Choosing a Financial Professional for a Collaborative Divorce (Part 2)

Presented by Ron J. Anfuso, CPA, ABV, CFF, CDFA, FABFA

In Issue 85 of Forensic Accounting Today, I delved into the process of selecting a fully qualified financial professional for a collaborative divorce. In most cases, achieving the most equitable outcome necessitates the expertise of a CPA who has undergone comprehensive training and gained proficiency in several specialized areas of accounting. This level of expertise demands a comprehensive understanding and application of knowledge and skills, which I explored in Ron’s Corner Issue 85. 

Furthermore, I began to discuss the specific areas of expertise required by the CPA in most collaborative cases and focused on one of these areas—business valuation and determining reasonable compensation. In this issue, I continue to address the areas that are often necessary. If you have any questions regarding any of these topics, please do not hesitate to reach out to me.

Determining Gross Cash Flow Available for Support

It is not unusual for a sizable portion of income generated from employment or by a self-employed business owner to be in the form of perquisites. The accurate determination and analysis of these “perks” can significantly impact property division, particularly when one or both parties own a business (e.g., during a business valuation). Furthermore, perquisites can pose complex challenges and result in substantial adjustments to the available cash flow for support. Therefore, it is crucial for the financial professional (CPA) to possess a comprehensive understanding of the prevalent types of perquisites and their implications on business valuation and gross cash flow available for support.

The financial professional (CPA) must determine which expenses are necessary for the business and which are personal on an expense-by-expense basis. Reimbursement of expenses that are found to be personal in nature should be considered as possible add-backs to income. These expenses include:

• Automobile expenses
• Entertainment
• Travel 
• Education (non-professional)
• Charitable contributions
• Legal fees (personal/dissolution)
• Accounting fees (personal tax preparation fees)
• Life insurance
• Disability insurance
• Medical reimbursements, and
• Pension or profit-sharing plan contributions.

Calculating marital standard of living (MSOL) can be challenging due to the lack of accurate data. Additionally, reconstructing financial details can be time-consuming and costly. In such cases, you need to decide whether to piece together the financial data or let the court determine the MSOL solely based on testimony and summary information.

Determining Marital Standard of Living

The court aims to award the amount of spousal support that best enables each party to maintain a standard of living as close as possible to what they enjoyed during the marriage. Furthermore, the court’s intention is not to award a level of spousal support that allows one party to enjoy a superior standard of living compared to what they benefited from during the marriage, regardless of the circumstances that caused the divorce.

In many cases, financial conclusions can be accurately estimated using readily available sources. Marital expenditures often align with reported taxable incomes, and the courts accept these incomes as a valid measure of marital expenses. However, if the financial situation is complex, such as a business valuation, consulting a forensic accountant is usually the most appropriate approach. Considerations include:

• Ownership of family homes
• Rental properties
• Vacation homes
• Vehicles owned 
• Vacations
• Investment accounts and employee benefits
• Debts and outstanding loans
• Social activities and memberships in organizations
• Charitable contributions, and
• Gifts and inheritances received prior to and during the marriage.

In addition to these, courts will take into account the following in determining the extent to which the earning capacity of each party is enough to maintain the standard of living enjoyed during the marriage:

• How long the couple was married
• The ability of the supported party to be employed or earn potential income
• Whether the supported party’s current or future earnings have diminished due to periods of unemployment
• Whether the supported party contributed to the education of the supporting party and how much
• The age, health, and medical needs of the parties, and
• The capacity of the supporting party to pay spousal support based on earned income, unearned income, assets, and earning capacity.

Apportionment

In California, courts may rely on several formulas (Pereira, Van Camp, and Capital Labor Apportionment Model) when determining how to divide a premarital business or investment in a divorce. The forensic accountant needs the expertise to help the court determine which formula to use.

The Pereira Formula is typically used when the business or investment growth is largely due to community efforts, such as management, strategy, or labor during the marriage before separation.

The Van Camp Formula is usually applied when the business or investment growth is mainly because of the natural enhancement of the underlying separate property assets, such as market forces or brand reputation.

TheCapital-Labor-Apportionment Model (CLAM) is employed when a case cannot achieve an equitable apportionment via either the Pereira or Van Camp approach. In such cases, the forensic accountant needs to embrace a hybrid strategy that makes appropriate use of both methods. Such a process requires the forensic accountant to possess thorough knowledge and considerable experience in apportionment to think creatively enough to formulate a logical solution that will be clearly understood by counsel and accepted by the court. In such cases, forensic accountants should consider the Capital-Labor Apportionment Model. For this model, the forensic accountant needs to determine and calculate sixteen steps for each year of the marriage. (See Forensic Accounting Today Issue 54: https://anfusocpa.com/wp-content/uploads/newsletters/Newsletter-54.pdf.)

2640 Reimbursements

California Family Code Section 2640 addresses the situation in which one spouse uses their separate property funds to contribute to the acquisition or improvement of community property. Understanding the code’s details and procedures is crucial to ensure that the contributing spouse is reimbursed for their financial contributions. This code section specifically provides for the reimbursement of separate property investments in community assets before the remaining community assets are divided. The reimbursement claim involves:

• Identifying the amount of the down payment: This entails determining the initial contribution made by the contributing spouse.
• Personal property: This involves reimbursing the contributing spouse for their personal belongings that were used in the community property acquisition or improvement.

I will cover Moore/Marsden, tracing, and reasonable compensation in the third and final part of Choosing a Financial Professional for a Collaborative Divorce.