How Forensic Accounting Helps When Dividing Property During a Divorce?
Many couples decide it is best to separate before filing for divorce when they feel their marriage is not working out anymore and want to end the relationship. However, separation can create a variety of property and assets disputes at a later stage.
One of the best ways to avoid a contentious situation about finances and individual spending after determining separation as the best course of action is to get post-separation accounting done.
Typically, forensic accountants are the best professionals to perform post-separation accounting. You can save a lot of time and money by providing the experts with detailed paperwork about you and your spouse’s financial information regarding post-separation income and expenditure.
Post-Separation Facts Surrounding Property Categorization
Many divorcing couples are confused about the property they acquire and debts incurred during the post-separation period. They find themselves to be in a grey area surrounding property rights.
The official date of separation coupled with the area you live in can trigger a significant change in your property rights. While it is the state laws that determine the official date of separation, the following factors can also have a say (single or combined):
- the date you and your spouse decide to end your marriage
- the date you and your spouse physically separate
- the date you and your spouse file for the divorce
It is important to note that the property purchased by you or your spouse after the separation date (but before the court has finalized the divorce) may be regarded as part of marital assets by the judge, regardless of the name on the title or whoever purchased it. The same holds true with debt and liabilities as well.
Again, the area you live in and the laws of your state play a significant role in this outcome. You should speak to a knowledgeable divorce lawyer if you have any questions about the laws surrounding the date of separation in your state and the way in which property is divided and categorized in a divorce.
It’s vital to maintain post-separation financial records, regardless of your state’s laws.
This allows you to be prepared when financial questions come up in your divorce and the court demands to see your expenditure, income, and debt accumulation post-separation. These financial records also help address claims for reimbursements to either side, if any.
Identifying Marital Accounts
The first step is to identify all your community or marital accounts which were open at the date of separation. The goal of post-separation accounting is to be able to identify which spouse spent how much and on what.
Post-separation accounting also determines whether a judge should categorize the money as separate or marital during property division. These are a few common examples of marital or community accounts:
- bank accounts held jointly or separately
- credit card accounts held jointly or separately
- rental property income
- tax debt and mortgage
- extracurricular activities of children
Typically, it is possible for couples to find this information by visiting the lender or the bank’s website. However, if your divorce extends to more than a few months, then you would need to request for older documents from the lender or banking institution.
Reviewing and Assessing
A forensic accountant or CPA analyzes each account once the couple compiles a list of all their accounts. This is done to determine whether:
- accounts mentioned are separate or marital
- funds have been used by either spouse in excess
- either spouse has overpaid to compensate the other’s excess
For instance, if you made repair and mortgage payments on the marital home using separate property income for six months (after you got separated from your spouse), and the summary shows that the property’s value increased because of these payments made by you, then the judge may see fit to order your spouse to reimburse you for the one-half payments made by you, or solely award the entire value increment to you.
Another example is a judge giving your spouse credit for the amount paid by them as the balance of a marital credit card during the phase of property division in the divorce.
Post-separation accounting done by a forensic professional is one of the easiest and least cumbersome ways for you and your spouse to maintain control of your finances throughout the divorce proceedings.
Make sure you get in touch with an experienced family law attorney if you are considering a separation or a divorce. Your attorney would be able to help you navigate the separation and divorce process better, and advise you whether you need to hire a forensic accountant.
What are Hidden Assets?
Assets that are not included or made part of the divorce settlement cannot be divided, which means their benefits are solely enjoyed by a single spouse. It is possible for the asset to be sold or consumed even if the other spouse learns about its existence at a later date.
These assets once missed, are rarely worth the additional expense of reopening a divorce case. For this reason, it is vital that you make sure all the assets are revealed during the divorce case and before the divorce decree is issued by a judge.
There are different types of assets that can be hidden, with the most common ones being bonds, cash, insurance policies, stocks, mutual funds, and annuities.
Some of these assets may be converted to cash and consumed by purchasing luxury items, such as art, jewelry, vehicles, antiques, and rare collectibles.
There are various ways to hide assets. Some individuals undertake elaborate processes to remove their assets to offshore accounts. However, the more likely scenario comprises of a spouse selling or giving away an article of value to a family member or a close friend.
Sometimes a safe deposit box may be used by an individual to store items on a temporary basis. It is also possible for your spouse to claim that they owe money to a friend, family member, colleague or acquaintance.
They may pay the money before the divorce decree is issued and then go back to retrieve the amount afterward.
There are times when employers may collude with employees by withholding or postponing the payment of bonuses, business contracts, or raises until after the divorce is finalized.
Your spouse, if they have a business, may also make use of their corporate identity to hide away assets. Some people get really creative in their bookkeeping by paying wages to people who don’t exist or paying them to friends and families or skimming money from the business.
