Forensic Accountants’ Full Employment Act: Appreciation of Separate Property
The Forensic Accounting Deskbook by Miles Mason, Sr. JD, CPA, published by the ABA Family Law Section
The Forensic Accountants’ Full Employment Act is Appreciation of Separate Property. Appreciation of separate property can present one of the most difficult financial and legal issues family lawyers can face. Help from a forensic accountant can make the difference between a fair settlement and a travesty of justice.
For a much more detailed discussion, see The Forensic Accounting Deskbook: A Practical Guide to Financial Investigation and Analysis for Family Lawyers, Second Edition, authored by Miles Mason, Sr. and published by the ABA Family Law Section. This updated edition of one the ABA’s most popular resources explains the practice of forensic accounting and business valuation and how to apply it in family law cases. It provides a practice-focused introduction to the core financial concepts in divorce, such as asset identification, classification, and valuation, income determination, expenses, and more.
See Mason’s complete list of the 10 Big Divorce Financial Mistakes.
VIDEO TRANSCRIPT:
Tracy Coenen: When we talk about marital property, I understand that it can be divided equally, or it can be divided equitably. What is the difference between those two?
Miles Mason: Each state’s going to have specific laws regarding that. And when a state refers to equally, that’s pretty simple, 50/50. But most of the states, the vast majority of the states, are equitable distribution states. And most of the states’ laws are going to say equitable does not mean equal. But in most of the states, in a typical divorce situation, a judge is going to start at 50/50 and move one way or the other depending on a set of statutory factors. And the statutory factors are going to be listed within state law, probably between 9 and 15 factors, which is going to be everything. Who earned the money? Who dissipated money? Who gave money away to a boyfriend, girlfriend? Who inherited? What’s the existence of separate property? So basically, every factor you can think of is a factor for equitable distribution.
But at the end of the day, and that’s a great role for forensic accounting and highlights the importance of identifying every asset. How do you divide assets unless you know what’s there? Fairness is a big issue. Judges are human. They’re going to look at something, they want to do something, what they think is fair. And that’s usually incorporated in several of the factors. And some judges may consider, for example, want to prepay alimony where they could say, “Well, I want one spouse to pay another spouse some money,” whether it be called spousal support in your state or maintenance. They may want to give one spouse a little extra money, or they may start and do that with some property division. Even though that’s not what the law says, some judges will do that.
Tracy Coenen: Can we get into separate property and marital property a little bit more, in exactly how a forensic accountant is going to determine whether something is separate or marital?
Miles Mason: If somebody earns income during the marriage, that income went somewhere. Most of the time, in a typical marriage, it’s going into a joint bank account. Well, marital property going into a joint bank account is a very clear example of something being marital property in a marital property account. But once you put separate property into, say, that joint account, then you have a commingling of separate property and marital property. So a forensic accountant does a great job of bringing to the table this general understanding of how assets are acquired, they’re maintained, maybe how an asset was disposed and what those records might look like.
Another key issue for forensic accountants is something called transmutation. It’s a legal term that’s fairly simple, but where a husband may have, for example, may have a separate asset and could transmute that into a marital property by simply gifting it, or transferring it, into joint title names. And you see that most often with real estate. Let’s say, a husband, or no, let’s say a wife owns a house before the marriage, clearly titled in her own name. They get married and they want to refinance, pull some money out of the house. Well, both parties get their name on the mortgage. Well, that’s transmutation. That’s a great example right there, but you can do it with transmutation most often done with real estate.
But another great issue, which I call The Forensic Accountants’ Full Employment Act, is the whole appreciation of separate property. It’s possible that an asset can appreciate and that appreciation become marital property, could be investments, could be a business. There’s a lot of different examples and the state law is going to drive that. And again, the forensic accountant is going to be very, very comfortable with the language, the documents, and the information is going to be used to make that claim or defend a claim by the lawyers.
And then the final, maybe the funnest part, for a forensic accountant is doing a dissipation analysis. In most common situation dissipation, you have a boyfriend, girlfriend and somebody spending money where they shouldn’t have spent it, could be gambling, could be a lot of different claims for dissipation. When you hear dissipation, you should be thinking wasteful spending. There’s a lot of different definitions and discussions within state law about what is dissipation. But the core is, if one spouse wastes marital assets, they need to make an additional contribution to the other spouse to cover that as part of the divorce process. And accounting for that, again, goes through the same documents you were talking about earlier, checking accounts, investment accounts, credit card statements, that sort of thing.
Thank you to Tracy Coenen, CPA, CFF for inviting me to join her in this video series. Tracy is a nationally recognized forensic accountant practicing in Milwaukee and Chicago.
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