Divorce Financial Analysis
When you fall in a river, you're no longer a fisherman; you're a swimmer. - Gene Hill
Financial decision making in divorce quickly becomes one of the most complex situations a person may encounter in a lifetime. Additionally, circumstances that lead to initiating divorce rarely allow for careful pre-planning. It does not matter whether the relationship is amicable or adversarial; the financial aspects are still loaded with potentially misunderstood or unnoticed details. Knowing what constitutes a fair settlement requires experience, neutrality and a bit of diving into the minutia.
As an experienced Certified Divorce Analyst, I can help you to unravel the tangled lines of assets and income flow, whether accidentally or intentionally obscured. I work in tandem with you and your legal team to provide the analysis and documentation necessary to achieve an equitable settlement, allowing you to move forward with your new life knowing that no rock was left unturned. As in all of my services, you are the one who determines the scope of our involvement. If you and your spouse are committed to an amicable settlement, then I am as well. I will work with one or both of you towards a continued peace and new lives.
Financial Affidavits and Budgeting
One of the first documents required in a divorce proceeding is the financial affidavit. Each state has its own version. Washington’s includes liquid assets, debt and the budget. It is often completed in a hurry, based on married life expenses, temporary and/or unrealistic expenses, or vague guesses disguised as estimates. While some lawyers expect to adjust the budget several times before it is considered truly relevant, other lawyers believe the initial version is critical, especially in cases that involve spousal support. I side with the latter because:
Accuracy, with every number supported and footnoted gives your attorney freedom to question the other side with confidence knowing that yours is unimpeachable.
Your financial security can be enhanced by showing true needs and factual income from the beginning. Family courts order both temporary and permanent spousal support based on need and ability to pay. Whether you are the payer or the recipient, consistency in your data lends credibility. The more variation from version to version there is, the more we invite the other side to dismiss our perspective.
This is an emotional process for both parties (whether they admit it or not). The more frequently numbers are updated and adjusted, the more likely the numbers become more emotionally laden, and fall into danger of becoming inaccurate or unreasonable due to emotion.
If you have already completed your financial affidavit but are rethinking the numbers, let me help you make the next version be the last one.
Asset (Debt) Categorization, Valuation, Inventory
Understanding how to create an asset inventory is like learning a new language. Legal breakdown is complex; ownership categorization and acquisition become critical to an effective creation of the inventory. Specific assets or accounts may produce income, have accrued tax liability, lack liquidity, or incur high holding costs. Business ownership, defined benefit pensions and employer stock grants require special consideration when determining value. Significant collections of fine art, antiques, or other collectibles may be important financially or in strengthening your negotiation position.
I will help you explore the benefits, costs, and risks of keeping your home. We can explore other scenarios involving continued joint ownership, renting, or selling it as part of the divorce.
At the end of this process, you will have a better understanding of the benefits and costs of the various assets and debts for making or judging proposals on equitable property division.
Spousal and Child Support
If your family includes children or need for spousal support, the financial affidavit will be critical for this calculation. Once we have a better understanding of cash needs, we can weigh the potential benefit of adjusting the division of assets or debt as an alternative to paying spousal support. Spousal support is included as taxable income for the recipient and deducted from the income of the payer. It may be possible to adjust spousal support in a manner that preserves various tax credits or exemptions or to increase the net amount of support to the recipient without increasing the total cost to the payer. Age and number of children, length of the marriage, earnings differences between each parent, age of the divorcing couple are all important factors in the pre-tax review and the final post-tax review.
Projecting Your Future/Evaluating Proposals
Although it may not seem like it while you are in the trenches, divorce is not about the battle. It is about your future. You future needs to be carefully considered before you accept a final settlement. An equitable divorce settlement gives both parties the best chance of rebuilding their lives and net worth as single people.
That means looking ahead. The longer the marriage, the further we look; the initial concerns are, of course, can each party pay their bills, and will each party get their “fair” share of the assets?
Do not make the mistake of stopping there. You’ll need to know what it will be like in a few years. Can the proposal be refined to minimize taxes for one or both parties? Will there be enough revenue or liquid assets to cover expenses once spousal support ends? What will your retirement savings look like? Your lawyer is the expert and will guide us in determining the time-period for projections and as to what specifics are relevant to your case.
Other questions that may be relevant: Will you both be able to purchase a new home within a certain timeframe? What would be the impact of agreeing to more support at the front end in order for the lower-earning party to take training that would increase their earning power?
Are or will either of you be eligible for divorced spousal benefits from social security? Which will better serve you - a property settlement note, a lump sum payment or structured support payments?
