A Miami CPA discusses the role of financial professionals in the divorce process and explains how family attorneys can use financial experts to strengthen their case.
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An Interview with Harriett Fox
Harriett Fox is a Florida Certified Public Accountant and a Florida family mediator. As a forensic accountant, Harriett specializes in complex financial analyses in the areas of family, commercial, and civil litigation issues. As a mediator, she helps settle cases in all areas of commercial and civil litigation. Harriett has served as an expert witness in numerous cases. She is a member of the American Institute of Certified Public Accountants, the Florida Institute of Public Accountants, and the American Woman’s Society of Certified Public Accountants.
What do you do as a professional to help family lawyers and their divorcing clients?
Fox: A very important element of a divorce is that both sides provide financial disclosure. An important part of that disclosure is the financial affidavit, which lists all of the assets and liabilities as well as the income and expenses for the family. We list what items are marital, what might be contested as non-marital, and the income and expenses for each party. The assets and liabilities determine the marital estate and then the law takes over in terms of how it gets divided.
When should a financial professional be brought into the case?
Fox: A financial professional should be brought into most cases. There are some simpler cases where you may have two employees who do not have a great deal of assets. They could probably go without a financial professional. Whenever the financials have complexities, a financial professional should be brought in. For instance, when there’s a closely held business, a financial professional should be brought in to determine to what extent the business expenses have personal components and must be recognized as income for the couple.
When a family lawyer’s client is concerned that the other side might be hiding assets, what do you do to find those assets?
Fox: The spouse who is not privy to the financial information often believes there are hidden assets. When I ask where the assets would be hidden, they say, “You’re the forensic accountant. You find out.” There need to be clues in order to believe there are hidden assets. Has the other party taken some unusual trips? Has their behavior changed recently? Then I go through all the details of the last two to three years of payments. Some of the smallest payments that seem irrelevant may not be. For example, one of my clients found a check for $35.00 for a filing fee. By asking what it was for, we found out a piece of land had been purchased that didn’t show up anywhere else. Even a small amount could be very significant in the process.
Business ownership can have an impact on divorce. What do you look at in regards to a closely held business when it comes to a divorce case?
Fox: There are several aspects we need to look at. One is the value of the business itself. If the business was created with marital effort – which means one of the spouses is married and conducting business – then the value of the business is a marital asset and in Florida the other spouse has a right to half of the value.
We also have to look at the income and expenses of the business itself. There are certain expenses that are allowed by the IRS; for example, an automobile is allowed as an expense necessary for the business. However, the family law in Florida says that even if you are an employee, you need to have a car. So the expense attributable to the business owner’s automobile is included in personal expenses when it comes to determining alimony and child support.
Is business valuation an art or is it an exact science?
Fox: It’s a bit of both. It has to have financial basis, but there’s always the judgement factor – which creates an art. Before giving a value of a business, a colleague might ask which side of the divorce I am on. That’s an inappropriate question, because it should not matter which side the CPA is working for. In any event, there will be a range of value for the business. I’ll give you a lower value and a higher value, but the reality is somewhere in between. That’s part of the negotiation at mediation, but sometimes people are influenced by which side they’re working for.
In Florida, is it usual to have one valuator on the case or would you normally have one on each side?
Fox: It works both ways and there are some people who have a preference to work one side or the other. I happen to have a preference to work neutrally. As a neutral forensic accountant, I have an agreement with both parties. It’s more cost-efficient, because you only have one CPA instead of two and it’s easier to get the documentation from both parties.
Is there any distinction between valuing the business to get a loan from a bank and valuing the business for the purpose of a divorce?
Fox: For a loan, the bank is going to look at the non-physical aspects, such as goodwill, differently than they will look at a hard asset. They may or may not allow goodwill in their calculations. For divorce, however, goodwill does come into play in a business valuation.
What do family lawyers need to know about lifestyle analysis?
Fox: Lifestyle analysis is an indirect method to determine income. Normally we look at bank statements, income, tax returns, W2s, 1099s, and everything we can to determine income. Sometimes what is reported does not seem that it would effectively support the lifestyle we know a family is living. Then we look at the expense side, because if you spend it, the money has to come in from somewhere. It’s an indirect way to determine income, but it is a very expensive process. It’s better to provide and obtain the income information as often as possible.
A number of people are living beyond their means and now that you’re dividing their assets and income in half, they’re going to have to change their lifestyle. Would that information be part of the lifestyle analysis?
Fox: Yes. That would definitely point that out.
How can lifestyle analysis be used to a client’s advantage or disadvantage?
Fox: The standard of eastern Florida used to be to maintain the lifestyle of the family – that was what alimony was supposed to do. If we assume there’s enough money to go around, then the advantage would be to the party receiving the alimony to support the lifestyle even if the income is not evident. It would be a disadvantage for the other party, because it’s a very expensive process.
Is there anything unique about high-asset divorce cases? Do you need to bring in other professionals?
Fox: There are times we would do that. For example, if there were a real property that needed to be appraised, we would bring in an appraiser. If there were collections that were part of the marital assets, such as artwork or other collectibles, then we would bring in appraisers.
What do family lawyers need to know about tax and divorce as it relates to child support and/or alimony?
Fox: When filling out a financial affidavit, there’s a place where you have to put the taxpayer’s status and calculate the amount of taxes. Oftentimes, the professional – sometimes the attorney, sometimes the CPA – uses the current status rather than the future status. There are people who might be filing jointly but who are going to be head of a household or who are going to be single. You need to pay attention to the change in status.
Also, lawyers should know the rule of thumb that alimony payments are tax deductible to the payor and taxable to the receiver. Child support payments do not have any tax impact. Sometimes, in order to even things out, the tax burden can be shifted as long as it’s in the marital settlement agreement.
Harriett Fox is a CPA and divorce mediator located in Miami, Florida. She uses her mediation skill to settle cases in various areas of commercial and civil litigation, while her applying her forensic accounting abilities to specialize in complex financial analyses in cases of family, commercial, and civil litigation. To find out more about Harriett and her firm, visit www.harriettfoxcpa.com.