In a marital dissolution, an attorney with expertise in family law is an obvious necessity. However, divorce can also involve highly complex financial issues. In these cases, someone with a strong background in finance is often a critical component of a complete marital dissolution team. This is where the experience of a divorce financial expert comes into play.
A seasoned divorce financial expert can leverage deep accounting, taxation, and financial expertise to help uncover essential financial information needed to present a strong case. This expertise is built upon the back of consistent practice as a full-time CPA and through the efficient use of tested and proven financial models and analytic processes. Clients gain valuable insights along with a more defensible position should a case make it to the courtroom.
A CPA experienced in marital dissolution should possess the relevant background, training, and experience to perform business valuations; prepare the marital balance sheet and assess the financial implications of the proposed property settlement; calculate and critique nonmarital tracings; and determine after-tax cash flow under various scenarios of property division, child support, and spousal support. Beyond the efficiency gains of having the right tools, processes, and know-how at their disposal, a divorce financial expert can help the involved parties understand, narrow down, and hopefully resolve all significant financial issues related to the divorce—especially within the Financial Early Neutral Evaluation (FENE) process.
When one or both spouses are self-employed or have an ownership interest in a closely-held business, the divorce process is usually more complicated. Many times the business is the most valuable asset of the marital estate. Moreover, determining the income of a self-employed individual requires knowledge and experience, as business owners may underreport revenue or intermingle business and personal expenses. It is important to have a well-prepared business valuation early in the divorce proceeding as the value of a business can ultimately affect property division, as well as child support and spousal maintenance.
While it is usually apparent if a party is self-employed, a decision has to be made whether or not a business valuation is needed in the first place. Yet, there is no silver bullet to making the final determination as to whether a business valuation is needed—which costs the parties additional time and money during the divorce process—as there are myriad factors to consider when making this decision.
An experienced business valuation expert can help attorneys and their clients decide whether a business valuation is needed in a divorce. This can usually be accomplished through a short phone call with relevant background information and a review of the business’s most recent balance sheets and income statements.
The marital balance sheet is an aggregation of all of the parties’ assets and liabilities as of the valuation date. Marital balance sheets can range from a simple listing of assets and liabilities to a complex undertaking, including a mix of pre- and post-tax assets which may necessitate seeking opinions from outside sources regarding the values of real estate, businesses, and pensions. Prepared correctly, a comprehensive marital balance sheet enables one to view all of the parties’ assets and liabilities in one place, so well informed decisions can be made regarding property division.
When preparing marital balance sheets, financial experts can assist with data gathering, information analysis, settlement negotiations, and trial testimony. In addition, divorce financial experts with the CPA credential can assess the financial implications of the proposed property settlement by estimating investment income or helping a party assess the pros and cons of keeping certain assets over others.
A divorce financial expert will help ensure that prepared marital balance sheets are free of error and properly account for all assets/liabilities and appropriate treatment of those assets/liabilities.
In a divorce proceeding in Minnesota, there may be both marital and nonmarital property. If a client is asserting a nonmarital claim, it might make sense to hire a financial expert to conduct the nonmarital tracing because experts are familiar with the relevant case law concerning nonmarital property and have the necessary experience preparing nonmarital tracings.
Experts can work directly with clients to review and analyze supporting documents and request additional information if needed. Furthermore, divorce financial experts can prepare schedules summarizing the nonmarital claims that can be used during settlement negotiations or write a report detailing the nonmarital claims for use at trial.
Nonmarital claims typically stem from assets owned prior to the date of marriage or that were either gifted to or inherited by one party during the marriage. Nonmarital tracings usually involve the tracing of nonmarital claims in businesses, real estate, investment/retirement accounts, and employee equity awards. In Minnesota, a nonmarital tracing of equity awards that vest after the date of valuation is commonly referred to as a Salstrom analysis. A nonmarital tracing of real estate is frequently characterized as a Schmitz calculation.
If one party is seeking child support and/or spousal maintenance, determining the income of both parties is essential. However, this is not always a straightforward undertaking and gets even more complicated when one or both parties own a business. A CPA with experience in marital dissolution proceedings can help determine each spouse’s income by reviewing and analyzing individual and business tax returns and other wage and financial data. Moreover, once income is determined, a CPA can calculate each party’s after-tax cash flow by projecting taxes, making cash flow adjustments, and analyzing post-divorce living expenses.
When estimating post-divorce income, taxes, and living expenses, it is useful to look at the parties’ historical tax returns. This allows us to see what income the parties’ earned historically and how much they paid in taxes. In addition, by making a few cash flow adjustments, we are able to estimate the parties’ historical monthly after-tax cash-flow, which is useful for analyzing post-divorce budgets.
When considering the need for spousal maintenance, the court will want to see that any budget items are reasonable in the circumstances and representative of the marital standard of living. Post-divorce budgets can usually be well supported by simply reviewing the parties’ recent bank and credit card account statements. Although a formal historical spending analysis may be needed to help the parties and the court ultimately determine the marital standard of living. A historical spending analysis usually involves a thorough review of all of the family’s spending over a given time period, as adjusted for non-recurring spending.
With a divorce financial expert analyzing and preparing documentation for specific aspects of a marital dissolution, the outcome is a more complete picture of the financial position of the client and typically creates a more defensible position should a case go to court. In addition, divorce financial experts have the tools, processes, and models they can leverage from years of practice. As a result there are inherent time and cost efficiencies that can be realized by working with a divorce financial expert, and the knowledge and expertise leveraged typically produces more thorough and accurate documentation.