Marital Balance Sheet What Is It and Why Is It Needed

     In most divorce cases, a marital balance sheet is the focal point and or summation of all community assets, liabilities and credits.  This compilation will also determine the equalization (buyout) that one spouse owes the other. 
     I was assisting an attorney with a settlement offer, which I basically prepared a rudimentary balance sheet on a piece of paper, I stated to the attorney that he should have had us prepare a marital balance sheet before the settlement.  He stated that it wasn't necessary, that it was easy dropping in numbers in the disso program.  However, when his client started to notice certain monies being withdrawn from the accounts by the other spouse that she wasn't aware of, and the attorney couldn't find current investment statements and other important documents, no accounting of the numerous credit card statements were done, it was clear to the attorney that he was way over his head and reluctantly admitted that we should have prepared a marital balance sheet.  Fortunately, in this case no harm was done.  We were able to obtain all of the records needed.  However, in other cases, this could be a real problem.
     The accountant should prepare a marital balance sheet as soon as possible in the case not only to identify what's on the table as far as assets and liabilities but also to trigger the identification of other financial issues such as withdrawals of cash by a spouse made on or near the date of separation, separate and community property issues related to stock options, pension plans, real estate and other investments, identification of separate debt incurred after the date of separation, identification of certain credits the spouse could claim and many other financial issues that the attorney may be aware of but would not be able to calculate and present on his/her own (I'm being nice). 
    If you wait too long in the case to prepare a marital balance sheet, or don't prepare one at all, you could run the risk of not identifying financial issues that may have a favorable material financial impact on the community with respect to the division of assets and liabilities, ultimately shorting yourself on your half of the available community assets.  Also, any delays could effect the ability to obtain vital financial records as you could run up against discovery deadlines or the accountant may not have enough time to analyze and calculate the numbers before the trial. Be smart, be prepared and get us in early in the game.

Dave

Buy Out Spouse's Interest in a Community Business (C-Corp) from the Company's Assets - Does This Trigger a Taxable Event?

I am going to make this format a little less formal.  More fluid.  So don't gig me for my spelling, grammer, punctuation, I plead the fifth.  In this case, the community will have no cash liquidity (not booze) with most of the capital tied in real estate and the community business.  How does one spouse buy out the other's interest in the business (a C-Corp) without liquidating assets?  Do the parties set up  a note payable where the buyer can make payments, using after tax dollars?  However, what if the spouse(buyer) decides to pay the obligation directly through/from the cash of the business (C-Corp)?

Does this transaction trigger a taxable event?  Is there a way to avoid taxes completely on this transaction?  If it is a taxable event, what option would result in the lowest taxes?  Should both parties be liable for the tax?  Should the buyout price be adjusted/discounted for taxes?

This issue comes up often in divorce, and no one seems to have a definitive answer.  Professionals have strong opinions but usually opinions not supported by the tax code/law.  You could apply common sense to this issue.  However, common sense should never be applied to tax issues, because, "it's the tax code". 

You'll have to come back later for the answer.

Tracing of Cash Activity for Identification of Separate Assets - Always the Separate Claimant's Burden?

Tracing of Cash Activity for Identification of

Separate Assets – Always the Separate

Claimant’s Burden?

by David V. Hanzich MBA CPA ABV CFF CVA 

As any 1^st year divorce attorney knows, the burden of proof in identifying “Separate” assets (cash, investments, etc.) is on the person that is making the claim for separate property in a marital dissolution.  Is there any occasion that would require the opposition to prepare a tracing analysis if the other party is making the separate property claim?

I would say that tracing of cash assets is the most costly and detailed analysis required for fraud and divorce matters.  There is no short cut to prove the location of assets or to identify the characterization of cash as separate or community property. 

Financial tracings can become extremely complex when the trail of cash transactions involve the tracing of “separate” cash assets through “community” bank accounts or when separate cash is moved from and to numerous bank accounts over a number of years.  It is further complicated when it is necessary to identify bank activity occurring during marriage to determine the characterization of those transaction and it’s affects on separate or community assets.   

The criteria for a successful tracing are as follows:

1.Separate property funds were available at time of   acquisition

2.Separate funds were actually withdrawn;

3.with the intent to acquire a separate property asset

4. Disclosure of intent to use separate property to acquire an

    Asset (1)

The financial documents used to prepare a tracing analysis involve bank statement copies, cancelled checks, deposit vouchers, withdrawal slips, and check registers identifying the source of cash deposits and identification of payees for all disbursements. 

So, at the risk of providing the opposing counsel evidence of his/her client’s separate property, is there any occasion that would require one side to prepare a tracing analysis for the other side? 99.9% of the time, the person making a separate claim will prepare a tracing analysis, subject to cross examination and review of the underlying evidence.

In a recent case, the respondent claimed he used separate property to invest in an apartment complex during the marriage.  This purchase occurred approximately a year into the marriage.  He claimed his separate account held sufficient cash to make the investment.  (There are other criteria.  However, we’ll focus on the tracing aspect).    Our risk was that the respondent could show sufficient separate cash available for the investment located in a separate account.  In addition, the respondent was a real estate broker with a history of investing in real estate.  However, when you reviewed the detail of the “separate” account, there were certain transactions that occurred during the marriage that were not identified. 

We obtained the respondent’s financial records and prepared a tracing of cash transactions from the date of marriage to the date of purchase.  From our analysis, we noted a number of deposits that were made into the separate account during the marriage which we identified as community (or income earned by the respondent during the marriage).  One of the rules when preparing a tracing is that when community expenses are paid during the marriage, community assets, if available, are used first to satisfy the payments for community expenses.  When community funds are depleted then separate assets are used to pay community expenses.  Following the rule, we noted that at times only separate cash was available to pay community expenses, eventually depleting any separate cash within the separate account. 

In addition, we noted a distinct pattern related to community cash deposits made into the separate account during the marriage.  Every time a significant deposit was made during the marriage, the respondent would immediately transfer the money over to a “separate” investment account (which had a zero balance as of the date of marriage) showing no intention of using his separate funds.  The investment account was eventually used to fund the investment purchase.  We proved that there were no separate funds available at the time of the purchase.  Had we not prepared our own tracing, it could have been difficult to rebut the respondent’s separate claim without reviewing all of the detailed information and doing our own work.   The judge agreed with the petitioner and our analysis that the million-dollar plus property was a community asset. It’s the claimant’s burden, but in some situations you may need to look under the hood yourself. 

Be careful out there!

Dave H.

(1) Complex Issues in California Family Law, Second Ed., Vol. D, Tracing Separate and Community Funds, Dawn Gray, Stephen J. Wagner, 2010, LexisNexis, Mathew bender

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I have set up this blog to post relevant information regarding financial matters related to civil litigation and family law primarily for individuals seeking information and attorney's that I work with.  Improving communication between attorney's and experts is always a good thing.  Creation of a good information blog is a start.  I would also like to initiate feedback or discussion of issues as they come up.