Divorce is a complex process full of emotion and uncertainty. Achieving an equitable settlement can be a challenge for couples with unique financial situations, especially in cases where one spouse is unfamiliar with the family finances. A Certified Public Accountant (CPA) can offer objectivity and independence while providing the expertise needed to arrive at a settlement that protects the short- and long-term financial interests of both parties.
CPAs can assist attorneys early in the process by gathering the appropriate documentation through discovery, preparing depositions or questions for the opposing counsel’s financial expert, evaluating the work of the opposing forensic accountant, and providing expert testimony if the case goes to trial. A CPA can also assist in completing documentation, such as Detailed Descriptive Lists and Income and Expense Affidavits, to be filed with the court.
CPAs offer forensic accounting services to identify critical information needed for an equitable settlement proposal and prepare defensible reports for litigation that corroborate their calculations. These services may include determination of income for alimony and child support, identification of hidden assets and income, and tracing of assets and liabilities to determine the classification and community value of the property.
Determination of Income for Alimony and Child Support. Using the income reported on a tax return may seem like a logical approach for reporting income for support, but the tax return may include deductions and write-offs that are disallowed for support purposes. A CPA familiar with family law will analyze tax returns and other documents to calculate the appropriate income number.
Tracing Assets and Liabilities to Determine the Classification and Community Value of Property. Property settlements are usually managed separately from other aspects of the divorce. The community ends at the date of termination, which is typically the date a couple files for divorce. However, financial transactions associated with community assets often continue long after the date of termination. Determining the community value of an asset at the date of division can be a complex process, especially if the couple continues to contribute or withdraw from community accounts before property is divided. Assets classified as separate property at the date of marriage must also be valued if there were contributions throughout the marriage with community funds.
In some cases, assets classified as separate property will require a community valuation, even if there were no contributions made with community funds. In Louisiana, for example, dividends and interest on investments are considered community income. If these earnings are significant, the community portion of the asset can grow at a surprising rate. Realized capital gains and losses must also be considered for accounts where active trading takes place, as these amounts are taxed, and could impact taxes paid by the community. A CPA understands how to calculate the community portion of these assets, as well as the tax effect of any trading activity.
Identifying Hidden Assets. In some cases, one spouse may not be aware of all assets of the community. For example, cryptocurrency is a fairly new type of asset that can be difficult to identify. Though recent laws have been enacted to regulate cryptocurrency, identifying this digital asset can be a challenge, especially in cases where one spouse has invested without the knowledge of the other. An additional complication arises when cryptocurrency is used to hide community money. Forensic services, such as tracing, will help identify these types of assets. Once identified, a CPA will provide the expertise needed to appropriately value and divide the asset.
Some community assets, such as a family-owned business, introduce unique financial complexities that make valuation difficult. A CPA can help identify and unravel these complexities to determine an appropriate value, while also taking into consideration the tax effect of the proposed division.
Valuation of a Community-Owned Closely Held Business. When a business is part of the community, it is often the largest asset to value and divide. Valuing a business with intangible value is more complex than valuing a business with significant physical assets and real property. A CPA can also perform forensic analyses to uncover assets that may be hidden in the business.
Determine the Tax Effect of Settlement Proposals. When dividing property, the tax implications associated with the allocation of certain assets, such as investment and retirement accounts, must be considered. A CPA has the tax knowledge and expertise to calculate the long-term financial implications of these types of divisions.
Marital Balance Sheet Preparation. Once all community assets and liabilities have been identified and appropriately valued, the CPA will prepare the marital balance sheet. The CPA can then assist the couple in calculating their after-tax cash flow under various scenarios of property division, child support, and spousal support to negotiate an equitable settlement.
Hoffman Divorce Strategies brings their experience of handling divorce cases since 1999 to prepare defensible financial reports for negotiation or litigation and can assist you and your clients in understanding the quality and long-term impacts of financial settlement proposals.