving’ the money because it already belongs to him.”
Inherited IRA Funds are Not Immune from Consideration for Child Support Calculations
The appellate court in Schell ultimately ruled that the inherited IRAs (although Mark’s non-marital property) were not immune from later being considered as income for the purposes of determining child support and maintenance.
Different Courts Have Different Opinions on Distributions from IRAs as Income or Not
In re Marriage of Lindman, 356 Ill. App. 3d 462 (2005) held generally that distributions from an IRA constituted “income” for the purpose of calculating income. That court stated that for child support purposes, such items as worker’s compensation awards, military allowances, deferred compensation payments, and even pensions, constituted “income.”
The case of In re Marriage of O’Daniel, 382 Ill. App. 3d 845 (2008) disagreed with Lindman. O’Daniel stated that “Except for the tax benefits a person gets from an IRA and the penalties he or she will incur if he or she withdraws the money early, an IRA basically is no different than a savings account, although the risks may differ. The money the individual places in an IRA already belongs to that individual. When an individual withdraws money he placed into an IRA, he does not gain anything as the money was already his. Therefore, it is not a gain and not income. The only portion of the IRA that would constitute a financial gain for the individual would be the interest and/or appreciation earnings from the IRA.”
Now there is a split between the jurisdictions on how the money should be treated.
Ruling in the Schell Case
This court found that the statutory definition of “income” as found within the Act is broad enough that it includes an individual’s inheritance when determining child support and maintenance. Therefore, because an individual’s inheritance must be considered as income under the Act and, in the present case there is no evidence in the record that the circuit court ever factored the $615,000 inheritance into any child support or maintenance calculations, Mark’s distributions from the inherited IRA will be considered income to him. The appellate court vacated the trial court’s ruling and remanded the case back to the trial court to recalculate child support and maintenance.