This article was originally printed in the ABA Section of Family Law eNewsletter, July 2012
A divorcing couple has a premarital agreement, so everything is simple when it comes to dividing assets and paying maintenance, right? Of course not. Premarital agreements are rarely simple, and they become even more complicated when the language in the agreement is imprecise.
This high net worth divorce case study provides some important insights into the process of completing a lifestyle analysis and calculating support. In this case, an imprecise premarital agreement led to problems in analyzing the marital lifestyle, excluding certain questionable expenses, and calculating future needs.
Marital Standard of Living
Premarital agreements typically speak to the factors to be considered in calculating maintenance, including the length of the marriage, the method for calculating the spousal support, and the lifestyle or the marital standard of living of the couple and their children. Unfortunately, there are many situations that are never contemplated when premarital agreements are written, so they aren’t addressed in the agreements.
The most hotly contested area is the standard of living, as this item is often elusive and subjective. In our high net worth divorce case study, the parties’ premarital agreement provided that the recipient spouse was to receive spousal support for three years in an amount to support her in the standard of living enjoyed by the parties during the last three years of the marriage.
Both parties retained forensic accountants to calculate spousal support, but with no specific guidance in the premarital agreement, the experts disagreed on how to determine the standard of living. With a high level of spending and two different methods of calculating support, the figures presented by each forensic accountant differed by several million dollars.
Imprecision in the Agreement
One problem in calculating the martial standard of living was the fact that Sarah, the spouse entitled to maintenance, engaged in questionable (and costly) activities prior to the separation. During the last few years of the marriage, she purchased substantial assets without the knowledge or consent of her spouse, spent lavishly on affairs (including dinners, entertainment, jewelry, and real estate for the benefit of her boyfriends), withdrew large and unexplained
amounts of cash from bank accounts, and spent a substantial sum of money on internet pornography.
Additionally, there were substantial monthly expenses related to the parties’ five children. The premarital agreement was silent as to how these items should be treated, stating only that maintenance would be based on the standard of living “enjoyed by Stephen and Sarah” during the three years prior to the separation.
The Experts Disagree
The mechanics of the lifestyle analysis were standard, with a multitude of bank statements, brokerage statements, credit card statements, financial statements, and other financial documents available. This analysis included a detailed examination of the transactions, categorizing each expenditure.
Sarah’s forensic accountant simply categorized and summed all expenditures of the family. Counsel argued that all expenditures of the family should be included in the standard of living, and that Sarah was entitled to the full amount calculated.
Stephen’s expert took the analysis further, and argued that certain expenditures should be excluded from the calculation of standard of living, as they either were not for Sarah’s benefit or they were not part of the known (and approved) marital lifestyle. The expert evaluated each expenditure to determine who benefited from the expenditure and whether it was part of the marital lifestyle.
It was important to know whether expenses were for one of the spouses or for the children, as this would directly impact the amount of spousal support that should be paid. Child support was an issue considered separately, so Stephen’s attorney argued that any expenditures for the children should not be a part of the calculated marital lifestyle.
Further, expenses that would not have been approved by Stephen if he had known about them were considered to be outside the marital lifestyle by his expert. For example, expenses related to affairs were excluded because they occurred outside the marriage. Secret, extravagant expenditures by Sarah were also excluded because her husband never would have consented to such expenditures.
The Art and Science of the Numbers
Seemingly simple calculations of lifestyle in divorces, including divorces with or without premarital agreements, are often more complicated than expected. Calculating lifestyle and needs is part science, in that mathematical calculations are performed. But it is also part art, because judgments need to be made in categorizing, segregating, and evaluating expenditures.
When a premarital agreement leaves room for much interpretation in evaluating lifestyle and calculating support, it is important to integrate both science and art. In this case, the arguments on Stephen’s side were compelling, and were incorporated substantially into the judge’s decision.
A more precise premarital agreement could have narrowed the financial issues and defined the parameters of the financial calculations by the experts in this divorce. The imprecise agreement in our case study resulted in substantial professional fees and much latitude for the judge. In spite of the deficiencies in a premarital agreement, a forensic accountant skilled in family law cases can help navigate the financial issues.
Tracy L. Coenen, CPA, CFF, is a forensic accountant and fraud investigator with Sequence Inc. in Chicago and Milwaukee. She specializes in cases of embezzlement, financial statement fraud, white collar crime, securities fraud, and family law. She can be reached at 312.498.3661 or [email protected]