Divorce Mediation Resources - The Fourth in a new series of interviews! 

Forensic accountants in Divorce Mediation?
Dividing Retirement Accounts

We only have a house and retirement accounts, what hidden costs and taxes do we need to consider? How do we value and fairly divide these assets? Part two of two – the retirement accounts.

Retirement accounts are complicated!  How do we know the actual value?  What taxes need to be considered? Next to the family house, retirement accounts are the most common assets divided in a divorce. However, there are important issues to consider to understand the best way to divide these valuable yet mysterious assets!  To get the best answers for you, I asked very experienced forensic accountant Nancy Kearson! 

Nancy Kearson, CPA, ABV
CVA, CFF, MAFF

Nancy has expert credentials and many years of experience working in divorce. In addition to being a CPA, Nancy is also certified as an ABV (Accredited in Business Valuation), CVA (Certified Valuation Analyst), CFF (Certified in Financial Forensics), and MAFF (Master Analyst in Financial Forensics.) Most importantly, Nancy is a trained mediator and so understands the needs and objectives of parties who are mediating their divorce agreement. If you think there are financial issues in your divorce or family law mediation that need the input from a forensic accountant, let’s talk about it at the next mediation session!  Nancy can be reached directly at nkearson@earthlink.net.  Here from Nancy is Part two of two – regarding retirement accounts:

In this brief blog, we cannot discuss every possible hidden cost and tax related to fairly dividing your assets, but we can discuss some of the more common issues couples run into when going through the dissolution process.

Like your house, retirement accounts have hidden costs and taxes depending on how you ultimately divide them between you.

Retirement accounts can have added value when held, because no taxes are paid on any earnings in the account until the funds are distributed. Depending on your age you might have a substantial amount of years ahead of continued reinvestment of earnings that otherwise would have to be used in part to pay taxes.   In situations where you want to take advantage of long term tax deferred investment and are in position to hold the funds for future years, this may be an attractive option for division of your retirement assets. Taking retirement funds as part of your division of community property may be a singular opportunity to invest for your later years, and especially if you don’t anticipate your own earnings will be enough to make retirement contributions going forward.  

When you are ready to withdraw funds from your retirement accounts, you can take them as a lump sum or incrementally, but will need to report them as income and pay the related taxes.  If you are under 59 ½ years of age you will also pay a penalty of 10% for federal and 2.5% for California State of the amounts withdrawn. 

If you take a distribution from a qualified plan (401(k), etc.) at the time of your marital property division through a separate document called a Qualified Domestic Relations Order (QDRO), you can be exempted from the penalties.   You will still, however, have to report and pay the income tax on the funds distributed to you from the account unless you roll them into another retirement account.

Another option is for you both to agree that the retirement fund holder will “buy out” the other’s half of the retirement funds.  This can be a challenging situation in considering what tax discount if any, should be applied under this scenario.  One suggestion might be to discount the retirement funds at the tax rate the one being bought out would have to pay if they were distributed the funds outright and then liquidated them at the time of division.  There are also those that would suggest that since the taxes are not immediate (typically within a year) and specific, no discount should be made for taxes, and particularly in light of the continuing opportunity to reinvest earnings with taxes deferred into the future.  Mediation is the opportunity to craft a decision based on your circumstances that will work the best for both of you.

Due to retirement related tax considerations, most couples divide the retirement funds separately from their other assets, even if there is only a house and retirement accounts.  Although not always applicable, often the total amount of all the retirement accounts is divided in two with each taking the accounts in their name, and then using one account or more to rollover a portion to a rollover IRA account to equalize a total of one half to each.  Then each of you can make a decision about how long you expect to hold the retirement accounts you received with each being responsible for the taxes on their one half, whether held for reinvestment or liquidated.

If the community has one or more defined benefit retirement accounts that pay a monthly amount for life beginning at a certain retirement age, the community property portion of this type of account may be divided separately by the retirement account administrator.  There would then be an account for each of you with an amount payable monthly when you reach the plan’s retirement age.  Alternatively, the defined benefit pension plan account can be valued by an actuary and the actuarial value divided against other non retirement assets, as under this alternative there would be no immediate tax triggering event.  These types of pension plan accounts are usually a benefit of some type of guild or union membership.

