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Forensic Accounting For High Net Worth Divorce Cases
Equitable distribution of marital property is analyzed by a multi step process. This is more complex for high-asset cases, as identifying assets and determining valuation can be problematic.
October 28, 2011 /Womens Interest PR News/ -- During a divorce, it is necessary to divide the marital assets between the two parties. This is known as equitable distribution. As part of a typical divorce case, a court will review the income and assets of the husband and wife and create an equitable, but not necessarily even, distribution of the marital property.
Equitable Distribution
New Jersey courts use a three-step process to determine an equitable distribution. The court must first decide the specific property of each spouse that is eligible or subject to distribution.
Then, it must determine its value for purposes of the distribution. Thirdly, it must decide how such allocation can most equitably be made.
The guideline factors New Jersey courts look to when determining an equitable distribution include:
- respective age, background and earning ability of the parties
- duration of the marriage
- the standard of living of the parties during the marriage
- what money or property each brought into the marriage
- the present income of the parties
- the property acquired during the marriage by either or both parties
- the source of acquisition
- the current value and income producing capacity of the property
- the debts and liabilities of the parties to the marriage
- the present mental and physical health of the parties
- the probability of continuing present employment at present earnings or better in the future
- effect of distribution of assets on the ability to pay alimony and support
- gifts from one spouse to the other during marriage
The court is also allowed to consider "any other factors it may deem relevant." In most cases, the equitable distribution can be accomplished by examining the income tax filings, bank accounts and property records of the parties.
In some cases, however, this is not enough. In cases involving high net worth business owners, the process can become much more complex.
Forensic Accounting
In these cases, it is necessary to engage in forensic accounting to ascertain all of the assets and income streams before one can determine what the equitable division will be. Assets may be hidden or missing, income may not be reflected accurately by income tax filings and bank records may appear incomplete.
In closely held businesses, family businesses and professional partnerships, an objective valuation may be difficult.
Record keeping can be "informal" or practically nonexistent. Corporate or other formalities may not be observed. The books may be deficient or missing from year to year. There may be unreported income (i.e. cash) that is not reflected in tax returns.
The failure to reflect or account for this cash causes an incomplete or incorrect reflection of lifestyle income, and valuation of assets, in particular, for the very business that generated the cash income.
A forensic accountant is an expert in accounting and "following the money." They will look at income, assets, property records, transactions, loans and any other aspect of the financial affairs of a party and their business to attempt to divine as true a picture of the economic situation. They may have to:
- analyze a large volume of transactions
- trace assets
- present value calculations
- perform a "lifestyle audit
- determine the "true" income stream of the spouse for support purposes
- value a closely-held business
Divorce and Forensic Accounting
During a divorce, it is imperative that the true financial data be used to perform the equitable distribution, as well as support the analysis. In most cases, there is no second chance.
While you can modify a support amount upon a showing of "changed circumstance," once the distribution is finalized, it is virtually impossible to change it in New Jersey.
Thus, when a lifestyle does not seem to be supported by the reported income and assets, it is necessary to attempt to find out where the money is coming from.
Sometimes, this may indicate illegal activity. Other times, it may be a conscious effort by a divorce litigant to hide income from their spouse, the court or tax authorities.
When valuing an asset that is difficult to value, a court looks at the reasonableness of the valuation method in determining whether the valuation is adequate.
How to Value an Asset with No Market
In the case of a closely-held business, valuation is particularly difficult because the entities stock is not available on the public market.
In certain instances, to compute the value, experts and courts may look towards the guidelines found in the IRS's Revenue Ruling 59-60 as the outline. The goal is to arrive at a fair market value for a stock for which there is no market.
To do this, the IRS recommends, "all available financial data, as well as all relevant factors affecting the fair market value, should be considered."
Among the factors listed in the Ruling as fundamental and requiring careful analysis
- are the history of the firm
- the nature of the company
- the outlook for the industry
- the book value of the stock
- the size of the block to be valued
- the market price of stock in the same or similar line of business
- the earnings and dividend-paying capacities of the company
- the existence of goodwill or other intangible assets
Because of the difficulty in dealing with these issues, you may need a forensic accountant to work with your legal counsel to discover the assets and, in the case of a business, to determine their value.
Your divorce attorney can help you obtain the services of a forensic accountant to properly value the assets involved in your divorce and analyze the income reported by your spouse in an effort to validate or dispute the levels of income claimed.
Article provided by Goldstein & Bachman
Visit us at www.goldsteinbachman.com
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