Chapter 11 – Special Items in Lifestyle Analysis

Standard

As with most of the work done by forensic accountants, the results of the lifestyle analysis can be skewed if “special” items are not treated correctly. Various cash receipts and expenditures of money by the family can have an impact on the calculations. Statutes, their interpretations, and case law may provide little to no guidance on the special items, since it is rare that the family lawyer encounters them.

In this chapter, we address some of the special situations that can occur in a divorce and will impact the lifestyle analysis. As with all of the material in this book, your local rules must be considered and will take precedence over any guidance offered here.

Nonstandard Forms of Compensation

Executive compensation plans often compensate employees in a number of ways considered nonstandard. In other words, they are different than the typical wages, commissions, and bonuses  we usually see in divorce and child support cases. These other types of compensation can be valuable, so it is important to inquire as to their existence. It is not safe to assume that just because the spouse has not mentioned another form of compensation, it does not exist.

There may be a tendency to exclude nonstandard forms of compensation from consideration in the lifestyle analysis simply because they are unusual and potentially difficult to understand. However, these items of compensation all have value, so it is imperative that they be considered in the lifestyle analysis. They must be included in support calculations and may factor into the asset division as well.

Commissions and Bonuses

Employees whose compensation is heavily weighted toward unpredictable forms, such as commissions and bonuses, create special issues in family law cases. The spouse paying support will often suggest that high earnings were unusual and will not be replicated. Thus, the spouse contends that support should be calculated based on a lower number. Earnings can be impacted by general economic conditions, changes in an industry, changes in the operations of the employer, and more.

The unpredictability should not deter the financial expert from attempting to calculate the reasonable level of earnings that should be used to calculate support. However, it is important to understand if commissions or bonuses have any seasonal or cyclical nature. The longer the history the expert examines, the better he or she can understand whether there is any pattern or predictability to the income.

Employee Stock Purchase Plans

An employee stock purchase plan (ESPP) allows an employee to purchase shares of a company’s stock at a discount that could be as much as 15 percent below the market price. Payroll deductions are used to make contributions, which are accumulated until the purchase date. Some plans have tax advantages like 401(k)s, while others do not. The biggest advantage to a program like this is the profits that can be made when the stock is eventually sold. Because the stock was originally bought at a discount, there is more money to be made when the shares are sold.

Also included in this chapter:

Business Income Issues
Division of Liabilities
Division of Liabilities
Income Tax Issues
Refuting the Lifestyle Analysis