EXECUTIVE
SUMMARY |
CPAs’ SPECIALIZED SKILLS
put them in a unique position to
help divorcing individuals and their
attorneys organize financial issues
related to property settlements and
support awards. Some practitioners are
developing a domestic-relations-consulting
niche.
CPAs ANALYZE FINANCIAL
DATA according to a range of
statutes, regulations, rulings and case
law. Local matrimonial statutes and case
law are in general less complicated than
many regulations practitioners interpret
daily.
IN DIVORCE WORK, CPAs
DELVE into a couple’s
financial records to determine the worth
of their domestic and business assets,
jointly and individually; whether assets
are encumbered; who earns how much; who
spends what; and what tax liabilities
are incurred under one asset
distribution scenario vs. another.
CPA/ABVs VALUE DIVORCING
COUPLES’ business interests,
and such expertise can be used to assess
other financial assets such as notes,
mortgages and retirement plans. Divorce
case law and local statutes may require
specific methods. CPAs can help
structure the payout to provide the
greatest tax advantage.
SOMETIMES DIVORCING
PARTIES, through error or
deception, do not accurately disclose
assets in the discovery process. CPAs
can use forensic skills to find them.
A CPA CONSULTING IN A
DIVORCE CASE will address tax
issues such as the taxability of
support, the basis of property to be
divided, the impact of the allocation of
the dependency exemptions and the timing
of the divorce or separation. Knowledge
of the divorce provisions in the
Internal Revenue Code and how to apply
them can help clients find liquidity.
| THOMAS F.
BURRAGE, CPA, is the litigation and
valuation services partner in charge at
Meyners & Co. LLC in Albuquerque, New
Mexico. His recent book, coauthored with
Sandra Morgan Little and published by John
Wiley, is Divorce and Domestic
Relations Litigation. He is a
member of the AICPA family law task force
and the litigation and dispute resolution
subcommittee. His e-mail address is
tburrage@meyners.com .
|
hen marriages hit the skids—and in
the United States almost 50% of them do—divorcing
individuals must position themselves for a
radically different future than they envisioned
when they vowed to “love and honor.” Under
tremendous stress, often while angry and grieving
for the past, they will make financial decisions
affecting the rest of their and their children’s
lives. Because such emotions tend to crowd out
rational self-interest, these folks can benefit
from a steadying hand, which CPAs’ specialized
tax, audit, valuation and forensic skills put them
in a unique position to provide. Advising this
growing segment of the population and their
attorneys about the money issues of ending a
marriage is the basis of domestic relations
consulting. Here’s how what practitioners know can
help people undergoing a divorce to organize the
information courts use in determining support
awards and dividing a marital estate.
QUALIFICATIONS WITH A CAVEAT
In simple terms,
dividing a divorcing couple’s property involves
identifying, valuing and apportioning assets, and
CPA tax and audit expertise is a natural
foundation for discovering the most relevant
information to complete that process.
Practitioners routinely determine owners’ equity
and cash flow, income and the value of any noncash
benefits, according to a range of statutes,
regulations, rulings and case law. CPAs can’t
practice law, but they do apply it when analyzing
financial data. Local matrimonial statutes and
case law are, in general, less difficult to
understand than many regulations practitioners
interpret daily. In divorce work, CPAs
compile data to determine
What a couple’s personal assets are
worth, both jointly and individually.
What their business holdings are
worth, both jointly and individually.
Whether assets are encumbered (by
debt or legal restrictions, for instance).
Who earns how much.
Who spends what.
What tax liabilities are incurred
under one asset distribution scenario vs. another.
“Those financial research and interpretive
skills are exactly what divorce attorneys and
their clients need,” says William B. Stewart Jr.,
CPA/CVA, CFE, of Houston. “Our work in domestic
relations is a microcosm of everything we do as
CPAs,” he says.
There’s an important caveat,
however: Often advice that’s good for one
party is detrimental to the other. CPAs
will want to avoid engagements having a
conflict of interest. In some cases a
divorcing couple that has been a client
will want the CPA to advise them both and
work with each spouse’s individual
counsel. If the practitioner accepts, he
or she should describe potential areas of
conflict in the engagement letter and
require both parties and their lawyers to
sign a release specifically waiving them
(see exhibit ).
