Accounting is a topic that can frighten otherwise brave professionals. All the asset, liability, income, and expense talk can be overwhelming if the listener is not trained in the field of accounting. The best forensic accountants are able to present financial issues in litigation so that they can be understood readily. Attorneys, judges, and juries often lack an accounting or finance background, so being able to break down financial topics in a way that is easy to understand is essential for forensic accountants.
An area of divorce financial analysis that is of great interest to attorneys and accountants is the standard of living. Jurisdictions have varying factors that come into play when determining the standard of living. The attorney must be familiar with local rules. However, this chapter details the most important factors that ought to be considered in analyzing the standard of living of spouses.
There are many different definitions of income that can be used in family law cases. Local law will play a big part in defining income, but in more complicated cases, other definitions may come into play. The financial expert can help the attorneys and the court understand the various types of income and why they should be included or excluded from income calculations in a family law case.
How can a family law attorney determine whether a lifestyle analysis is needed in a divorce case? A suspicious spouse may be all that is needed to begin a lifestyle analysis; however, a more objective basis for undertaking the lifestyle analysis is preferred. This chapter discusses numerous red flags that may indicate hidden income, hidden assets, or other financial irregularities.
Discovery for the financial portion of the family law case can be time-consuming, particularly for cases involving high net worth spouses. There may be many accounts with a high volume of transactions, creating dozens of boxes of financial documents. Unfortunately, this process is a necessary part of family law cases, particularly if there are multiple sources of income, if the totality of the family’s assets is unknown, or if a number of the red flags discussed in Chapter 4 are present.
In this chapter we will discuss the documents that are needed to perform a lifestyle analysis and how those documents are used. In later chapters, we will focus on specific types of income or assets and, more specifically, how the documents are used to investigate those items.
In many divorce cases, it is easy to determine income and identify assets and liabilities. Income includes W-2 wages of the spouses and a few small items such as interest income and dividends. Assets and liabilities are obvious, as they often include houses, automobiles, and a bank account or two. In other divorce cases, it is much more complicated. Divorces involving self-employed individuals, rental properties, income-producing assets, or high-level executives with special perks and benefits are more difficult to evaluate. These are the cases in which more documentation must be evaluated, including the laundry list of documents in Appendix B and possibly other documents depending on the unique factors in the family law case.
As discussed in Chapter 2, the standard of living enjoyed by the spouses during a marriage is often one of the main factors in awarding spousal support and child support. One cannot determine the “reasonable need” of a spouse unless the actual expenses during the marriage are analyzed. The standard of living will be determined on the basis of historical expenditures, with some modifications or adjustments depending on local rules and/or the circumstances of the case.
Finding hidden sources of income is important as it relates to spousal support. However, the discovery of income streams can also influence the division of assets. If one spouse has a larger income stream than previously disclosed, that spouse may have less need to receive assets divided during divorce. Clearly, the discovery of hidden income can significantly impact the financial outcome of a divorce or child support action.
Hidden assets can impact both the property division and the award of support payments. Assets hidden by one spouse deprive the other spouse of a share of them. If the hidden assets include income-producing assets such as a business venture or an investment portfolio, the spouse receiving support may receive a lesser amount of support than he or she is entitled to. Some of the most common personal and business assets hidden during a family law case include