Discover Hidden Assets and Uncover Hidden Income in Tennessee Divorces
Forensic accountants help discover hidden assets and uncover hidden income in Tennessee divorces for divorcing spouses and their lawyers. As the forensic accountant works a divorce case, they can perform many tasks and functions. Without being instructed, forensic accountants know to look for hidden assets and undisclosed income. Here is a complete discussion of services forensic accountants can perform in Tennessee divorce and family law cases.
Discover Hidden Assets and Uncover Hidden Income in Tennessee Divorces
Forensic accountants work in many areas of law other than family law and divorce, including damages calculation, mergers and acquisitions, fraud, criminal fraud, bankruptcy, personal injury, and wrongful death. For every aspect of law involving money, there is usually some expert somewhere with the needed specific professional experience. Most forensic accountants will agree that family law is a great way to build a practice and can be very lucrative. Many enjoy it. Others will tell you they dread family law and it is only a means to pay the bills until other forensic work comes along. More than a few forensic accountants refuse to handle family law cases altogether because of the venom and ugliness often involved.
The scope of services forensic accountants provide in family law is limited only by the complexity of the estate and the imagination of the client/lawyer/accountant team. Some of the more common tasks include the following:
1. Marital balance sheet creation and analysis. In all divorces, family lawyers must identify, classify, and value assets and liabilities. Also, the tax basis of each asset can be very important to the overall proposed division of the estate. Upon review of documents provided by the client and obtained in discovery, this process can be either simple or exhausting. Simple assets include bank accounts and publicly traded stock. Complex assets include pensions, stock options, and business ownership. Each asset and debt demands its own specific information for settlement or trial. Assembling this information early in a case can be a very useful tool in depositions, settlement negotiations, and trial preparation and presentation. Without a detailed marital balance sheet listing all assets and debts, how is a lawyer going to analyze the proposed distribution percentage of the net marital estate?
a. Asset identification. In drafting settlements, thorough divorce practice requires knowing and listing all assets and debts. Is there a suspicion of hidden or overlooked assets? If so, the forensic accountant can help plan strategies for needed investigation. Does the tax return reflect interest income from an omitted bank certificate of deposit? Is there a capital gain from a mutual fund located within an undisclosed brokerage account? Every family lawyer’s recurring nightmare is omitting an important asset from settlement paperwork.
b. Asset classification. The process of determining which assets are marital property (or community property) and which are separate property can be among the most challenging aspects of divorce work. What assets existed at the time of the marriage? gifts? Was there transmutation? Are there tracing concerns or opportunities to defend commingling claims? In many cases, the classification of appreciation of separate property can comprise the largest and most involved calculation in a case. Classification of appreciation of separate property can be described as the Forensic Accountant’s Full Employment Act.
c. Asset valuation. Valuation is rarely as simple a problem as it seems at first glance. For example, to properly value a whole-life insurance policy, the policy itself, declaration page, and tables must be reviewed to determine its cash surrender value, beneficiary, and owner. Also, pensions and stock options require external information in order to calculate their value as of the date of their acquisition and as of the distribution date (separation or divorce). In fact, many pensions list “values” in statements to employees. Unless the asset is a 401(k), rarely will this calculation accurately reflect the asset’s true value for divorce purposes. Finally, spouses often list quite different values on financial statements than those listed in discovery. This difference in value can make or break a case.
d. Built-in capital gains. Never forget about an asset’s tax basis. Tax basis is not simple and can be easily overlooked. A capital gain is the difference between the sales price (realization) less its tax basis. For some assets, rules for determining tax basis can be very, very complex. Stock and mutual fund basis calculation is fairly simple—their cost. In the divorce context, consequences can be disastrous if a party ignores built-in capital gains. For example, if one party receives a stock account worth $100,000 in exchange for another asset also worth $100,000, the spouse who ignores tax basis can be at a serious disadvantage. If the tax basis is materially different and the asset received must be sold shortly after the divorce to pay for college or debt caused by the divorce itself, the $100,000 is no longer $100,000 and may be worth significantly less. Forensic accountants can provide very important tax advice regarding this issue.
