Overview of the marital balance sheet
One of the duties of a forensic accountant is to prepare a marital balance sheet to facilitate the distribution of marital assets/liabilities. Marital balance sheet assets and liabilities may include, but are not limited to:
- Bank accounts
- Automobiles, boats, etc.
- Tangible property, including artwork, furniture, jewelry, collectibles, wine, etc.
- Brokerage accounts including stocks, bonds and securities
- Retirement accounts, including pensions, IRAs, profit sharing plans, 401(k), etc.
- Value of a business interest
- Employee benefits, such as restricted stock, stock options, etc.
- Cash value of life insurance policies
- Liabilities include mortgages, lines of credit, notes payable, personal loans and credit card liabilities
The value of certain assets listed above, such as real estate, pensions, jewelry and wine collections, are determined by appraisers who specialize in these areas. Kelly Blue Book or similar services are often used to determine the value of automobiles, boats, etc. Account statements are reviewed by the forensic accountant to determine the value of assets, such as bank, brokerage and retirement accounts. Forensic accountants are responsible for determining the value of an interest in businesses to help lawyers determine the parties’ share of the business value for an equitable distribution.
Failure to consider tax implications could result in an inequitable distribution of assets
Some assets may seem of equal value on the surface. However, certain events could have tax consequences, which could result in very different values.
Take, for example, the marital residence. There is no problem if the parties agree to sell the matrimonial home and share the proceeds. However, if one of the parties stays in the house and then sells the house, the tax consequences, in particular capital gains tax (if applicable), could affect the value for that person after their sale.
Assets in a brokerage account portfolio may not be truly equal in value. A brokerage account with $100,000 in cash is not worth the same as a brokerage account with $100,000 in stock on an after-tax basis. Once the tax implications are taken into account on the stock when it is sold, the values become very different. The gain on the sale of shares is the difference between the cost price and the sale price. This gain will be subject to long-term or short-term capital gains, resulting in an after-tax value of less than $100,000. Similarly, if the parties have two brokerage accounts each with $100,000 of stock in the portfolio, the cost basis of each of these accounts could be very different, resulting in more or less tax. The tax consequences must be taken into account so that the asset is fairly distributed.
Retirement Account Division – Understanding the Rules
The distribution of retirement assets, such as 401(k)s, should be carefully considered. In addition to tax implications, specific rules also apply to the transfer of certain pension assets. Failure to follow these rules could lead to unintended consequences. For example, if one party is entitled to part of a 401(k), the money should not be withdrawn and transferred to the other party without executing the proper paperwork. Failure to do so could result in early withdrawal penalties and tax consequences for taxpayers. A document known as a Qualified Domestic Relations Order, or QDRO, must be drafted, which outlines how the spouse will receive their share of the 401(k) without triggering income tax or early withdrawal penalties. Qualifying withdrawals from a 401(k) will be taxed at ordinary tax rates and should also be considered when dividing this asset at settlement. Using a forensic accountant with income tax experience can help you avoid the pitfalls of 401(k) distributions.
Liquidity of assets
The liquidity of an asset or the ability to turn the asset into cash is very important to consider when dividing marital wealth. Cash in a savings or checking account is the most liquid asset. However, assets such as houses, wine collections and/or art collections are less liquid because it takes time to sell these types of assets. It is impractical for one spouse to receive primarily liquid assets and the other to receive primarily illiquid assets. Significant cash flow problems could result for the person receiving the portfolio of substantially illiquid assets. One of the parties can keep the marital residence, in exchange for less cash. It is imperative, especially when there is a lack of cash to be received in settlement, that an appropriate budget be considered to cover home maintenance expenses and other lifestyle expenses.
Life insurance policies
It is common in marital settlement agreements (MSAs) for one of the parties to maintain a life insurance policy to cover their child support and/or alimony obligation if that party dies before their support obligation ends. . The spouse for whom the insurance is purchased must be either the owner or the irrevocable beneficiary. This will ensure that the beneficiary will be notified if premiums are not paid or if there are other issues with the policy. Failure to check the policy could result in lapse or cancellation of the policy. Alternatively, the spouse maintaining the policy should provide proof of the policies over an agreed time frame, whether quarterly, semi-annually or annually.
Any of these common areas discussed above in a marital settlement agreement could lead to significant financial loss and/or future financial hardship if not handled properly in settlement. Therefore, it is imperative to analyze the assets and consider all the financial/fiscal consequences that each asset may have so that the division of marital property is fair and equitable.