Without a release a practitioner should
use great caution when advising anyone
whose spouse has been a client of the
firm. Note : Many CPAs who
specialize in this niche cultivate
relationships with neutral domestic
relations attorneys to obtain referrals
from them. |
If at First You Don’t
Succeed…
About 80%
of divorced men and
75% of
divorced women remarry,
whether or not they have
children. Most do so within
three years.
Source:
www.divorcewizards.com
.
| |
RECORDS, RESOURCES AND NEEDS
It isn’t unusual for a divorcing couple’s
financial records to be in disarray and spread
between two households, with important papers
stuffed in a shoe box, for instance. That shoe box
often contains brokerage and bank statements,
deeds, titles, invoices and tax returns along with
other important records. In divorce consulting, a
CPA organizes and analyzes those financial
documents, outlines the couple’s holdings and
income, relates findings and explains the tax and
other issues to the hiring attorney, the parties
and the judge.
Based on that information,
the court then divides the assets and
decides the amount and duration of
support, if any. To award child or spousal
support, the court looks at each
individual’s income, cash flow, noncash
benefits, perquisites and established
level of expenditures and projects the
need of the recipient, the ability of the
payer to fund it and the tax consequences
to both. (For example, spousal support
might be taxable where child support is
not.) Michelle Gallagher, CPA/ABV, of
Gallagher and Associates PLC of Lansing,
Michigan, says courts don’t always agree
with a spouse about what’s considered a
“necessary” expense. For example: “One
lady with a wealthy husband listed a
$3,500 monthly expenditure for shoes as
necessary. She didn’t get it,” Gallagher
says. CPAs assisting clients analyze
divorcing individuals’ historical
spending patterns and use the
information to project postseparation
and postdivorce expenses. They consult
their client’s attorney(s) and refer to
local case law to determine what types
of income and expenses a court considers
relevant when it establishes
pending-divorce and postdivorce support
awards, the amounts of which may differ.
RESEARCH TRUMPS MISTRUST
The nature of divorce is conflict,
and the list of issues the parties
dispute can be extensive. One partner
may accuse a spouse of hiding income or
say underperforming marital assets
should be sold and reinvested to produce
a higher rate of return. |
Always and Never Tips
for Divorce Consulting
CPAs’
accounting skills and
objectivity qualify them to
assist divorcing parties, and
the escalating divorce rate in
our society is creating a
demand for these advisory
services. Practitioners who
use this opportunity to expand
their scope and increase
revenue should observe the
following dos and don’ts:
Always get an
engagement letter or other
evidence of the client’s
understanding of what services
are to be performed, what the
financial responsibilities may
be and for whom the CPA is
working.
Always consider
whether there are real or
perceived conflicts of
interest in representing a
party to a divorce. This is
particularly critical when the
CPA has previously represented
the couple in other matters.
Always approach
the engagement with the
objective of helping the
couple preserve assets,
maximize cash flow and solve
financial issues to their
joint advantage.
Always consider
the parties’ respective
financial interests, but
understand the client may make
decisions on an emotional
basis.
Never fail to get
a retainer to cover your fee.
Even when the CPA has
performed in a stellar manner,
the client—who is on an
emotional roller coaster—may
feel differently when the
process ends.
Never get
emotionally attached to your
clients or their issues. When
this happens the CPA loses
credibility and objectivity
with the parties and the
court.
Never accept
cases for which others may be
more qualified without
informing your client and his
or her attorney of that fact.
| |
When particular circumstances require CPAs to
check such claims’ accuracy, they can use business
valuation methods to do the job. Practitioners may
compare performance for investments or individuals
with appropriate benchmarks or peer productivity
figures or assess whether a business or asset is
under- or overperforming by looking for
consistent, reasonable data about that type of
entity. To learn whether assets have been invested
appropriately, CPAs can compare them with other
suitable investments. CPA/ABVs often obtain
comparative business valuation data from the
Internet and other information sources (see “
Signed, Sealed, Delivered, ” JofA ,
Nov.02, page 30). Although divorcing
couples usually disagree about how to divide their
property, local statutes and case law largely
determine value and proportionate ownership. If
the ownership interest in property is disputed
because it has been acquired, partially or
completely, with separate funds, CPAs can trace
the sources of funds through the financial records
of both individuals. Janet M. McHard, CPA/ CVA, of
Meyners & Co. LLC in Albuquerque, New Mexico,
gives an example: “I recently traced funds through
60 bank accounts spanning 14 years to prove that
more than $1 million in property and securities
were directly traceable from gifts and
inheritances my client had received. When we
started, the opposition claimed all of it was
community property. When we finished they conceded
it was separate.”
