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.

Tools for Success in Mediation

                    TOOLS FOR SUCCESS IN MEDIATION

1.Be willing to listen. It benefits both sides to really hear the other side’s thoughts and ideas! Listening to each person's concerns can help you both understand what options might be available and open up ideas that you haven’t yet considered. If you think you are hearing things you’ve heard before, try to listen with a different viewpoint to consider what the other person is suggesting. 

 2.Use cooperative language.  Words matter!! The words we choose when we talk absolutely affect how we are understood. The old adage, "choose your words wisely" is still very meaningful! Ask yourself if the words you are using to express yourself are going to get your ideas and concerns across to the other person? 

 3.Be open to new ideas.  New information or new ideas may create different alternatives for solutions.  How does the new information affect your thinking on an issue?  One of the benefits of mediation is that you have ultimate control over the outcome and have the ability to address many interests that a court could not consider. 

 4. Be an active participant. Your input is necessary and important! Many couples have a dynamic in which one spouse can be more vocal than the other.  One may be more argumentative, louder, or aggressive. One may be more agreeable, conciliatory, or willing to “give in” just to have the discussion conclude.  Mediation requires hard work, patience, flexibility and creativity on the part of the participants.  If you have an idea, make a proposal. If a proposal is made to you and you are not agreeable to it, make a counterproposal with terms you are agreeable to.

5.  Try to leave the past in the past. It is very true that past experiences and conduct can shape our concerns.  However, the goal of mediation is to come to agreements as you move forward with your lives, not to rehash the past! Be open to try to create new patterns for your interactions.  The past is the past and you cannot change it but you can change the future if you are willing to try. 

Making the Most of Mediation

Mediation is an extremely effective means to settle family law disputes.  In mediation, both parties concerns and objectives are put on the "table" to be addressed.  Mediation does not determine who is right or who is wrong-- (and it is almost never a matter of who is right or wrong--) but how to solve the problem.  In the mediation session, the mediator is going to work with you both to help you find a mutual solution to your dispute.  Here are 10 helpful hints to get ready for a successful mediation session.

1.  Bring pictures of your children to the mediation and put them on the mediation table.

2.  Make a list of the reasons why you want the mediation to work.

3.  Make a list of why you chose mediation.

4.  Make a list of why you didn't want to go to court.

5.  Be open to sharing your ideas and opinions in mediation. 

6.  Be willing to listen even if you don't agree.

7.  Keep an open mind-- the first idea or proposal might not work, but it's second, third or even fourth revision might be the middle ground you and the other party CAN agree upon.

8.  Try not to make assumptions.

9.  Focus on the future.  We often don't want to believe in change because we can only think about how things have been in the past.  If we keep looking back for reasons why an idea/plan/schedule, etc., won't work, we will never be open for the possibility that we can make it work.  Instead, bring to the table your concerns so that they can be addressed. 

10.  Be patient.  It takes time to get through all the issues and some take more time than others.  A good agreement may take time to reach. 

Thankfulness for Positive Things-Focusing on the Future

What are you thankful for? It's easy to focus on all of the negative-- it is human nature to list the things we are unhappy about! It takes more patience and focus to really think about what is Good, or even just okay. When you are in divorce there is no question that there is alot of "bad" to look at. It is one of the reasons you are getting a divorce. But the divorce will not last forever (though sometime the length of time it takes can seem like it!) and life will go on. Take the time this week and throughout the holiday season to be thankful for those things that are not wrong!

Maybe some of this sounds familiar?

Your ex and you argue, but maybe you can acknowlege that they are a good parent?

You, your ex and your children are healthy, this is good for you and your children.

You have free time to focus on YOU when your children are with the other parent.

You or your ex's job is secure.

You have a place to live.

You have people who love you.

Benefits of a Collaboratively Reached Agreement

I believe that in most cases a resolution of family law issues should not be treated the same as a lawsuit. However, when most family law matters go to court, this is exactly how they are handled. When your issues are resolved in the courtroom, you and the other party are adversaries. After “argument” the court will make a decision that you and the other party must follow. What would this look like if the resolution of the dispute was obtained through the Collaborative Process? Consider an example of two parents with two small children. Both parents want significant time with their children but they have differences about what the children need and what a good schedule is will be. If these parents go to court, they will necessarily have to present arguments to the Judge which pits them against the other parent, by trying to persuade the court why the children should be with them more than the other parent. This requires the parents to position themselves against the other. This frequently causes one or both parents to be negative about the other parent. Often litigation counsel will encourage their client to raise any possible negative history of the other parent, such as prior bad conduct to persuade the judge. Parties become angry and hurt by the statements made by the other, and in defending themselves, seek to bring up “dirt” on the other party. Declarations become clogged with accusations, misunderstandings, and sometimes blatent lies told in order to persuade a judge to agree with them. This kind of litigation can cause a dispute to escalate and change future ability of the parties to work together as parents.
In a Collaborative case, parties will work with attorneys and other professionals, who try to help the parties come to agreements without becoming adversarial. Parties will have assistance to find a way to bridge their differences and find a way to come to a resolution. Old issues and prior conduct which have no direct effect on parenting will not be part of the discussion. Parties will be able to discuss their goals and differences with the other party in a safe and respectful environment. There is opportunity to discuss the “why’s” and “how’s” of what each parent wants. This is a significant change in how families can seek legal resolution because they are not trying to persuade a single decision maker but trying to work together to come to a collaboratively crafted agreement which both parties can support. This difference alone can facilitate the decisions necessary to resolve family law disagreements. Family law disputes can be hard enough without fueling them with litigation tactics and this alone one of the best benefits of the Collaborative Process.