Divorce rates have been on the rise for years, and with them has arisen a need for more and more forensic accountants with expertise in property law. Property is one of the most contentious points in any divorce case, and each state in the union has different laws and policies regarding how these cases should be addressed.
While it would be too complicated to explain state-by-state how property is handled during divorce, there are similarities to be found between states, and a few healthy generalizations to be made. With that in mind, let’s start with some background on the development of this area of law.
Development of Property Law
Property law in the United States has evolved in multiple directions over the course of time. In most areas of accounting, there are some fairly fixed Generally Accepted Accounting Principles (GAAP) which guide most accounting.
Family law hasn’t followed quite that same path. In family law, the GAAP are in many ways made irrelevant by legal constructs that define what property is, and what ought to be done with it. It’s vital for accountants to understand the ways in which divorce cases should be handled differently than other accounting tasks.
The two main systems of property are Community Property and Equitable Property.
Community property is the system used in nine states, primarily those further to the West. In a community property system, property of a married person is established as either marital or separate property. Marital property is the term used for property gained by the couple during the duration of the marriage, and separate property refers to property that was owned by only one party prior to the marriage or after the separation. Property that was inherited by one spouse is also considered separate.
Under this paradigm, community property is split equally between the two parties, and separate property belongs to whoever owns it.
Every other state operates under equitable property systems. In such systems, property is divided in a way that the court determines is fair. Now, this does not necessarily mean that it is divided equally. Under this system, separate property of one spouse may be called upon to make the settlement fair for both parties.
Fault in Divorce
Fault in a divorce refers to any behavior by one party that the court determines to be unacceptable: a fault, just as the name suggests.
In some states, such as California, no fault is required for the dissolution of a marriage. In these cases, community property must be divided up equally between both parties. Other states’ laws allow for differing divisions of property that favor one party based on the faults of the other.
Of course, parents are obligated to support their children. However, there are no set standards for what level of support a parent should provide. This question is usually answered by asking a few questions: namely, questions of custody agreements and of income. As a forensic accountant, it’s common for you to help determine factors like income insofar as they’re necessary for determining child support.
Spousal support, or alimony, can be a little trickier. Alimony typically involves the higher-earning spouse paying a set amount to the other party for a set amount of time. There are even more factors determining this than there are for child support. Things like the standard of living held by the couple when they were married, the length of the marriage, the needs of each spouse, and other factors come into play, in addition to the obvious ones like income.
All assets of both parties come into consideration when determining how to split up property. Each type of asset, from businesses to stocks to retirement plans and more, has to be dealt with separately and with care. Forensic accountants are tasked with valuing each asset.
Once the assets have set values, it’s time to figure out what goes to whom. This process requires an intimate knowledge of property values, income tax rules, and family law. Financial planning for the future can also come into play.
When divvying up property in a divorce, it’s not uncommon for one spouse to attempt to hide some asset from their spouse and the courts in order to avoid having to give it up. In addition to being questionable ethically, this type of fraud is illegal. In some states, this sort of action can come with severe legal consequences.
Marital fraud sometimes involves a continuation of tax fraud that was committed during the union, which, as we all know, is also illegal. So, that’s something to keep in mind.
All of the intricacies of property involve some consideration of income and other related taxes. This can cause various problems to pop up, and it’s key that you be ready to deal with them.
All the forms of spousal and child support have an impact on income tax. While child support isn’t considered deductible, spousal support is deductible as alimony. Taking these pieces into account is crucial to financial planning for accounting clients.
Here we’ve covered some of the basic principles of the accounting that goes into a divorce. Later on, we’ll be delving into some of the more complex artifacts associated with this process, so stay tuned for more.