You may wish to consult with a forensic accountant to identify the types and values of your retirement accounts, and how best to divide the community portion, while keeping your future needs in mind. 

In mediation, where ever you can reach agreement you are comfortable with, you have the best opportunity to clear a path to move forward with your lives.  Consulting a forensic accountant may well be a valuable tool in reaching this goal in your mediation.

This article does not constitute legal or tax advice or specific advice of any sort. Be sure to consult with your family law attorney and other appropriate professionals as each situation is different.

Divorce Mediation Resources - The Third in a new series of interviews! 

Forensic accountants in Divorce Mediation?
The Family Residence

We only have a house and retirement accounts, what hidden costs and taxes do we need to consider? How do we value and fairly divide these assets? 

The family house is the most common asset divided in a divorce.  What to do with the family home is one of the most frequent questions from my mediation clients.   To get the best answers for you, I asked very experienced forensic accountant Nancy Kearson! 

Nancy Kearson, CPA, ABV
CVA, CFF, MAFF

Nancy has expert credentials and many years of experience working in divorce. In addition to being a CPA, Nancy is also certified as an ABV (Accredited in Business Valuation), CVA (Certified Valuation Analyst), CFF (Certified in Financial Forensics), and MAFF (Master Analyst in Financial Forensics.) Most importantly, Nancy is a trained mediator and so understands the needs and objectives of parties who are mediating their divorce agreement. If you think there are financial issues in your divorce or family law mediation that need the input from a forensic accountant, let’s talk about it at the next mediation session!  Nancy can be reached directly at nkearson@earthlink.net.  Here from Nancy is Part one of two – regarding the family residence. 

In this brief blog, we cannot discuss every possible hidden cost and tax related to fairly dividing your assets, but we can discuss some of the more common issues couples run into when going through the dissolution process.

Going through this process can be challenging emotionally, and often we want to hold onto our family home because it has been a source of comfort and emotional safety. However, it may ultimately cost too much financially to keep your home. Assuming this is a community asset you will need to determine how you will “buy out” your spouse either with cash through a refinance, by giving up your interest in other community assets like the retirement accounts, or through some other arrangement that you both agree to.

Maintaining a home includes paying the mortgage, property taxes, home owners insurance, and continuing repairs and maintenance.  If you don’t expect continuing income of at least three to four times these averaged costs monthly, you may well run into financial trouble.

If you have a home that has substantial equity, which is that portion of the value that exceeds the mortgage and other secured loans, the equity is locked in to this one asset and not available to earn a secure income stream for you as it might be if it was invested elsewhere.  You might decide to make your home into a rental property, but there is a pretty steep learning curve if you do not know how to manage rental property.    Your income from a rental property would be after paying all of the expenses related to the property, and depending on the situation may not net you enough cash flow for the risks involved.  You will also not be living in your home any longer if it is rented.

If you hold on to your home after the divorce you may decide in a few years that you need to sell it, and at that point any gain over and above the original purchase costs, improvements, and sales expenses will be taxed as capital gains.  If you have lived in and have owned the property two of the last five years before the sale, you can also deduct a $250,000 exclusion from the gain before taxes. Typically, the costs of sales and capital gains taxes are not factored in to a division of marital assets unless it is expected that the house will be sold within the next year.

You have to weigh the benefits of holding real estate as an investment which have included increasing value in most areas of Southern California, against the circumstances of having all of your worth tied up in one asset at a time when you are trying to find your financial footing.  The better financial choice may be to sell your home at the time of your marital settlement, and divide the net proceeds and taxes between you and your spouse.  Then each of you can claim a $250,000 exclusion from the gain before taxes for a total exclusion of $500,000, if you have both lived in and owned the property two of the last five years.  In this scenario, you will probably save taxes, and have liquid funds that you can invest for continuing cash flow and/or buy a home that you can more easily manage in terms of costs and maintenance as you move forward with your life.

