The real bottom line in divorce.
Some lawyers use accountants to kill a deal by exposing the actual value of a financial settlement offer. Other lawyers use accountants for the opposite effect. I have conferred with accountants on many cases, and I don't think we work together effectively until it's too late. As a result, I think we misuse each other.
Accountants often enter the proceedings to interpret offers and separate the bargain from the sting. In settling divorce cases, accountants are important not only to appraise the estate but also to evaluate a settlement. The equity of a settlement offer is often in the eye of the beholder.
Let's start with a balance sheet which Husband presents to Wife as "Offer I" (See Exhibit 1). You can tell he's no accountant -- there are no footnotes or disclaimers and all of their assets are in even numbers and on one piece of paper. Even if incorrect, having a rough draft puts us miles ahead. You need to list all the assets and liabilities before you can negotiate.
This offer makes him look great. With $200,000 in net worth and $100,000 of debt, Husband takes $100,000in assets, $100,000 of debts and gives Wife $100,000 worth, or what appears to be 100% of the assets. She takes the offer to her lawyer and he suggests consulting an accountant. But why does he do that? Let's discuss it.
Roughly half of all marriages in this country end in divorce. More people are in the judicial system for divorce and family law litigation than any other area of the law. Now connect at dollar sign with it.
Marital estates are divided. Real estate and personal effects are sold. Retirements split. And consider the money supposedly changing hands for alimony and child support. Add court costs, attorneys counselors, and accounting fees. The financial implications of divorce cry out for expertise in assessing numbers. And attorneys need accountants to be optimally effective.
Let's look at the assets in this divorce settlement. This alone will demonstrate the illusive nature of "value" on a balance sheet. Remember, we are talking exclusively about property acquired during the marriage, not what the couple brought into the marriage.
Cash CAsh is obvious. You know who wants it and what it's worth. There is a catchall in most discovery which says "name any other assets that are not included in the above." Here, Husband says he needs all the cash to keep the business afloat. Without the business, he can't pay alimony.
Bonds/Stocks "Worth" in this context is what a willing buyer and willing seller take for the stock at this time. You can't split stocks until you know whether you can sell them. Is there a market? Are they restricted? What about fees, penalties, capital gains, and cost of sale? What is the real cost to the party receiving and what is the selling party actually forfeiting? Let's say [TABULAR TABLE OMMITTED] these stocks are worth $20,000. Husband keeps them all.
Personal Effects Personal effects are jewelry, clothing and collectibles. This isn't usually a major area of dispute. However, you can hide a lot of value in personal effects, especially in jewelry and collectibles, as often only the collector knoes the real value. In this case, Husband estimated their holdings at $20,000. He says his share is worth $5,000 and gives her $15,000 worth.
Household goods This includes furniture and fixtures, and values can be all over the ballpark. Some people have $3,000 worth of early mother-in-law others may have a $70,000 home and $50,000 of furniture just in the hallway. Household goods are evaluated at market value based on what a reasonable person would pay for them, not the replacement value. Again, Husband estimates their total value at $20,000 and gives wife $15,000 worth while he takes $5,000.
Real Estate Here we are talking about the assets as they sit, not as reduced to an amount in your bank account. As you well know, the dollar signs in the value column don't necessarily represent what the property is worth. They represent what someone says is it is worth. Many clients do not understand this.
1. Residence -- This is usually the couple's largest asset. It clouds the process and generates the most fights. Before an attorney wages war to get the house for his client, he should be sure his client really wants and can realistically keep it. If the client gets the house but can't make payments or afford maintenance and repairs, she won't have it. In this case, the house has a mortgage of $120,000 that is payable at $800 a month and a paper equity of $20,000. Husband gives Wife the house, but with repairs, financing and cost of sale, the equity is eaten away and Wife has $0.
2. Apartments -- This couple has apartments worth $200,000. That is the appraisal. Market-analysis and a mortgage payable at $1,000 a month says they're worth $180,000. Hence, they have a net equity of $20,000. As with the house, Wife gets the apartments but cannot afford them. She loses the apartments and their equity.
3. Land -- Many balance sheets keep the real estate at purchase price. From my experience one of two things befall real estate: it's drastically undervalued from just sitting, or it has been built up to serve as collateral and is terribly overvalued. In this case, Husband keeps the land and retains his $20,000 equity.
Vehicles Husband has a new model, $30,000 car, 100% financed, no equity. Wife drives a 1973 Volkswagen which she owns. On paper, it's even. Economists can show that Husband has more value than Wife. How they perform that procedure, I'm not sure. Husband and Wife keep their own cars.
Business Assets What is a business worth? Some are easily evaluated and others aren't. One difficulty is that many business owners don't want to know. Some people prepay expenses, insurance or inventory. And it takes four or five years of balance sheets for that to show up. Depending on the type of business, you could hide a lot of money.
In this case, Husband keeps the business.
Accounts Receivable This couple's accounts receivable are personal family loans. Husband says, "I'm glad we loaned your brother that money. And you can keep it when he repays you." Wife is now out $20,000 of Wife's assets.
But Husband also says, "We can't stiff Mom. She needs the money, so I'll repay her." Husband is now out $20,000 worth of debt. Everybody knows neither of these loans will be repaid.
Retirement We have a statement from a company and they have an IRA account there. I can read it; and everybody reads it. So we list it as an asset. Husband keeps his retirement.
But what about the liabilities? Husband says he owes $20,000 for last year's taxes. No, actually, he's getting $10,000 back. And he owes nothing for 1991. He kept an extra $10,000 in cash to run the business. The debt with Mother-in-Law cancels out. And their net liability to the bank and the credit card companies is only $10,000 since he kept the $10,000 tax refund. Since Husband's $100,000 in assets was actually worth $100,000, he absorbs the $10,000 debt.
When she tries to sell them, Wife's personal effects are worth $1,000 rather than $15,000. Her part of the household goods is worth $4,000. The loan to her brother won't be repaid, and she lost her equity in the house as well as the apartments.
Offer 1, which at first blush looked like a great deal, gives Wife $5,000 in assets and Husband $92,000. You may even things out somewhat by keeping alimony open as an option. But you won't find a judge doing that.
Hammering out the details of such a settlement is, I am sure, a frustrating process for the client. But it is important to ensure that people going through divorce have a realistic understanding of their arrangement. And a settlement is just that, an arrangement -- a compromise. No one ever gets everything he or she wants, and the entire process is thoroughly distasteful to most. But I would rather have a frustrated client who understands the settlement agreement than one who cashes out later for a fraction of the perceived package.
David Kelsey is referred to as the Dean of the Family Law Bar in New Mexico. He is a graduate of the Notre Dame Law School. He began his law practice in 1961 in New Mexico and was admitted to the United States Supreme Court in 1970. He was the first lawyer in New Mexico to specialize in Family Law is a principal in the Family Law Firm of Atkinson and Kelsey, PA, in Albuquerque. He is credited with founding of the New Mexico State Bar amily Law Section. He speaks regularly at the national level on the subject of family law and has published numerous articles and manuals on family law.
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|Title Annotation:||accounting services for divorce proceedings and settlements|
|Publication:||The National Public Accountant|
|Date:||Nov 1, 1991|
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