Illinois Divorce Lawyer: Nonmarital and Marital Property

A “source of funds” rule refers to a legal principle, primarily used in divorce proceedings, that determines whether a property should be classified as marital or separate based on the origin of the funds used to acquire or improve it; essentially, it means that if a spouse contributes premarital funds to purchase a marital asset, they may retain a separate interest in that asset proportional to their contribution.

The husband filed for dissolution after 18 years of marriage, disputing whether two adjacent lots were marital property. One lot included the marital home, and the other had a barn for the wife’s horse training business. The husband purchased both lots before the marriage, but both were encumbered by loans paid off with a mix of marital and premarital funds. The properties appreciated significantly during the marriage due to market forces. The key issue was whether paying down the loans with marital funds created a marital interest in the properties.

The District Court concluded that the lots were nonmarital property, except for the marital contributions toward the loan principals. The court awarded the husband the properties and the wife a cash equalization payment for half of the marital contributions. The wife appealed, arguing that the properties should be considered marital due to the use of marital funds to pay down the loans.

The Court of Appeals affirmed the district court’s decision regarding the land portions of the lots, finding them nonmarital. However, it reversed the decision regarding the barn and other improvements on one lot, classifying them as marital property due to the joint efforts in their construction and operation. The court modified the equalization payment to the wife accordingly.

The Supreme Court reviewed the case and adopted the “source of funds” rule, which considers the marital estate’s acquisition of equity in the properties through loan paydowns with marital funds. The court reversed the Court of Appeals’ decision regarding the land portions of the lots and remanded the case for a new hearing to determine the equitable division of these properties, considering the source of funds rule. The decision regarding the barn and other improvements was affirmed.