It is also possible for a business owner to delay entering lucrative contracts in a bid to downgrade or minimize the business’s value.
They may go as far as underreporting their income for the year on their tax returns while drawing up financial statements.
Detecting the Hidden Assets
One of the most critical roles of any forensic accountant is to locate assets hidden by the other spouse. A number of methods may be employed by the forensics team to uncover these assets.
They may begin by first getting a clear understanding of how your spouse functions. They may ask you questions regarding your spouse’s habits in order to identify possible locations where any such assets may be kept.
Then, they may request you to provide contact information of close friends and family members, in case your spouse made transfers to them.
Forensic accountants also make it a point to review all recent income tax returns. If you do not have or cannot access a copy of your spouse’s recent tax returns, then you can request for the same by getting in touch with the Internal Revenue Service.
Income tax returns are crucial financial documents since they indicate the income amount earned by your spouse in the previous financial year. These documents also state the amount of interest earned on assets and whether any were sold recently.
W2 information, in specific, can reveal whether your spouse has any executive benefits or deferred compensation plans.
A Form 6521 attached to the income tax return indicates incentive stock options, development costs, accelerated depreciation on real estate, and other similar expenditures related to investments.
Likewise, Form 4797 shows the sale of business assets, and whether they were sold at a profit or loss. Profit or loss from a business is mentioned in Schedule C.
Forensic accountants don’t just stop at tax returns. They also review all necessary financial account statements, such as the ones for savings accounts, checking accounts, and money market funds.
These statements can give an inkling of unknown assets in their tabulation of deposits and withdrawals. It can be easy for a forensic accountant to identify whether any hidden asset is pulling or bringing undisclosed funds.
Your forensic accountant can also review credit card receipts for loan application or purchases that need to be disclosed by the spouse among all assets and income.
Business transactions for people who own a business are closely analyzed by forensic accountants. The review shall focus on whether any significant assets have been recently written-off.
The accountants may also conduct a thorough search of public records, including property deeds among other similar records.
This process is conducted to reveal any quitclaim deeds, which refers to the quick transfer of property to a family member. This search may also reveal other significant matters, like judgments, bankruptcy, and liens.
Business assets are reviewed by forensic accountants by searching the records from Secretary of State’s Office. All financial records are typically required to be filed with the Secretary of State where they remain active for the next five years.
The ingrained knowledge of financial analysis, accounting principles, and auditing techniques are employed by forensic accountants to unearth all hidden assets and income.
Need for a Forensic Accountant when a Spouse Owns a Business or Stocks
Divorce at the most elementary level is nothing but division. This includes division of the union brought on by marriage, division of all the assets, and the division of all debt.
Divorce is about taking whatever each party placed in the combined marriage pot and then splitting the contents between them. It may sound or seem simple in theory, but it rarely is in real life.
The notion of dividing income, assets, debt, and liabilities for people with complex finances is a formidable task – not to mention assessing their lifestyle to arrive at a fair resolution.
While divorce lawyers may be well equipped to deal with assessment of support and the division of assets and debt, the basic questions of ‘value’ is answered by forensic accountants. What is the value of assets and liabilities? Who spent what during the marriage? And, what exactly is at stake during the divorce?
The above is true even in the most amicable of divorces. It can be a knotty mission to divide assets requiring the expertise of a professional to unravel all the complicated tangles.
These are examples of typical situations when a forensic accountant may prove to be invaluable and even necessary:
If one or both spouses are involved in corporate interests, sole proprietorship or partnerships, then hiring a forensic accountant should definitely be considered. There could be situations where one or both parties own a business.
It is possible for the non-owner spouse to feel entitled to a portion of the business assets and profits, assuming that the business was set up or acquired during the marriage. In many cases, these business interests can make up a significant portion of the marital assets and dividing them requires special expertise.
Assessment of business interests can be easily conducted by a forensic accountant who will sift through the financial records and books of the business to determine both standard and premise of value.
The assessment can be complicated because goodwill of a business and other intangible assets also requires a valuation to be divided.
Such analysis makes use of both objective data and subjective study depending upon the nature and type of business in question.
Corporate Stock Benefits
Forensic accountants are required when the value of restricted stock units, stock options (vested and unvested), performance shares, and the benefit from long-term incentive plans needs to be determined. The forensic accountant will employ complex mathematical models to project the value of these assets after compiling all relevant data.
Claim of Dissipated Assets
A spouse may make the claim that the other party spent money on ventures that are non-marital in nature, such as gambling or an extramarital affair.
In such an event, a forensic accountant may be required to sift through all bank and other financial statements in order to identify the amount dissipated and to determine the compensation value to the non-dissipating spouse.
The accountant shall also assess the nature and particulars of the claim to accomplish an appropriate analysis.