There are four issues involved in considering any division of property in a divorce. First, the characteization of each asset must be established. In other words, is the item community property — something obtained during the marriage — versus separate property — something had before the mnarriage or through gift or inheritance? Only community property items are divisible by the judge in a divorce.
Second, what is the value of each item of property? In order to determine whether a division of property in a divorce is "just and right" (the Texas standard) the judge must be able to compare the total value of the property awarded to each spouse.
Third, are there any issues that would allow for a disproportionate division of property? Generally, Texas law requires a division of assets to start at 50/50, but allows for deviation from that standard based on various equitable factors.
The fourth factor is actually dividing the property.
In looking at the first and second factors — characterization and valuation — sometimes it is helpful to have a forensic accountant assist on the divorce team to evaluate various property division issues.
Consider the post from Alexis Dow on The Oregon Divorce Blog on When and How to Use a Forensic Accountant in Your Divorce:
A Forensic Accountant can be a great help to you and your attorney to assist in communication and explanation by creating, using and explaining visual displays for financial details.
Communication is fundamental to any human interaction. The ability to communicate clearly, concisely and in a way one’s audience can readily understand is an extremely important skill.
During a divorce, there is a need to communicate with opposing parties, attorneys, judges, and people in general. The stress and distractions of divorce can make communicating effectively a challenge. This is particularly true when trying to communicate the significance of property, income, and other information needed in divorce proceedings to attorneys, soon-to-be former spouses and possibly a mediator or judge.
Clearly laying out key ideas and arguments supporting divorce matters can be critical to successful negotiation or convincing the judge. Visual tools such as tables, charts and graphs can help make and emphasize key points. They can also be particularly helpful for laying out financial information. Clear communication can help achieve a satisfactory solution as soon as possible as both sides can clearly see the facts and figures.
Some of the areas where a CPA and forensic accountant can help develop and illustrate financial matters in a divorce include:
• Preparing a Marital Balance Sheet: Developing and presenting in tabular form a listing of assets and liabilities of each spouse before, during and after marriage and apportion assets and liabilities to each spouse based on the date and nature of property acquisition
• Determining Spousal interest in Marital Assets: Calculating the percentage owned by each spouse based on the timing of acquisition, use of joint funds to add to assets or to fund costs of assets and showing this information in a table or on a graph. For example, a 401(k) has a value at marriage, marital assets are used for additional investment, and then, after separation, individual funds add to the 401(k). During the period of ownership there are price fluctuations. The total marital value would need to be apportioned to reflect all the inputs. A second example, a home is owned by a spouse at date of marriage, it is rented during the marriage, but marital assets are used to pay shortfalls. Both the original owning spouse and the married couple now have an interest in the home. A third example is when spouses have separate checking accounts and each pays certain expenses related to a marital asset with one spouse paying more (possibly because that spouse earns more or has greater assets than the other spouse) creating a disproportionate interest in the asset.
• Calculating Controllable Cash Flow: Determining the total value of compensation, including perks and payment of personal items with business funds when a spouse owns a business and illustrating that information using a bar chart, pie chart, table or graph.
• Performing a Needs/Lifestyle Analysis: Calculating monthly needs for alimony payments and presenting this information in tabular form.
Other related services a forensic accountant can provide include:
• Valuing Spousal Interests in Businesses
• Analyzing personal expenses of business owner who denies income and available cash flow. Analyzing the personal expenses of a business owner who states there is little or no income to assist in proving the existence of positive cash flow.
• Tracing Assets: 1. Tracing the source of funds used to purchase assets during marriage; for example, one spouse owns a house at marriage, it is deemed separate property. That house is sold and the proceeds are used to buy stock, it would remain separate; 2. Following assets/income to determine if additional marital assets exist.
• Searching for Undisclosed Assets
When you want to communicate core financial issues in any dispute, contact a forensic CPA to help improve communication and facilitate resolution by providing clear visual displays of financial matters.
We have several forensic accountants that we routinely use as part of our divorce team.