Welcome to our three-part series on navigating the complexities of high-asset divorces. In cases involving significant financial holdings, retirement accounts, and high-value personal assets, achieving a fair division often requires an expert in forensic accounting or valuation issues. Certain assets, such as financial accounts, debt accounts, or assets bought or sold near in time have an value which is easily established. Other assets, such as businesses or real estate (residential or commercial) require opinion testimony from an expert. This series explores how to divide complex assets fairly, starting with the essential role of forensic accountants in uncovering hidden wealth, accurately valuing business interests (including most notably goodwill), and ensuring financial transparency. By understanding the function of forensic accounting in high-asset divorces, you’ll be better equipped to secure a fair outcome.
Forensic accountants play a crucial role in high-asset divorces by uncovering assets, or clarifying the classification of assets (marital, separate, or hybrid) by illustrating how such assets work, and when they are “earned” for equitable distribution purposes. This gives the client (and his or her attorney) a clear view of the entire financial picture. This foundational work is essential for asset division and equitable distribution, setting the stage for dividing financial accounts, and real and personal property in upcoming parts of this series.
Why Forensic Accounting Matters in High-Asset Divorces
In high-asset divorces, financial portfolios are often intricate and include a mix of businesses, investment accounts, real estate, and sometimes international assets. These complexities make it challenging to ensure full financial disclosure. Forensic accountants specialize in tracking, evaluating, and verifying these diverse holdings, providing a comprehensive view of each party’s financial situation.
Without forensic accounting, assets can sometimes be overlooked or concealed, leading to an inequitable division that could leave one spouse at a significant disadvantage. By using forensic accounting to identify and value all marital assets, both parties are assured a more transparent and fair settlement. This groundwork is critical to the overall success of the division process, setting a strong foundation for equitably distributing other types of assets, as we’ll explore in later parts of this series.
Uncovering Hidden Wealth and Income
One of the primary functions of a forensic accountant in divorce is to locate and identify hidden wealth. In high-asset cases, there may be numerous financial vehicles that can obscure assets. Forensic accountants use a range of techniques to uncover any undisclosed income, offshore accounts, or assets that may not be readily apparent.
Methods for Finding Hidden Assets
Forensic accountants analyze financial documents such as tax returns, bank statements, business ledgers, and credit card records to identify any discrepancies or signs of hidden wealth. They may also look for patterns of unusual spending, hidden investments, or unusual transactions that suggest funds have been transferred to undisclosed accounts.
Common Hidden Assets
Some assets are more commonly concealed in high-asset divorces, including:
- Offshore accounts: Money hidden in accounts outside the U.S. can be difficult to trace without specialized knowledge.
- Deferred income or stock options: These are sometimes hidden by intentionally delaying payouts until after the divorce.
- Personal property or collectibles: Valuable items like art, jewelry, and collectibles are often underreported.
Impact on Settlement
Uncovering hidden assets ensures that each party receives a fair share of the marital estate. When undisclosed assets are identified, they can be factored into the settlement, resulting in a more equitable division. Absent discovery of these assets, one spouse could lose out on their rightful share, potentially impacting their financial future.
Evaluating Business and Financial Interests
For high-net-worth individuals, business interests often represent a significant portion of the marital estate. Valuing these assets is complex, as businesses can vary greatly in terms of structure, revenue, and potential growth. Forensic accountants are essential in accurately assessing the value of privately held businesses, partnerships, or professional practices.
The Importance of Accurate Valuation
Valuing a business accurately is crucial because it determines the amount of compensation or ownership interest the non-owning spouse may be entitled to. An inaccurate valuation can lead to a settlement that disproportionately benefits one spouse, compromising the other’s financial stability post-divorce.
The Business Valuation Process
Forensic accountants assess business assets, debts, income, and growth potential. This process includes:
- Evaluating financial statements: Examining profit and loss statements, cash flow reports, and balance sheets.
- Analyzing market value: Looking at comparable businesses and market conditions.
- Projecting future earnings: Calculating potential revenue growth or decline.
- Distinguishing personal goodwill from entity or enterprise goodwill: Goodwill, defined as the established reputation of a business defined as a quantifiable asset, is a critical component of a business’s intrinsic value. In Virginia, individual goodwill is separate property, while enterprise goodwill is marital property. Understanding the distinction between the two and being able to establish the breakdown of both in a particular business requires an expert opinion from a forensic accountant. Especially in professional practices, the accountant must separate the goodwill arising from the individual owner’s reputation or skill from the goodwill which is transferrable with the business without the presence of that individual owner (in consideration of the business’s prominence in the industry independent of that owner).
Common Challenges in Business Valuation
In addition to these steps, forensic accountants face challenges like classifying assets which were acquired or started before marriage or after separation. In the context of restricted stock plans or deferred compensation, there are considerations relating to when an asset is started/acquired as well as when that asset is earned or vested. A forensic accountant is also critical for determining whether a business started before the marriage may have increased in value due to the personal efforts of either party during the marriage. The Virginia Code clearly identifies personal efforts expended during marriage as a marital component of any business when such business increases in value due to these personal efforts.
Setting a Basis for Fair Division
By ensuring an accurate valuation of business interests, forensic accountants help prevent one party from unfairly benefiting at the other’s expense. Often a business owner has undervalued their business in various tax schedules and perhaps overvalued their business in any loan applications with a third-party bank. This fair valuation lays the groundwork for the equitable division of other assets which we will discuss in Part 2 (retirement accounts) and Part 3 (personal property).
Real-Life Applications of Forensic Accounting in High-Asset Divorces
To illustrate the value of forensic accounting, consider a case where one spouse owns a successful business with several business bank accounts. The forensic accountant investigates and finds that funds were moved from the business account to an offshore account and fails to report this account in his or her separation/divorce disclosures. By identifying this concealed in, the accountant ensures that these assets are included in the division, securing a fairer settlement.
Another example might involve a spouse who received substantial stock options before the divorce but did not report them or takes the position that they are separate property and not subject to division. Through careful analysis of financial documents and an understanding of the assets themselves, the forensic accountant includes the true value of these options in the settlement, preventing one spouse from losing out on significant value.
These real-life applications highlight how forensic accountants not only protect the interests of each party but also promote a balanced and just outcome.
Conclusion
Forensic accounting is a critical step in high-asset divorces, ensuring that all financial interests are disclosed and accurately valued. By identifying hidden assets and evaluating complex business holdings, forensic accountants provide a transparent foundation for dividing marital property.
In Part 2 of this series, we’ll explore how retirement and investment accounts—key components of many high-asset portfolios—are divided in divorce. We’ll look at Qualified Domestic Relations Orders (QDROs) and strategies for protecting long-term financial interests.
When navigating a high-asset divorce, consulting with experienced forensic accountants and family law professionals is essential for safeguarding your financial future. Stay tuned for the next part of this series as we dive into retirement account division and the importance of protecting these valuable assets.
If you have questions about dividing assets in a divorce, please contact Christian Lapham at (703) 525-4000 or clapham@beankinney.com.
This article is for informational purposes only and does not contain or convey legal advice. Consult a lawyer. Any views or opinions expressed herein are those of the authors and are not necessarily the views of any client.
