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What’s my Rate of ROI? Relevant Information in Setting Support

Published in Chicago Lawyer Magazine, April 2020
By Daniel Stefani

Illinois now has divorce guidelines for both child support and maintenance which are true income-sharing models. As such, the payee’s income from all sources is now more relevant to the calculation of any maintenance and/or child support obligation.

The payee’s income can be from several sources including, but not limited to, actual employment or income can be imputed by the court based upon a finding as to the payee’s ability to find employment. The court also considers any assets the payee controls that could generate income.

In imputing employment income to the payee, the court considers  many  factors, including the payee’s education and work history. In calculating income from assets, the court must consider the nature of the asset and whether it’s income-producing as well as if it creates cash flow immediately or is deferred like retirement accounts.

Once the court identifies the income-producing assets that can yield immediate monthly or annual income, the court then considers the appropriate rate of return the asset will yield. In doing so, the court typically would hear testimony by each party’s expert or the court’s own expert as to the appropriate rate of return to expect on the income-producing asset which would then become a component of the payee’s income for calculating maintenance and child support.

In a recent opinion by the  5th District Appellate Court, the court affirmed the lower court’s decision which made a finding as to the rate of return the payee could expect on the cash allocated to her when calculating maintenance and child support. The trial court did so without the aid of an expert and used the parties’ historic rate of return on their assets to guide its finding that the cash assets could generate a 6.5% annual rate of return.

In In re Marriage of Lugge, 2020 Ill App. 5th 190046, on Jan. 15, the court issued an Illinois Supreme Court Rule 23 opinion. Consequently, the opinion cannot be used in other cases as precedent. However, it gives practitioners some direction on how a court looks at the application of investment income as a component of the payee spouse’s total income both for maintenance and child support calculations.

In Lugge, in setting a husband’s  support and maintenance obligation, the court considered that his wife was awarded a total of $1,136,535 in cash from the parties’ existing investment accounts as well as a lump sum cash settlement of $471,500.

The wife argued  her cash property settlement shouldn’t be considered income. The trial court relied on the Illinois Supreme Court case In re Marriage of Rogers, 213 Ill.2d 129, 820 N.E.2d 386 (2004), for the proposition that the term “income” for calculation of  support and maintenance includes money received from liquid investments. The court applied a 6.5% rate of return to a portion of wife’s cash assets, namely, $950,000. The court applied the guidelines for support using interest income to the payee wife of $61,750 per year.

On appeal, the  wife argued the method the trial court used to calculate each party’s income was inequitable, namely, identifying it as a component of her income, a rate of return on a portion of her cash and investable assets.

The wife also argued that certain cash reserves held by her husband’s company should have been considered by the court as income-producing assets in calculating his ability to pay maintenance and child support.

The husband argued the cash reserves were held for a legitimate purpose and the trial court agreed. The appellate court held that there was no abuse of discretion when the trial court refused to consider the cash retained in the husband’s business as available to him and therefore, “income-producing.” The court acknowledged that “it is sometimes necessary for a corporation to retain profits …   to meet ongoing business necessities.”

The wife also argued that considering interest income from marital property awarded to a spouse is improper “double counting of her assets.” She cited cases which held that if a court values personal goodwill in a business as a marital asset and the court also orders maintenance to be paid from the income generated by the business, it is an improper double count.

Citing the Illinois Supreme Court cases of Zells and Talty, the wife argued that her situation was similar here. The appellate court disagreed, distinguishing Zells and Talty from the situation here, pointing out that the court can consider investments when determining income for support.

The appellate court further justified the trial court’s decision by noting not only did the court act within its discretion to include interest income from the wife’s cash assets, the court only applied about two-thirds of the historic rate of return on their investments and only included a portion of the cash assets she received as being income-producing. Evidence revealed  the parties’ historic rate of interest income on their investment account was 9.93% but the court applied  6.5%.

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.

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