How can you ensure divorce cases are equitable?

By Freed Maxick on January 30, 2014
Back to main Blog
Freed Maxick

Freed Maxick provides accounting, auditing, tax and consulting services and serves public and private companies, not-for-profits and municipalities to enhance profitability, save taxes, improve accountability and preserve wealth.

By Ron Soluri, Jr. CPA Director

In typical divorce cases, courts will try to split assets equitably between both spouses. But, at times, the parties can make the court’s job quite difficult by hiding assets or performing their own valuations. The key to a fair settlement is hiring an experienced financial expert to accurately appraise the assets.

Inadequate Discovery

A common roadblock to an equitable asset split in a divorce is inadequate discovery. When the divorcing spouses own a business, it can be their biggest and most illiquid asset. But a spouse who controls a business can often be reluctant to release certain information, such as tax returns, financial statements, contracts, business plans and marketing materials.

Divorcing spouses may also resort to unscrupulous behavior and actually hide income or assets. Others may argue that giving an appraiser access to such information will breach the company’s security and interrupt its business operations.

When valuing a company, an appraiser must have access to information that’s usually known only to insiders. Make sure you involve your financial expert early on in the process to help improve the scope of discovery. And be sure to ask him or her for a complete list of documents and procedures that’s needed to complete the job.

Digging Out Fraud

At times, spouses might try to hide assets in anticipation of an impending divorce. Or a business owner might delay reporting his or her income or even overstate expenses until the divorce is settled.

Let’s look at an example of such behavior. Mrs. Moneybags opened a bank account under her adult son’s name and set aside $200,000 over three years. She suspected that her husband was being unfaithful, and she wanted to tuck away some funds, just in case he left her. Trouble is, the $200,000 legitimately belongs in the Moneybags’ joint marital estate — regardless of which spouse is in the wrong.

If you or a client thinks the other spouse is concealing income or assets, the actual scope of an assignment may need to be expanded to investigate any asset misappropriation or financial misstatement. Financial experts in such divorce proceedings often have a background in forensic accounting, so make sure you tap into their fraud expertise.

Solving the problem of subjectivity

As you know, divorce cases can be fraught with subjective issues. For instance, it may be unclear whether discounts for lack of control and marketability (common in Tax Court cases) apply in divorces. There are other relevant issues that might apply when appraising a business. They may include the appraisal date, the appropriate standard of value, and the local courts’ treatment of goodwill and buy-sell agreements.

Although it’s quite necessary to look at applicable case law in the appropriate state, having an understanding of legal precedent in other jurisdictions can be helpful, as well. For example, family courts sometimes consider cases in other states, especially if the state hasn’t ruled on a similar case or if state case law is contradictory.

The parties might also argue whether it’s appropriate to subtract built-in capital gains tax liabilities when the joint marital estate includes C corporation stock. If the economy is volatile, the parties might argue over whether the court date or the filing date is actually the more appropriate “as of” date for valuing retirement accounts, stock and other marital assets.

Points of contention like those expressed above can slow down a divorce case and even add an element of uncertainty to court-imposed settlements and judges may have different interpretations of these issues. Sometimes, the parties are simply better off negotiating their own out-of-court settlements.

Avoiding the DIY scenario

If a client brings up the idea of a do-it-yourself (DIY) assessment of assets as a way to save money, don’t let him or her do it. Professional appraisers use highly sophisticated methods to help value assets, particularly businesses. Such methods often include the adjusted book value, merger and acquisition, guideline public company, capitalization of earnings and discounted cash flow methods. Such techniques are preferred by the courts.

Shortcuts, such as net book value, industry rules of thumb, or buy-sell formulas, will likely be inadequate. And any attempts to fraudulently hide or misrepresent assets could lead to even more legal trouble that will make the original divorce action seem like a walk in the park.

It is wise to consult with valuation analysts and CPA’s who can provide solid litigation support in these cases and provide adequate comparables, as well as analyzing financial results that ultimately lead to an accurate determination of value assets.

Stay up to date