Client
expectations are difficult to manage in
tracing engagements, however. It’s
virtually impossible for a CPA to predict
how much work will be required or what the
results ultimately will be. CPAs
performing tracings should communicate
with clients and attorneys regularly to
let them know what results they’re getting
and the fee-to-date amount. Divorcing
couples’ business interests need to be
valued before they can be fairly
divided, and CPA/ ABVs have the acumen
to assess these stakes. Methods detailed
in local divorce case law may differ
from some valuation norms, so check
regional legal requirements carefully.
Gary R. Trugman, CPA/ABV, of Trugman
Valuation Associates in Rockaway, New
Jersey, says: “Many times the family
business is the largest asset in the
marital estate and a major portion of
equitable distribution. We use our
skills and knowledge as CPAs to help
structure the payout in a fashion that
provides the greatest tax advantage to
the parties.” | |
Engagement
Letter Waivers
| A
CPA who chooses to work for a
client couple should discuss the
potential conflict in an
engagement letter addressed to
the clients’ attorneys. Both
clients and their respective
attorneys should sign it. It
might express waivers such as
the following examples.
This letter will
confirm our discussions and
the engagement of our firm on
behalf of Dr. Herbert Doe and
Jane Parker Doe, hereafter
collectively referred to as
the “client,” to consult with
both parties on a “neutral”
basis related to their
divorce. All workpapers or
other documents used by us
during the course of this
engagement will be maintained
in segregated files. At the
completion of our engagement,
the originals and all copies
thereof will be returned to
you, upon your written
request.
By signing this
letter agreement, you and your
clients acknowledge and
request that all parties are
aware that ABC Accounting Firm
has provided exclusive
accounting services over the
past several years to the
parties individually, to Dr.
Doe Dentistry, to the Doe
Family Limited Partnership, to
offspring Bob and Mary Doe and
to the children’s trusts
established for their benefit.
You and the parties represent
to us that the parties have
been fully informed as to any
potential conflicts of
interest and that the parties
nonetheless wish to engage us
to perform these consulting
services related to financial
and accounting issues in their
divorce, including issues
concerning the value of the
dental practice. The parties
hereby release ABC Accounting
Firm and its members,
employees, successors or
insurers from any claim or
liability for damages
resulting from any perceived
or actual conflict of
interest.
| |
Expertise such as what practitioners use to
value businesses also can be employed to value
financial assets such as notes, mortgages and
retirement plans, which may be affected by
conditions such as a holding period, rate of
return, interest rates and the amount and timing
of income generated. Part of valuing those
financial instruments includes researching the
appropriate levels of premium or discount
allowable under the local law. In some
circumstances the value of a property may
have been enhanced by the labor of the
couple. If this has happened with property
that isn’t jointly owned (perhaps the wife
contributed marketing services to the
husband’s family business or the husband
reroofed a home the wife inherited), there
may be conflict about who deserves the
value created from the spouse’s labor.
Reimbursement for the work can settle this
as can other types of apportionment of the
value. When valuing assets it benefits
the CPA greatly to consult with the
client’s attorney to ensure a thorough
understanding of local law. Valuations
vary with circumstances, and
jurisdictional requirements may cause a
valuation for divorce purposes to differ
significantly from one that’s
appropriate for another type of
engagement. The differences can affect
how the CPA advises the client.
Divorcing parties also frequently
have disputes about the costs associated
with selling assets. These include
income tax on the sale of the asset
and/or commissions and fees. Some
jurisdictions allow the deduction of one
or both such costs to be divided. If the
cost is an unavoidable part of the
property division, the parties typically
share it in proportion to their
respective ownership. If not, the
expense is borne by the partner who gets
the property. Even when a couple
prefers not to sell an asset, CPAs
nevertheless calculate the deferred
income tax liability for the asset as if
it were going to be sold. The tax
responsibility will devolve to the
person awarded the asset and, in some
cases under local law, won’t influence
the property division. However, because
the tax associated with the asset may
become due at a future date, the looming
liability may impel clients to choose
one asset over another. |
|
How CPAs
Can Help To
expedite closure in divorce
consulting, practitioners can
Identify all the
assets and liabilities of the
couple’s estates.
