Breaking down disability benefits

Property or income question has not been easy for the courts

All in the Family

Dan Stefani

Dan Stefani is principal at Katz & Stefani and primarily handles family law matters that require detailed analyses of complex transactions and business valuations. 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, child custody and support issues as well as paternity and domestic violence.

August 2014

Since 1980, Illinois law has consistently held that disability benefits in pay status are marital property, subject to an equitable division between the parties. Other jurisdictions have held that disability benefits in pay status are income which can be considered for child support and maintenance issues.

As such, in Illinois, any disability policy acquired during the marriage that begins paying benefits during the marriage is presumptively marital property. The case law is silent as to whether a disability benefit policy that is acquired before the marriage but begins payment during the marriage is marital or non-marital property.

One could argue that if the policy is acquired prior to the marriage and payments begin during the marriage, the payments are non-marital property because the policy (the “asset”) was acquired prior to the date of marriage versus the acquired “asset” being the disability payments. In such a case, it could be argued that the non-marital property could then be considered in the owner spouse’s ability to pay child support and/or maintenance. Also, it is unclear what, if any, authority the court has over disability insurance policies that are not in pay status.

Illinois courts have consistently held that disability benefits are marital property subject to an equitable division between the parties pursuant to Section 503 of the Illinois Marriage and Dissolution of Marriage Act. In In re Marriage of Smith, 84 Ill.App.3d 446 (3rd Dist. 1980), during the parties’ marriage, the husband suffered a heart attack and subsequently retired from United Airlines as being totally disabled to pilot an aircraft. The husband received a monthly disability pension.

In an issue of first impression, the 3rd District Appellate Court found that disability pensions differ from longevity (retirement) pensions only in its compensatory element, its mode of inception and possibly its duration. Accordingly, “[g]iven the classificatory directive of Section 503(a) [of the IMDMA],” the 3rd District held that the disability benefits constituted marital property.

Similarly, in In re Marriage of Sawicki, 346 Ill.App.3d 1107 (3rd Dist. 2004), during the parties’ marriage, the husband became disabled and began receiving disability benefits. The trial court found that the disability benefits were marital property subject to division between the parties.

The 3rd District noted that the husband’s disability commenced prior to the dissolution of his marriage and he was drawing proceeds from the disability pension throughout the proceedings. Thus, the 3rd District affirmed the portion of the trial court’s order relating to disability benefits and, citing to Smith, supra, found that “[i]t is well-settled that disability pensions are considered marital property.”

In the jurisdictions that consider disability benefits income for maintenance or child support issues, the primary basis for such a motion is that disability benefits in pay status represent a replacement for lost wages due to the recipient’s disability and/or injury. The impact of whether such benefits are property versus income could be the difference between a 50-50 split versus maintenance and/or child support payments at a level significantly less than 50 percent to the payee spouse.

Regardless of the property issue versus income, under Illinois law, the court has the ability to find disability benefits marital property and still achieve a result where significantly less than 50 percent would go to the payee spouse. The Illinois Marriage and Dissolution of Marriage Act states that marital property is to be equitably divided. Illinois case law is clear that equitable does not mean equal.

While courts rarely deviate more than 60-40 either way in equitably dividing marital property, there is a justification to have a more disproportionate split of the disability benefits. The court, having this flexibility, allows for an analysis of the severity of the injury and the needs of either party. The situation is analogous to the court equitably dividing personal-injury awards.

Illinois appellate courts have upheld equitable divisions of personal-injury settlements from 25 percent to the non-injured spouse down to a low of approximately 12 percent, depending primarily on the severity of the injury.

The last issue is whether the court has authority to compel a spouse to procure (or at least apply for) disability insurance. Unlike the statutory authority to compel an application for life insurance to secure support obligations, the statute and case law is devoid of any specific statutory or common-law authority. Perhaps an agreement can be made that the court has the authority under Sections 5/102(4) and (5) of the Illinois Marriage and Dissolution of Marriage Act, which read as follows: “This act shall be liberally construed and applied to promote its underlying purposes, which are to … (4) mitigate the potential harm to the spouses and their children caused by the process of legal dissolution of marriage; and (5) make reasonable provision for spouses and minor children during and after litigation, including provision for timely awards of interim fees to achieve substantial parity in the parties’ access to funds for litigation purposes.”