There may be other considerations when it comes to dividing the family residence which are not detailed in this short blog. Some lingering questions may include:  If I am buying out my spouse, how do I find the right value for the home? What does it take to assume the existing mortgage?  Will I have to refinance my home and take out additional funds to buy out my spouse, and what will the mortgage payment be if I do? Will I qualify on my own for a mortgage? Is there a substantial amount of deferred maintenance that I need to consider? 

You may want to consult with a forensic accountant practicing in marital dissolution to help you take a look at a few realistic scenarios and options in deciding how to divide what is usually the most valuable asset a couple owns.

In mediation, where ever you can reach agreement you are comfortable with, you have the best opportunity to clear a path to move forward with your lives.  Consulting a forensic accountant may well be a valuable tool in reaching this goal in your mediation.

This article does not constitute legal or tax advice or specific advice of any sort. Be sure to consult with your family law attorney and other appropriate professionals as each situation is different.

Divorce Mediation Resources - The SECOND Installment in a new series of interviews! 

Forensic accountants in Divorce Mediation? How can they help with property division?

*We only have retirement and a house.  Can’t we just divide these equally? How can a forensic accountant help us with identifying what part is dividable community property and what part is separate property?

 

How does a forensic accountant assist in property division? What does a forensic accountant provide? Property division can be complex! So how do you know?  To get the best answers for you, I asked very experienced forensic accountant Nancy Kearson!

Nancy Kearson, CPA, ABV
CVA, CFF, MAFF

Nancy has expert credentials and many years of experience working in divorce. In addition to being a CPA, Nancy is also certified as an ABV (Accredited in Business Valuation), CVA (Certified Valuation Analyst), CFF (Certified in Financial Forensics), and MAFF (Master Analyst in Financial Forensics.) Most importantly, Nancy is a trained mediator and so understands the needs and objectives of parties who are mediating their divorce agreement. If you think there are financial issues in your divorce or family law mediation that need the input from a forensic accountant, let’s talk about it at the next mediation session!  Nancy can be reached directly at nkearson@earthlink.net.  In this second installment of our question and answer series, Nancy answers frequent property division questions asked of mediation participants. 

We only have retirement and a house. Can’t we just divide these equally? How can a forensic accountant help us with identifying what part is dividable community property and what part is separate property?    

      Yes, you can divide them equally.  With an IRA, you can rollover one half of the account into a “Rollover IRA” account for the other spouse.  You will need to contact the institution that holds the IRA account and arrange to open the Rollover IRA in the other spouse’s name.  Then you will need to request that the institution transfer the funds from the IRA account into the new Rollover IRA account.  You want to be sure to be careful in the division and transfer of IRA funds to avoid triggering an unwanted taxable event.

        If you have a retirement account related to your employment like a Profit Sharing account, 401(k) account, or a defined benefit pension account, you may need to have a Qualified Domestic Relations Order (QDRD) to divide the funds to the other spouse without triggering a taxable event.  You should contact your pension administrator to discuss how to best accomplish the division of these types of retirement accounts.

       However, if you made contributions to your retirement account before you were married or after you separated you may want the help of a forensic accountant in allocating the earnings or losses to the separate and community contributions as they accumulated over time.  Then you will know what portion of the current balance of the account is dividable community property and what portion is separate property.  

        Many union members and other governmental employees are part of a defined benefit pension plan.  This is a type of retirement plan that pays you a monthly sum beginning at retirement age depending on years of service and the plan’s rules and guidelines.  Check with the plan administrator on how best to determine and divide the community portion of your defined benefit pension plan account.

        If you purchased your house during marriage with marital earnings, made all the mortgage payments from marital earnings, and you both want to sell the house, then you just need to find a broker you agree to, list it and divide the net proceeds one half to each through escrow.  

       However, if one of you wants to continue to own the house then it can be more complicated to reach agreement on how one spouse might buyout the other spouse’s one half of the community interest in the house.  If the house was owned by you prior to marriage or separate property funds were used to make a down payment or mortgage payments, then it also gets complicated.  Calculating the community property interest in a house is a function of the source of funds used to acquire the property, legal responsibility and recourse for mortgages and other secured loans, titling, and other factors.  A forensic accountant can analyze your situation, and make the calculation you need to determine how much of the current equity in the property is dividable community property and how much is separate property.

