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In Re Marriage of Holman

OPINION FILED MARCH 29, 1984.

IN RE MARRIAGE OF DOROTHY HOLMAN, PETITIONER-APPELLEE AND CROSS-APPELLANT, AND JOHN C. HOLMAN, RESPONDENT-APPELLANT AND CROSS-APPELLEE.


Appeal from the Circuit Court of Du Page County; the Hon. Frederick Henzi, Judge, presiding.

JUSTICE LINDBERG DELIVERED THE OPINION OF THE COURT:

Respondent-appellant-cross-appellee John C. Holman appeals from an order of the circuit court of Du Page County which dissolved his 10-year marriage to petitioner-appellee-cross-appellant Dorothy J. Holman, distributed the parties' marital and non-marital property and awarded maintenance to Dorothy. John challenges the trial court's award of maintenance and its characterization of certain assets as Dorothy's non-marital property. Dorothy cross-appeals, raising as error the trial court's allocation of the parties' marital property. We affirm.

Dorothy, age 56 at the time of trial, and John were married on July 4, 1970, in LaGrange, Illinois. Both parties had been married previously; Dorothy had five daughters from her first marriage and John's first marriage produced two sons. Upon the death of her first husband, Dorothy acquired by survivorship a home in LaGrange, Illinois. John and his two sons moved into this residence after the marriage. Dorothy also acquired the beneficial interest in a testamentary trust upon her first husband's death. During their marriage, Dorothy paid the mortgage on the residence from income generated by the trust. The real estate taxes and insurance payments on the residence were paid directly by the trustee, LaGrange State Bank. Dorothy's primary source of income during the years of the parties' marriage was from the trust. John was employed throughout the marriage, owning a variety of businesses which provided his means of support.

On September 25, 1980, Dorothy filed her dissolution petition, and after John filed his answer, the trial court ordered John to pay temporary monthly maintenance of $950, which was later reduced to $700. After hearing testimony for three days, the trial court on November 18, 1982, issued a ruling by letter which divided the parties' non-marital and marital property and awarded Dorothy permanent maintenance. The letter was subsequently incorporated into a judgment of dissolution. On February 4, 1983, John filed a post-trial motion seeking modification or amendment of the judgment, which the court denied. Thereafter, John filed a timely notice of appeal and Dorothy filed a cross-appeal.

John raises as his first assignment of error that the trial court incorrectly characterized the trust and the LaGrange residence as non-marital property. While he asserts these designations are erroneous, he does not seek a different allocation of the property. Rather, he requests only that this court redesignate the trust and the house as marital property in the judgment of dissolution. In her cross-appeal, however, Dorothy does challenge the trial court's allocation of the marital property. Since inclusion of the beneficial trust interest and the residence in the marital estate would affect this court's review of the trial court's marital property allocation, we proceed to determine if the court correctly characterized the trust and residence as non-marital property.

Section 503(a) of the Illinois Marriage and Dissolution of Marriage Act (Ill. Rev. Stat., 1982 Supp., ch. 40, par. 503(a)) (IMDMA) designates property acquired by certain means as non-marital. The trial court in section 503 is directed to "assign each spouse's non-marital property to that spouse." (Ill. Rev. Stat., 1982 Supp., ch. 40, par. 503(d).) The statute then directs the court to apportion the marital property in just proportions considering as one factor the value of the non-marital property set apart to each spouse. Ill. Rev. Stat., 1982 Supp., ch. 40, par. 503(d)(2).

The trust which is the subject of this appeal was established in 1966 by Dorothy's first husband. The trust beneficiaries are Dorothy and her five daughters. The trust agreement established two funds: the marital fund (Trust A) and the residual fund (Trust B). Dorothy was entitled to all of the income and up to $5,000 in principal from Trust A and by 1977, the marital fund was exhausted. Dorothy is entitled to the income from Trust B and may receive distribution of the principal if the trustee, LaGrange State Bank, determines the sums are necessary for her reasonable support and comfort. Judith French, a trust administrator at the bank, testified that Dorothy is required to make an application for principal distribution and the decision whether to grant the application is within the discretion of the trustee bank. French stated preservation of the trust corpus for the remaindermen was one factor to be considered in deciding upon a request to distribute principal.

Neither party disputes that the trust was Dorothy's non-marital property at the beginning of the marriage. John contends, however, that the trust was transmuted into marital property based on two theories. First, John contends he enhanced the value of the trust by paying the State and Federal taxes due on the income produced from the trust. John argues that had the trust been required to pay the taxes, at least the interest and perhaps some of the principal from the trust would have been expended. Dorothy responds that she paid the taxes on the trust income in 1973 and 1975, and furthermore, that John's payment of the parties' State and Federal income tax liability did not increase the value of the trust corpus.

