Sunday, June 30, 2019

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.

Thursday, June 20, 2019

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.