Consider the tax
consequences of the asset
divisions.
Evaluate all the
various entities of the
parties—not just the
businesses.
Act as employee
benefits advisers by informing
clients about alternative ways
to deal with retirement plans.
Perform financial
planning by advising clients
which assets to take and in
which form they will be most
advantageous. Source:
William B. Stewart Jr.,
CPA/CVA, Houston.
| |
UNCOVER FINANCIAL DECEPTION
The emotional turmoil that affects divorcing
individuals often causes them to lose trust. It’s
easy to understand. Many times divorces are
precipitated by one party’s belief that the other
has kept information from him or her, and
allegations of financial deception are common.
Sometimes misrepresentations occur, whether by
intentional or unintentional conduct. CPAs
regularly analyze clients’ organizational and
financial information to determine the possibility
or existence of corporate financial fraud, and the
skills for uncovering whether matrimonial income
or assets are being hidden are the same. Lori E.
Bunker-Leary, CPA/CVA, of Financial Investigative
Services in Montclair, Virginia, offers an
anecdote: “I represented the wife of a CEO of a
major corporation and part of my engagement was to
determine the value of his retirement vehicles and
estimate her interest in those accounts. He wasn’t
uncooperative, but he didn’t have a lot of time to
answer my questions. He requested I speak with
corporate counsel to get answers. “I felt
I wasn’t getting the whole story, so I called the
pension department and spoke with a clerk there
who divulged the existence of an annuity from a
closed retirement plan. The annuity, worth over
$650,000, had not been disclosed in discovery.
When questioned, the husband said he was quite
surprised to learn of its existence, as was his
attorney. My client was thrilled she would be
getting a percentage. I learned from this case
that you can’t always depend on the records
produced—and CPAs’ forensic skills come into play
in all forms of investigations,” says
Bunker-Leary. CPAs are trained to pay
attention to detail and to be persistent about
resolving inconsistencies, and the ability to
serve clients’ interests well depends on these
qualities. Educated clients understand, however,
that the CPA’s best efforts and techniques can’t
guarantee they will discover every dollar of
income or every well-hidden asset that may be
buried in the backyard. When given a choice,
practitioners must strike a cost-benefit balance
between dedication and knowing when to call a halt
so clients aren’t saddled with outlandish bills.
Communicating an expectation of realistic results
is essential to a domestic relations
practitioner’s long-term success.
TAX TREATMENTS CAN UNLOCK LIQUIDITY
A CPA consulting in a divorce case will
address tax issues such as the taxability of
support, the basis of property to be divided, the
impact of the allocation of the dependency
exemptions and the timing of the divorce or
separation. However, after the valuation and
disposable income reports are on record and the
divorcing parties and their counsel turn their
thoughts to settlement and, one hopes, away from
litigation, liquidity becomes an issue. A careful
financial solution addresses concerns about
alimony recapture, contingencies affecting the
classification of payments as alimony or child
support, meeting requirements to qualify payments
as deductible alimony and how best to use tax
rules in settling the case. CPAs who practice in
this discipline have solid knowledge of the
divorce provisions in the Internal Revenue Code
and how to apply them to help create liquidity.
Donald J. DeGrazia, CPA/ ABV of Gold Meltzer
Plasky & Wise in Moorestown, New Jersey, says:
“Often we are able to generate liquidity or
sources of collateral that aren’t apparent to the
spouses and their attorneys. For example, in
several cases I worked on there was liquidity
inside the company but little in the marital
estate, yet a dividend or bonus would have created
either double taxation or a 45% tax rate.” His
firm recommended a stock redemption to halve the
tax rate and free up the liquidity inside the C
corporation. In another case a wife’s
concern that the husband would default on an
equitable distribution note made a collateral
interest in his closely held company unacceptable.