       You may want to consult with a forensic accountant to help understand the complexities of dividing your house and your retirement accounts as well as calculating the community property interest.  Ultimately you must decide if knowing you fairly assessed and divided your community property going forward is worth the relatively small cost of consulting with a trained marital forensic accountant during your mediation.

        You may want to consult with a forensic accountant to help understand the complexities of dividing your house and your retirement accounts as well as calculating the community property interest.  Ultimately you must decide if knowing you fairly assessed and divided your community property going forward is worth the relatively small cost of consulting with a trained marital forensic accountant during your mediation. 

Divorce Mediation Resources - The First in a new series of interviews! 

Forensic accountants in Divorce Mediation? What do they do?

*Why would we need a forensic accountant if we are mediating our divorce?  

*Aren’t forensic accountants for litigation? 

*Can’t we figure this out on our own? 

*Won’t the mediator be able to tell us the right amounts for support? 

*What does a forensic account do anyway?

These are the questions that I frequently hear from people in mediation.  To get the best answers for you, I asked very experienced forensic accountant Nancy Kearson!

Nancy Kearson, CPA, ABV
CVA, CFF, MAFF

Nancy has expert credentials and many years of experience working in divorce. In addition to being a CPA, Nancy is also certified as an ABV (Accredited in Business Valuation), CVA (Certified Valuation Analyst), CFF (Certified in Financial Forensics), and MAFF (Master Analyst in Financial Forensics.) Most importantly, Nancy is a trained mediator and so understands the needs and objectives of parties who are mediating their divorce agreement. If you think there are financial issues in your divorce or family law mediation that need the input from a forensic accountant, let’s talk about it at the next mediation session!  Nancy can be reached directly at nkearson@earthlink.net.  Here is the first part of our question and answer series. 

"What is a forensic accountant?" Here is Nancy's answer:

I hear client’s saying, "Part of the reason we came to mediation was to avoid all the additional expensive costs of litigating a divorce, why do we need a forensic accountant?  Isn’t that just an additional cost?  We have a CPA for our taxes that we know; can’t he/she help us?”

Dividing property and determining the best amounts for support can be very challenging.  There may be questions your mediator or CPA can’t answer and even some very important things you may not have thought of. 

A forensic accountant working in Divorce should be knowledgeable about all types of income being considered for support payment calculations.  Some types of income may not be taxable or even reportable, but are considered income available for support purposes.  As an example, matching amounts contributed by an employer to a 401(k) or similar retirement plan don’t appear on a W2, but are in substance additional income available for support.  You might need a forensic accountant to go over all of the items listed on a W2 and a year end pay stub to accurately include all the income for support calculations.

You might want a forensic accountant to go through expenses from your small business to identify any business expenses that might have some “personal” component that is considered income (even though they are legitimate tax deductions.)  Maybe you simply have a discussion with the forensic accountant about what you have identified yourselves that could be income, but you are not sure.

You might need a forensic accountant to help you reach a value for a small business.  While a small business might not have a market value and not be sellable, in a divorce there is often an"intangible" community property value.  This value is due to the anticipated continuing income stream it provides to the person who will continue to own and run the business going forward.  The forensic accountant can help calculate this intangible value.

You might need a forensic accountant to help you identify the pre marriage contributions to a retirement plan, the marital contributions to a retirement plan, and the post marriage contributions to a retirement plan, and what each of these portions of the account earned from the investment so you can divide only the portion that is the community property contributions and earnings.

These are just a few examples of the ways a forensic accountant experienced in divorce can provide you with guidance and calculations for an informed mediation. 

Your CPA may be well skilled in accounting and tax preparation, but typically has no experience in these types of calculations for divorce mediation.

At the very least, you may wish to consult with a forensic accountant regarding the types of property and income you have to calculate and divide, and perhaps formulate a game plan to cost effectively get to the information you need.

In mediation, where ever you can reach agreement you are comfortable with, you have the best opportunity to clear a path to move forward with your lives.  Consulting a forensic accountant may well be a valuable tool in reaching this goal in your mediation.

This article does not constitute legal or tax advice or specific advice of any sort. Be sure to consult with your family law attorney and other appropriate professionals as each situation is different.