When you bring your financial expert to divorce mediation, it can be a game changer in a high-asset or financially complex case. Having the right expert with you powerfully enhances and demonstrates the strength of your case.
By Lisa Ann Sharpe, Family Lawyer
If you are on the fence about involving your valuation expert in mediation in a complex financial divorce, then consider how many times have you had a mediation break down because a valuation issue or tax question was raised that you could not adequately explain, did not anticipate, or could not an answer. Mediation should be scheduled so that your valuation expert can attend.
The vast majority of divorce cases will settle before ever going to trial. Complex financial divorces are often settled through mediation, with a neutral, agreed-upon mediator facilitating the settlement negotiations. To ensure the highest probability of effectively communicating the core valuation facts of your case at mediation, your valuation expert can increase your likelihood of doing so and of reaching a settlement.
Complex financial divorces involve disputes over property division and, often, over alimony. There are three main issues involved in considering any division of property in a divorce. First is the identification and characterization of each asset – is the asset considered separate or marital property. Second, is the valuation of each asset. Third, are there any factors that would reasonably allow for a disproportionate division of property? For example, an individual’s 401(k) has a value at the start of the marriage; significant contributions are added during the marriage, and at separation, both spouses now have varying interest in the 401(k). Another example is when a spouse owns a business before the marriage and takes a low salary, using the earnings to build the business during the marriage and at separation, there is a fight over the characterization of the business.
Valuation and forensic experts can assist family law attorneys with the following: trace assets, value business interests, establish a framework to divide assets, analyze cash flow, provide calculations supporting future alimony payments, explain complex tax issues, determine spousal interest in assets, and search for undisclosed assets.
Why Bring Your Financial Expert to Mediation? Here are 4 Good Reasons.
Bringing your valuation expert to mediation increases the likelihood that the parties, attorneys, and the mediator have a clear understanding of your financial case. This is also likely to lead to a better resolution.
1. Focusing on the numbers.
An expert helps to clarify valuation issues when the heart of the case is a valuation dispute. The expert can provide valuable support and explanations for their reports in real time at mediation. When attorneys are focused on client advocacy (often perceived by the mediator as there to “argue”) and clients are caught up in their own emotions, the expert is viewed as more persuasive to the mediator. The expert can also be better positioned to marshal, present, and convey the financial facts of the case to the mediator and the opposing side, particularly if either or both need to be ‘educated’ on the complex financial matters at hand. Valuation experts focus on the critical valuation issues, explain the valuation differences, and why his/her valuation methodology and numbers are appropriate.
2. Preparing a Marital Balance Sheet.
An expert will generally “own” the marital asset and liability spreadsheet. Attorneys may try to get experts or opposing counsel to agree to the spreadsheet and asset list before mediation. The expert may update the numbers throughout the mediation day. This will expedite the resolution process. Your expert should be able to simplify rather than complicate the asset allocation spreadsheets.
3. Visual Charts and Graphs.
The expert may prepare a short presentation for mediation and can also provide data visualization to facilitate effective communication of the financial facts of the case. The expert will often use bar charts, tables, or graphs making the financial information more readily understandable by providing clear visual displays. For example, for the disadvantaged spouse: cash settlement and alimony spend down to show financial disparity in the future. The expert can also calculate controllable cash flow and determine the value of total compensation, including the perks and payment of personal items with business funds when a spouse owns a business. On the other hand, an expert for the money-advantaged spouse charts can show problems with cash flow.
4. Tax Ramifications.
A CPA expert can explain complex tax issues. For example, in cases with stock awards, the IRS withholds 25% at vest, but the actual tax burden is almost always higher. The changes in tax law have also resulted in greater SALT (State and Local Taxes) liability and using prior tax returns will not provide an accurate indication of future net income in states with high property taxes and income taxes. The expert is able to run tax calculations and answer income tax questions in real-time at mediation. The tax ramifications of settlement are particularly critical after the 2018 Tax Cuts and Jobs Act, which cuts individual income tax rates, doubles the standard deduction, and eliminates personal exemptions.
A well-prepared expert can save you and your client time and expense by clearly identifying and presenting the key facts and issues in dispute in an objective manner. They can provide assistance in educating your client, the opposition, and the mediator as necessary. And finally, your valuation expert can assist in diffusing unreasonable expectations of your client or the opposing side, focusing the parties instead on realistic resolutions to their case.
When deciding whether or not to bring your expert to mediation, it is important to consider that as a testifying expert, his or her file is generally available for discovery. Bringing your expert to mediation opens the potential for waiver of confidentiality or work product by prematurely disclosing the expert witness or your work product to opposing counsel, if the case does not settle at mediation. Maintain your guard against this potential pitfall!
- Carefully evaluate what information you provide to your expert.
- When providing settlement communications to your expert prior to mediation, be sure to label all information as “Confidential Settlement Communication – For Settlement Purposes Only”.
- Make sure your expert understands that mediation statements may not later be used by him/her in future reports or in providing testimony.
- Emails to and from the expert with settlement strategy should be kept to a minimum and critical strategy sessions should take place in-person or on phone calls to avoid creating an email trail on your settlement strategy than could be discoverable by the other side.
While most states have statutes protecting settlement communications occurring during mediation, it is the best practice to discuss these issues with opposing counsel and the mediator before the mediation. This will confirm that there is a clear understanding and agreement on how communications will be protected going forward.
Preparation for Divorce Mediation with Your Financial Expert
Before mediation, your client should meet with your expert, understand the end-game and the settlement numbers. Often there is a psychological boost to the client when they meet the expert, understand the expert’s report, and review a reasonable range of settlement outcomes with the expert.
Be sure to inform the mediator and opposing counsel that you are bringing your expert to mediation. This will prevent the opposing side from feeling ambushed or unprepared which can result in ending the mediation prematurely. The parties and mediator should agree that the expert will participate in mediation and, to some degree, what role he/she will play. If valuation experts are engaged on both sides, the mediator may suggest that the experts caucus without counsel, particularly before a face-to-face mediation session. In this situation, you should set clear guidelines with your expert about what he or she can and cannot disclose to the other side.
Communication is key. Communicate with your expert to ensure that he or she will increase your ability to effectively communicate the financial facts of your case to all parties at mediation. With the right expert in the right case, having your valuation expert with you at mediation powerfully enhances and demonstrates the strength of your case.
Lisa Ann Sharpe is a family lawyer at Lasher Holzapfel Sperry & Ebberson. A former president of the AAML’s Washington State Chapter, Lisa focuses her practice on complex divorces and mediation/arbitration. www.lasher.com
Learn more about this topic at the AAML/BVR National Divorce Conference, May 8-10, 2019. www.bvresources.com/events/national-divorce-conference-2019