Evaluating Businesses for Divorce: Using the General Ledger

When a divorce involves a business, we often ask for a copy of the general ledger, which is part of the company’s accounting records. The general ledger includes the details of transactions for a specified period of time. What can we find in the general ledger? Tracy Coenen explains in this video:

Why Women Are Often at a Disadvantage in Divorce

divorce financial analysisIn many divorces, women are at a significant disadvantage, especially when it comes to money. In many marriages, the husband has been the main breadwinner. He often controls the purse strings, and often knows much more about where money has been spent and what assets are owned.

In contrast, the wife has often had lower earnings, and has had little to no control over the money. She may have been free to spend money as she saw fit, but she did not see the bills, pay the bills, or maintain control over bank and brokerage accounts. At divorce time, she has no idea where the money is, where is may have (improperly) gone, and may have no access to it.

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Divorce Financials: Importance of a Lifestyle Analysis

In the early stages of divorce, clients are required to complete financial affidavits, financial declarations, or other similarly titled disclosures.  The importance of an accurate disclosure of assets, liabilities, and income is obvious. Yet many clients are unable to accurately prepare this financial information.

Particularly in high net worth divorces, it may be difficult for the husband or wife to report these financial details because of a large volume of data and/or an inability to compute the numbers. The financial declaration will be a primary piece of information used to divide assets, calculate alimony, and calculate child support. Errors can therefore be very costly.

A lifestyle analysis completed by a forensic accountant can solve this problem, and can add other value to the divorce process. The lifestyle analysis is typically done to demonstrate the spending (or the lifestyle) of the family prior to the separation.

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Lifestyle Analysis in Criminal Cases: Proving Income Without Full Documentation

Both civil and criminal cases often involve an element of proving or disproving income of an individual or business. It is not unusual for a divorce case to include allegations of hidden income or assets. In contract disputes alleging the loss of sales or profits, an accurate determination of income is critical.

In criminal cases, the issues surrounding the income of an individual or business have even higher stakes. These cases are quite often tax-related matters, but cases involving white collar crimes and drug trafficking usually include questions about income too.

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Lifestyle Analysis in Divorce Cases: Investigating Spending and Finding Hidden Income and Assets (Book)

LifestyleAnalysisInDivorceCasesSmallMy new book, Lifestyle Analysis in Divorce Cases: Investigating Spending and Finding Hidden Income and Assets, is being published by the American Bar Association this summer. It will be the only book available on the topic of lifestyle analysis in divorce cases. While there are plenty of excellent books on financial issues in divorce, none of them focuses on the lifestyle analysis, how it is done, and how the results may be used in court.

This book focuses solely on the lifestyle analysis in the family law case, although other services from a financial professional may also be needed in a case. The lifestyle analysis is the process of tabulating and analyzing the income and expenses of the parties. The lifestyle analysis is then used to determine the standard of living of the parties, which will influence support calculations, and possibly property division.

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Income Tax Information Used in Family Law Cases

This article was originally printed in the ABA Section of Family Law eNewsletter, February 2014.

Income tax returns and supporting information such as W-2s and pay stubs are the most common and basic documents which evidence income in family law cases. This article discusses the sources of income that are disclosed on a personal income tax return (Form 1040), and some ways the items can be evaluated to search for hidden income and hidden assets.

  • Wages – The figures reported on the income tax return should be matched to the W-2. The W-2 and the pay stubs will provide additional information on the employers, pay rates, total pay, certain benefits, and taxes withheld. Additional analysis may include tracing bank deposits to ensure that all wages were used for the benefit of the family.
  • Taxable Interest and Tax Exempt Interest – These items of income must be considered when calculating income available for support. They are also important because they can point to bank, investment, and brokerage accounts that may not have been specifically disclosed in the family law case.

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How a Lifestyle Analysis Can Be Used in a Divorce Case

A lifestyle analysis is the process of tabulating and analyzing the income and expenses of the parties. The lifestyle analysis is then used to determine the standard of living of the parties, which will influence support calculations, and possibly property division.

Calculating the lifestyle of the spouses prior to separation can provide insight into the lifestyle the married couple enjoyed and the cost of that lifestyle, as well as the income that was or is required to fund the lifestyle of the married couple. The results may be used to prove a spouse’s financial needs following divorce. In other words, a detailed analysis of the spending during the marriage can be the basis to calculate the funding the spouse needs to maintain a similar lifestyle after divorce.

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Income Available For Support

forensic-accountingThis article was originally printed in the ABA Section of Family Law eNewsletter, May 2013.

The issue of “income available for support” in divorces can be huge, particularly if only one spouse works. The issue gets complex if the earnings of one or both spouses are non-traditional. Regular wages are usually easy to evaluate in a divorce case, while income from businesses, real estate, and other investments become more complicated.

As a general rule, there is latitude in state courts when it comes to income and what is included or excluded for support calculation. There are general rules about the most common forms of income, but they don’t cover every issue and they all have a bit of “gray area” within them.

It is important to know the tricky kinds of income and cash flow that come up in divorces, as well as the varying views of how and why they should be included or excluded. Some of the types of income or expenses that may be treated differently from divorce to divorce and jurisdiction to jurisdiction include:

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ABA Section of Litigation’s Sound Advice: Dividing Shared Business Assets During a Divorce

Earlier this year, I recorded a Sound Advice podcast for the American Bar Association’s Section of Litigation.  When dividing shared business assets in a divorce, it is important to fully evaluate the finances of the businesses. It is impossible to fairly divide these assets if you do not dig into the financial details.

This podcast goes through the financial documents needed, including the tax returns (and which forms you should ask for, based on whether the business is a corporation, partnership, LLC, or sole proprietorship), the financial statements, and the detailed accounting records.

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