• 1 We conclude that John's payment of the parties' income tax liability is insufficient to effect a transmutation. John does not cite any decision which has addressed his transmutation theory. Supportive of Dorothy's theory is In re Marriage of Jones (1982), 104 Ill. App.3d 490, 432 N.E.2d 1113. There, the husband entered the marriage with a stock trust. During the marriage, he reinvested most of the dividends in additional stocks, kept the trust assets segregated from the parties' marital property, and reported the income earned by the stock trust on their joint tax returns. In defense of the trial court's characterization of the trust as non-marital, the husband argued that "the payment of taxes does not constitute the preservation or enhancement of the stock trust." (104 Ill. App.3d 490, 497; 432 N.E.2d 1113, 1118.) On appeal, the court agreed that the trust was non-marital. The court found significant that the husband segregated the trust from marital funds, reinvested most of the dividends, and did not commingle the trust income with marital property. As in Jones, the parties here reported the trust income on their joint income tax returns. The trust was always segregated from the parties marital property, and the trust income was used almost exclusively to make the mortgage, insurance and property tax payments on the LaGrange residence. We find Jones persuasive and conclude that John's payment of the income tax liability on the income from the trust did not transmute the trust corpus into marital property. See also In re Marriage of Wojcicki (1982), 109 Ill. App.3d 569, 440 N.E.2d 1028 (property retained its non-marital character even though marital funds were used to pay real estate taxes on the property).

As his second transmutation theory, John contends the commingling of trust income with trust principal transformed the trust into marital property. John's argument is unpersuasive. The record demonstrates the trust income was not commingled with trust principal. Trust administrator French testified that in certain years, when not all of the trust income was distributed to Dorothy, the accumulated income was deposited into an account separate from that containing the principal cash because the latter was used for investment. Since the funds were not commingled, John's transmutation argument is without merit.

John next contends the trial court erroneously concluded that the LaGrange house was Dorothy's non-marital property. After John and Dorothy were married, Dorothy maintained the house in her name alone until she transferred the title to the LaGrange State Bank in trust on February 13, 1976, retaining the sole beneficial interest and naming her five daughters as remaindermen. Dorothy testified that on February 14, 1970, the parties had a discussion in which Dorothy agreed to pay the monthly expenses on the home including the mortgage, real estate taxes, and the insurance payments. In return for these payments, Dorothy stated, John agreed to pay the utilities on the house and the parties' grocery bills. In his testimony, John confirmed that this understanding existed between the parties. Although the parties dispute who paid for certain maintenance expenses on the residence, the terms of their agreement were adhered to by the parties. Dorothy testified that the trust department of the bank would deposit $450 monthly into a checking account at the LaGrange State Bank held jointly by John and Dorothy. The bank then would automatically withdraw from the account the funds necessary to pay the mortgage. John testified that he never contributed any funds to the LaGrange State Bank checking account which he regarded as her account. He also stated he never contributed any funds toward the mortgage, real estate taxes or insurance on the residence. Similarly, Dorothy testified she never contributed any funds to this account and the only funds ever deposited there were from her trust. John testified that he paid the utilities and grocery bills from his Edgewater Bank account which both John and Dorothy testified was his account. Dorothy never made a withdrawal from or deposit to this account during their marriage.

• 2 John argues, however, that the simple fact that the trust income was placed in a marital account which was then used to pay the mortgage on the LaGrange home transmuted the residence into marital property. Transmutation can occur when non-marital property is commingled with marital property, thereby converting the entire non-marital property into marital property. The supreme court has specifically recognized the transmutation-of-property theory. (In re Marriage of Smith (1981), 86 Ill.2d 518.) In Smith, the court stated "where a spouse who holds non-marital property causes it to be commingled with marital property, or with non-marital property of the other, we hold that the commingled property is presumed to be marital property." 86 Ill.2d 518, 529.

• 3 Dorothy persuasively asserts, however, that the evidence rebutted any presumption that the house was marital property. The record establishes that the trust income was non-marital. (See In re Marriage of Jones (1982), 104 Ill. App.3d 490, 432 N.E.2d 1113; but see In re Marriage of Reed (1981), 100 Ill. App.3d 873, 427 N.E.2d 282 (interest earned during the marriage on non-marital certificate of deposit is marital property).) This income was deposited by the trustee bank monthly into the checking account in both parties' names. That fact raises the presumption that the account was marital property. (See In re Marriage of Emken (1981), 86 Ill.2d 164.) The uncontradicted testimony of both John and Dorothy, however, rebuts the marital presumption. Dorothy and John testified concerning their agreement regarding which expenses each party would assume in connection with the LaGrange residence. Dorothy testified she told John prior to the marriage that she wanted to continue paying the mortgage, insurance premiums and real estate taxes. Dorothy's expressed intention to maintain the residence as her separate property was evidenced by her placing in trust the title to the LaGrange residence with her daughters as beneficiaries. Consistent with the parties' agreement, Dorothy made these payments out of the LaGrange checking account or had the bank pay the creditors directly. John testified that he never made a withdrawal from or a deposit to this account, and Dorothy testified that she never deposited any funds in this account. The only deposits were made directly by the LaGrange State Bank. This testimony rebuts the presumption of marital property raised because the account was in the names of both parties.

John unpersuasively contends that this court cannot consider whether the LaGrange checking account was characterized incorrectly as marital property by the trial court because Dorothy failed to challenge the characterization in her notice of appeal. In his notice of appeal, John challenged "the Court's findings and orders entered on the same day relative to the designation and assignment of non-marital and marital property owned by the parties." This broad language empowers this court to consider all decisions of the trial court relative to the characterization of the marital and non-marital property. John raises in his appellate brief the trial court's characterization of the trust and residence as non-marital property. The interrelationship of the ...


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