By Kriste J. Rodriguez, CPA/ABV | EisnerAmper, AAML NJ Gold Sponsor

Overview of the Marital Balance Sheet

One of the tasks as a forensic accountant is to prepare a marital balance sheet to help facilitate the division of the marital assets/liabilities. The assets and liabilities of the marital balance sheet may include, but are not limited to:

• Real estate
• Bank accounts
• Automobiles, boats, etc.
• Tangible property, including artwork, furniture, jewelry, collectible items, wine, etc.
• Brokerage accounts including stocks, bonds and securities
• Retirement accounts, including pensions, IRAs, profit sharing plans, 401(k)s, etc.
• Value of a business interest
• Employee benefits, such as restricted stock, stock options, etc.
• Cash surrender value of life insurance policies
• Liabilities include mortgages, lines of credit, notes payable personal loans and credit card liabilities

The value of certain assets listed above, such as real estate, pensions, jewelry, and wine collections, are determined by appraisers that specialize in these areas. Kelly Blue Book or similar services are often used to determine the value for automobiles, boats, etc. Account statements are reviewed by the forensic accountant to determine the value of assets, such as bank, brokerage and retirement accounts. Forensic accountants are tasked with determining the value of an interest in businesses to help attorneys determine the parties share of the business value for equitable distribution.

Failure to Consider Tax Implications Could Result in Inequitable Division of Assets

Certain assets may appear to be equal in value on the surface. However, certain events could trigger tax consequences, which could result in very different values.  

Take, for example, the marital residence. There is no issue if the parties agree to sell the marital home and split the proceeds.  However, if one of the parties remains in the house and subsequently sells the home, the tax consequences, specifically capital gains tax (if any), could impact the value to that person after it is sold.

The assets in a brokerage account portfolio may not really be equal in value. A brokerage account with cash of $100,000 does not have the same value as a brokerage account with $100,000 of stock on an after-tax basis. Once the tax implications are considered on stock when it is sold, the values become very different. The gain on the sale of stock is the difference between the cost basis and the sale price. This gain will be either subject to long-term or short-term capital gains, resulting in an after-tax value less than $100,000. Similarly, if the parties have two brokerage accounts each with $100,000 of stock in the portfolio, the cost basis for each of those accounts could be very different, resulting in more or less taxes. The tax consequences should be considered so that the asset is equitably distributed.

Retirement Account Division – Understanding the Rules

The division of retirement assets, such as 401(k)s should be carefully considered. Not only are tax implications involved, but specific rules also apply to the transfer of certain retirement assets. Failure to comply with these rules could result in unintended consequences. For example, if one party is entitled to a portion of a 401(k)the money should not be withdrawn and transferred to the other party without executing the proper paperwork. Failure to do so could result in early withdrawal penalties and incomer tax consequences. A document known as a qualified domestic relations order or QDRO should be drafted, which specifies how the spouse will receive their portion of the 401(k) without triggering any income tax or early withdrawal penalties. Eligible withdrawals from a 401(k) will be taxed at ordinary income tax rates and should also be considered when dividing this asset during settlement. The use of a forensic accountant with income tax experience can help you avoid the pitfall that can be encountered with 401(k) distributions. 

Liquidity of Assets

The liquidity of an asset or the ability to turn the asset into cash is very important to consider when dividing up the marital estate. Cash in a savings or checking account is the most liquid asset. However, assets such as homes, wine collections and/or art collections are less liquid because it takes time to sell this type of asset. It is not practical for one spouse to receive mostly liquid assets and the other to receive primarily illiquid assets.  Significant cash flow problems could result for the person receiving the mostly illiquid asset portfolio. One of the parties may keep the marital residence, in exchange for fewer liquid assets. It is imperative, specifically when there is a lack of liquid assets to be received in settlement, that a proper budget is considered to cover the expense of maintaining the home and other lifestyle expenses.

Life Insurance Policies 

It is common in marital settlement agreements (MSA) for one of the parties to maintain a life insurance policy to cover their alimony and/or child support obligation should that party become deceased before their support obligation is over. The spouse that the insurance is obtained for should either be the owner or irrevocable beneficiary. This will ensure that the beneficiary will be notified if the premiums are not being paid or if there are any other issues with the policy. Failure to control the policy could result in a lapse or cancellation of the policy. As an alternative, the spouse that is maintaining the policy should provide proof of the policies on an agreed-upon time frame, whether quarterly, semi-annually or annually.

Conclusion

Any one of these common areas discussed above in a marital settlement agreement could cause significant financial loss and/or future financial distress if not addressed properly at settlement. Therefore, it is imperative to analyze the assets and consider all financial/tax consequences that each asset may have so that the division of the marital estate is fair and equitable.