Is there a possibility of bankruptcy by either of you in the future? If so, child support and spousal maintenance are protected, unsecured property settlement notes may not be. Completed asset divisions as decreed in the divorce are not relevant to the other party and therefore not vulnerable to his/her creditors.
Do you suspect your spouse has hidden assets or is diverting income? Unfortunately, proving it is often one of the most difficult tasks during the divorce process.
The first step, usually done with your attorney, is to identify the source of your suspicions and try to guess at the possible amount. Your attorney has the most information about what is likely to influence negotiation and the court, as well as the best overall perspective. This conversation will guide your choice on whether or not to reach out to a forensic accountant.
As a Certified Divorce Financial Analyst, my goal is to perform whatever analysis necessary to assist my clients and their attorneys in achieving an equitable settlement. Each client’s unique circumstances determine the components of our analysis. When pursuing hidden assets the first step is to confirm and trace the known asset inventory. Transfers and trading activity could have provided the other party the opportunity to remove evidence of assets.
The second step is to review financial documents for indicators of other assets or sources of income. If we are still uncertain as to the value of hidden assets, I focus on identifying items that will help us estimate the potential. It is important because the results will determine the depth of further research. Our purpose is to add to our clients’ financial wellbeing; the cost-to-benefit ratio in forensic accounting is always of concern. It doesn’t make sense to spend more than what could be gained. My work process builds in review points to ensure that you are able to make the best decisions regarding the scope of our work together.
Next, I interview you to gather a list of family and friends who could be complicit. Becoming familiar with other places you’ve lived, states and cities of relatives and general relationship patterns is also helpful. We keep this information in mind as we examine transactions in each account and look at:
- depository and credit accounts for anomalies in monthly flows, and new transfer codes
- paycheck stubs and tax returns for changes in direct deposits, deductions, retirement contributions, pay rates, mortgage statements for increases in escrow accounts, and so on,
- tax returns for indications of other sources of income and the existence of other assets. Tax abstracts from the IRS will tell us if there is a large or increasing credit account for the taxpayer. IRS credit accounts are an easy and commonly used method of hiding assets.
- account transcripts from the IRS to see if there is a credit account and
- business records if applicable.
After organizing and cross-referencing information gleaned from this review, we use it to track deposits, withdrawals, major purchases and major expenses from every account. This often includes background searches for evidence of undisclosed financial relationships or ownership of recorded assets in other states. Occasionally it leads to a full life style analysis, but that is more common in cases of disputed support.
I’ll write a report that will support your attorney in negotiations, mediation, arbitration or court. If we find undisclosed assets or can show that income is being diverted, it will include the description of the item, explanation of how we discovered their existence, and if applicable, suggestions for further action.
When we are not able to confirm the identity of specific assets, the report will focus on questions raised by the analysis. Your attorney can use these questions in the discovery process. The right questions can motivate the other party to settle at the mediation stage rather than risk further investigation.
Extensive footnotes, pertinent illustrative attachments and thorough disclosure make the report ‘courtroom-ready’. Every question includes an explanation of the transaction or event that triggered the question and why it applies.
At the end of this process, you will have peace of mind knowing you've done everything you can to uncover the truth.
Life Style Audits
The lifestyle analysis demonstrates the family’s lifestyle prior to the separation. It takes the forensic accounting discussed above an extra step.
The lifestyle analysis is done by analyzing bank statements, brokerages statements, credit card statements, personal and business income tax returns, credit reports, and any other detailed financial documentation that will substantiate the spending (the same documents examined in forensic accounting). However, in lifestyle analysis spending will be categorized.
The result will be a clear picture of the funds required to maintain the standard of living enjoyed during the marriage. It may be important in determining spousal support payments, or it may result in evidence of hidden assets or sources of income. Once the data is collected and catalogued we will all be able to clearly see whether the disclosed income could have supported the lifestyle, determine the most appropriate level of support payments and uncover possible evidence of hidden assets.
It is labor intensive and can be costly. Nevertheless, for high net worth cases, lifestyle analysis may be the key to a fair settlement.
Divorce changes the need for and availability of medical insurance, life insurance and disability insurance. Insurance can be a labyrinth of paperwork, riders and options in the best of circumstances. I can help you understand different timeline/deadlines applicable for procuring insurance, changing beneficiaries, considering child support with life insurance, and other complex situations that often arise in separation of a household.
Betty Hedrick is NOT AN ATTORNEY AND DOES NOT PROVIDE LEGAL ADVICE. All information she provides is financial in nature and should not be construed or relied upon as legal advice. Individuals seeking legal advice should solicit the counsel of competent legal professionals knowledgeable about the divorce laws in their own geographical areas.
Divorce financial planning is a fee-only process that does not involve investment advice or securities or insurance transactions.