2. Income determination. Income is the most important factor for determining child support and alimony. Who earns what? Is the income reported to the IRS complete? Are the books cooked? Were there any cash transactions? Can the CPA calculate imputed income from the spouse’s monthly spending? Does a spouse’s loan application contain admissions of a much greater income than reported in the case? On a W-2, what are the differences in the calculation among boxes 1, 3, and 5? Forensic accountants know their stuff.
3. Lifestyle analysis. For those states with alimony, many states’ law provides for considering the historical spending of the parties to determine the reasonable need of the supported spouse. Other states also consider the projected future active earnings from employment and passive earnings from investments, including projected investment asset appreciation. The lifestyle analysis can be a powerful tool to present arguments in favor of or in opposition to larger alimony awards.
4. Dissipation and fraudulent conveyances. While every state may have subtle differences in its case law, questionable transactions should be identified, investigated, and analyzed. Wasteful spending in one marriage may be considered routine historical-lifestyle spending in another. Also, transfers to related parties can be fraudulent. Any transfer without consideration must be by either gift, loan, or theft. No other options exist. All have relevance and significance in a divorce.
5. Credibility and admissibility. Proving the opposing spouse lied in discovery about assets, debts, income, or expenses can be very important. Proving that the claimant materially understated assets or underreported income can result in a powerful shift in relative negotiating strength. The larger the omission or misstatement, the more benefit may be obtained. Expert testimony may be required to admit into evidence analysis of the documents that help prove the lie. Plus, under the right circumstances, a forensic accountant’s affidavit in support of a critically timed motion can help break up logjams in negotiations.
6. Defending against the questionable opposing expert. All in all, most experts are very serious about independence. This is especially true with forensic accountants. But there are a number of very derogatory slang terms used to describe those special few expert witnesses who are willing to accept pay in exchange for specific testimony. If you practice family law long enough, you will run across such an expert. Accountants can contrive ratios, formulae, and analyses that are intentionally dishonest. Usually, those experts see this type of testimony as a game. Unfortunately, this game can have a devastating impact on your client unless you mount a competent challenge to this tactic. For example, manipulation of a coverture factor in a pension calculation can result in a $100,000 swing in an estate in favor of the manipulating party. Defense requires an expert.
7. Litigation support. This is a catch-all phrase describing engagement planning and assistance in all phases of the case, including analyzing discovery, advising regarding additional needed investigation, preparing for deposition, and developing trial strategy. For example, a forensic accountant can review tax returns and advise the lawyer on supplemental schedules and documentation that should have accompanied the return filed with the IRS but that have not been produced in discovery.
This blog post is an excerpt from The Forensic Accounting Deskbook: A Practical Guide to Financial Investigation and Analysis for Family Lawyers. Reprinted by permission. Copyright © 2011 American Bar Association. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Footnotes may be omitted from the original text.
Miles Mason, Sr., JD, CPA practices family law exclusively and is founder of the Miles Mason Family Law Group, PLC, in Memphis, Tennessee. Miles is the author of The Forensic Accounting Deskbook: A Practical Guide to Financial Investigation and Analysis for Family Lawyers, published by the American Bar Association.
The Forensic Accounting Deskbook teaches lawyers, forensic accountants, and divorcing spouses how to uncover hidden income and discover hidden assets in complex divorces involving business owners and highly compensated corporate executives. The author, Miles Mason, Sr. has presented numerous seminars on divorce, family law, forensic accounting and business valuations at national and regional conferences for judges, divorce and family lawyers, forensic accountants, and business valuation experts. For a complete listing of speaking presentations, publications, and more of his professional biography, see Miles Mason, Sr.’s professional biography.