In that instance the firm recommended use of a
qualified domestic relations order (QDRO) of the
husband’s interest in his retirement plan as
collateral, which also collateralized his alimony
obligation. “A 1992 IRS private letter ruling
provided the road map to implementing this
strategy,” DeGrazia says. In yet another
case his firm demonstrated to participants how the
three-year alimony recapture period could be
shortened to 367 days, allowing more money to be
classified as alimony in a much shorter period and
taking advantage of the wife’s lower tax bracket,
all in compliance with tax law. “Finally, by using
the revenue ruling 2002-22 guidelines, we’ve been
able to help counsel successfully lower the tax
bracket on deferred compensation and nonqualified
stock options (those still above water) by
shifting them from the employee spouse to the
nonemployee spouse for exercise in a lower tax
bracket,” says DeGrazia. Taxes can vary
dramatically based on the wording of an order, the
type of asset divided or the completion of an
appropriate form. Practitioners who
understand how taxes affect divorcing couples have
a unique opportunity to structure agreements to
improve their clients’ cash flow and the value of
the assets they receive. In this arena CPAs can
deliver solid financial benefits to clients.
TOWARD A HUMANE RESOLUTION
CPAs’ commitment to integrity and
objectivity for litigation services practice as
mandated by professional ethics and their clients’
trust in them sometimes position practitioners to
mediate divorcing couples’ disputes without
litigation. Many jurisdictions across the country
use CPAs as settlement facilitators, arbitrators
and mediators, says L. Gail Markham, CPA/ABV, a
certified family mediator with Markham Norton
Stroemer & Co. in Fort Meyers, Florida. She
says, “CPAs are a natural fit for mediation in
domestic relations cases.” She cites CPAs’
training and experience in problem solving and
analysis as applicable strengths. “Our experience
has taught us to evaluate inconsistencies and
search for the missing pieces in each engagement,”
she says. “Because the CPA profession, as a whole,
continues to command a high level of trust, our
work is well-respected and usually is given a
great deal of consideration in the mediation
process. Early and consistent advice from a CPA
can save divorcing parties many thousands of
dollars and a great deal of trauma.”
THE PLEASURE OF HELPING
Practitioners say they are careful to remain
objective with divorcing clients but nevertheless
take great pride in using their experience and
skills to help clients organize their finances and
get their new lives in order. Most CPAs have the
knowledge to perform domestic relations financial
consulting yet hesitate for fear of having to deal
directly with a client’s distress or concern they
won’t have a good enough grasp of the “rules of
engagement” under local law. CPAs who wish to do
divorce consulting can avoid emotional issues by
dealing primarily with attorneys, and they can
learn more about jurisdictional rules from local
counsel, fellow accountants and their state bar
associations. Fact-finding interactions
offer an excellent opportunity to learn about
resources and events where CPAs can make
gatekeepers aware of their services. Another way
to market services is by teaching lawyers and
other gatekeepers how CPAs can maximize financial
strategies to give clients the best possible
resources for starting over once the divorce is
final. Says Stewart, “We quite literally hold our
clients’ futures in the palm of our hand.”
Resources
Authoritative literature available to
members at
www.aicpa.org includes the
following:
AICPA Code of Professional
Conduct.
AICPA Statement on
Standards for Consulting Services no. 1,
Consulting Services: Definitions
and Standards. (See AICPA,
Professional Standards, CS
section 100). Some
nonauthoritative literature available to
members at the AICPA Web site includes:
Special Report 93-2,
Conflicts of Interest in
Litigation Services Engagements.
Special Report 93-3,
Comparing Attest and Consulting
Services: A Guide for the
Practitioner.
Special Report 03-1,
Litigation Services and Applicable
Professional Standards
(supersedes Special Report 93-1).
| Technical consulting practice
aids at
www.aicpa.org and www.cpa2biz.com
:
Consulting Services
Practice Aid 93-4, Providing
Litigation Services.
Consulting Services
Practice Aid 95-2, Communicating
Understandings in Litigation Services:
Engagement Letters.
Consulting Services
Practice Aid 96-3, Communicating in
Litigation Services: Reports, A
Nonauthoritative Guide.
Consulting Services
Practice Aid 99-1, Alternative
Dispute Resolution Services.
Small Business Consulting
Practice Aid 93-3, Conducting a
Valuation of a Closely Held Business.
AICPA conference:
National Conference on Advanced
Litigation Services/Fraud October
2 and 3, 2003 Fontainebleau Hilton
Miami Beach, Florida More
information is available at www.cpa2biz.com
. | |