The division of assets during and after a divorce can be a hard process. This is especially true when retirement accounts have major tax implications. As couples untangle their financial lives, retirement accounts can become a focal point, as they often make up a significant portion of a couple’s wealth. It is important to be aware of what can happen to your taxes when you divide assets during divorce so you can avoid unexpected financial troubles down the road.

How Dividing Assets Works in a Divorce

In general, the tax rules for dividing assets in a divorce are relatively simple. Under Section 1041 of the Internal Revenue Code, there is no tax on property transfers between spouses or former spouses.

However, some exceptions exist. If you get a distribution from a retirement account not qualified for rollover, you might have to pay taxes on earnings. Also, if you are younger than 59½ years, a 10 percent early withdrawal penalty could apply on any distributions from a retirement account.

Divorce can be an emotionally, mentally, and financially grueling process, with long-long lasting consequences for both the spouses and any children that are involved. While the parties are negotiating a settlement, it is important to ensure that the two spouses preserve their existing assets. In cases where one spouse believes that the other spouse may try to hide or dissipate assets or is spending exorbitant amounts of money on non-essential items, a financial restraining order may be necessary to ensure marital funds are not recklessly spent or transferred. If you have these concerns about your spouse, consult with your divorce attorney to understand your options and decide whether pursuing a financial restraining order is appropriate at this time.

Most Important Aspects of Financial Restraining Orders

The process of seeking a financial restraining order begins by petitioning the court. Please also understand that these types of orders are not automatically granted. Essentially, a financial restraining order is a tool a court uses to prohibit either spouse from transferring or disposing of any assets during the divorce proceedings. In addition, it bars the parties from incurring any new debt unless it is for necessities, like groceries, paying bills, etc. The idea behind financial restraining orders is to protect the parties’ shared assets that might otherwise be used as leverage by either party or may disappear altogether by the dishonest actions of either spouse. With the finances “frozen,” it ensures that both spouses will have fair claims to all the marital assets while equitable distribution is being determined.

Illinois statutes specify that financial restraining orders can last as short as 30 days. This is referred to as a temporary restraining order. However, they can be elongated to ensure that marital assets are safeguarded. While the financial restraining order is in place, each party must seek the court’s approval to spend money on unnecessary items, sell any property, or unreasonably try to borrow money, among other things.

Divorce is a taxing and emotional time. Dissipating assets during divorce is not uncommon when parties may feel disadvantaged by the looming proceeding. When one spouse dissipates assets during a divorce to exercise control over the outcome of issues like property division, it is illegal. Today, we will delve deeper into what you should do if you think your spouse may be dissipating assets.

What is Dissipation of Assets?

Dissipation of assets occurs when one spouse spends marital funds or assets for purposes unrelated to the marriage. This can include gambling, unnecessary expenses beyond reasonable requirements to maintain a particular lifestyle, making investments irrelevant to the marriage, or spending money to support an extramarital affair.

What to Do if You Suspect Asset Dissipation

Here is what to do if you think your spouse is dissipating assets, including:

Divorce can be a complex and emotional process. It can be even more challenging when retirement accounts are involved. In Illinois, retirement accounts are considered marital property, which means that they are subject to division during a divorce. It is essential to understand the laws and regulations surrounding retirement account division to protect your financial future.

Understanding The Division of Retirement Accounts

When dividing retirement accounts in Illinois, there are a few key factors to consider. First, it is essential to identify all the retirement accounts subject to division. This includes 401(k)s, pensions, IRAs, and other retirement savings plans. Once the accounts have been identified, the next step is determining how they will be divided.

The Role of Qualified Illinois Domestic Relations Orders (QILDROs)

In Illinois, one of the methods of dividing retirement accounts is using a Qualified Illinois Domestic Relations Order (QILDRO). A QILDRO is a legal document used to divide retirement accounts between spouses in Illinois. A court order directs the plan administrator to divide the account and pay a portion to the non-employee spouse. 

Because couples are getting married later in life, divorce attorneys in Illinois have observed an increasing trend of divorcing spouses who own valuable personal property they acquired before their marriage. Unless a couple signed a clear and enforceable prenuptial agreement and was circumspect about keeping their personal and marital property separate throughout their marriage, it can be very difficult or impossible to separate personal and marital property in a divorce.

However, doing so is an important first step in the asset division process so each spouse can ensure they keep what is theirs in addition to securing their fair portion of the marital estate. To learn more about how marital and personal property can become commingled (combined) during a relationship, read on and then contact an Illinois divorce attorney for answers to your questions.

How Does Marital and Personal Property Become Commingled?

Once a marriage legally begins, everything of monetary value that either partner earns from employment is considered part of the marital estate. Any property that belonged to either spouse before the marriage, or that was inherited by or gifted to only one spouse during the marriage, remains the personal property of that spouse.