Matrimonial Cases: Rising Above the Numbers
by Megan A. Sartor, CPA, Sax LLP –
November 21, 2017
When couples are getting divorced, it is difficult to talk about financial settlements because those numbers are so tainted with emotion. Often times, the settlement discussions are not about the numbers at all. Accountants involved in matrimonial matters have to not only be knowledgeable about the numbers but also be conscious of the parties’ emotions and be able to navigate them carefully. The easy part is the accumulation and analysis of data and the preparation of schedules and reports. The difficult part is taking that data, comparing the results with the client’s goals (or both of their goals if the financial professional is hired jointly) and putting together settlement scenarios that the attorneys and clients can use to settle their case outside of court. The vast majority of matrimonial cases settle outside of court, and that happens in large part because of the financial professionals involved.
The two biggest financial pieces of matrimonial cases are equitable distribution and alimony/support. These two pieces cannot be looked at in silos; they have to be looked at together as there is overlap.
Equitable distribution is the way that the assets and liabilities of a marriage are divided in New Jersey. Equitable distribution does not necessarily mean equal; it means fair. For each asset and liability, the following is determined:
- Title — Who currently owns the assets: husband, wife or both (joint)?
- Source of funds — What funds were used to acquire the asset or incur the liability? Were they marital funds or separate funds? Separate funds are typically funds that one party had prior to marriage or funds that were gifted/inherited.
- Value — Determining value is simple for some assets and liabilities and more complex for others. For bank accounts and brokerage accounts, value is determined simply by looking at the statements. Determining the value of 401(k) and IRA retirement assets is more simple, while valuing pension retirement benefits is more complex. For business interests, value should be determined by a professional with valuation credentials. If there are marital and separate attributes of assets and liabilities, the value of those assets and liabilities becomes more complex and takes more investigation by a professional.
- Allocation of value — What portion of the value is each party entitled to receive? Not all assets and liabilities are divided equally between the parties. Active assets, in which one party participates more than the other, may be allocated disproportionately. For example, typically a joint bank account is divided equally but if one party owns a business interest in which they actively participate, they may receive a higher allocation of the value of the business interest than the other party who does not participate.
- Allocation of title — Who is going to retain title to the asset or liability post divorce?
Alimony is calculated by determining the income of both parties and the lifestyle of the marriage. The idea is that each party should be able to enjoy a lifestyle similar to that of their marriage. However, in the majority of cases that cannot happen as the income earned is not enough to now fund two separate homes and lifestyles. In New Jersey, for a marriage of less than 20 years, the term of alimony should not exceed the length of the marriage, except in exceptional circumstances.
Now, on the surface, alimony and equitable distribution seem to be separate issues. But let’s say that the net assets to be divided are $20 million. A non-working spouse is going to receive $10 million in net assets, $7 million of which are investment accounts. When calculating if the non-working spouse is entitled to alimony, the income earned on those brokerage accounts will be taken into consideration.
What if one party has a significant amount of separate property assets? The income generated from those assets will be taken into consideration when determining alimony. Or what if those separate assets were being used to fund the lifestyle of the marriage? What if the marital lifestyle was funded by debt?
If parties are far apart on what the amount of alimony should be, accountants can assist by making changes to the allocation of value or allocation of title in equitable distribution.
These are just a few examples of the issues that arise in matrimonial cases where an accountant can really prove their worth, above and beyond the numbers, to help clients come to resolution during a very emotional time in their life.
Megan A. Sartor
Megan A. Sartor, CPA, ABV, CFF, is a senior manager with Sax LLP. She is the leader of the NJCPA Business
Valuation Forensic Litigation Services Interest Group and is a member of the Student Programs and Scholarship
This article appeared in the November/December 2017 issue of New Jersey CPA magazine. Read the full issue.