I have been providing business valuations, characterization analysis and financial services for divorcing couples for over thirty years in Central Texas. I often tell clients considering a divorce that I believe the Collaborative process is the better of the bad, when compared to going through the challenges of a litigated divorce. There are many benefits for couples working toward their new normal when using the Collaborative divorce process.
The first part on the Collaborative divorce roadmap is gathering information. The part of gathering information I will focus on here is encouraging the clients to practice transparency and assuring that the attorneys, mental health professionals, financial professionals and the clients all do our best to cover all the bases. This is easier said than done sometimes.
In trying to get a comprehensive and accurate picture of all transactions in a closely held business, beware; experienced owners can manipulate the books and assets to their advantage. If the client is a W-2 employee, they could ask that a bonus be held for a while, defer salary, make extra payments to the IRS, send extra payments to their insurance company, prepay expenses, even create fake debt payable to a sympathetic family member or friend. If they are a commission salesperson, they could ask for commissions to be held until after the divorce is settled. It is very important to emphasize to the clients that hiding assets or creating fake debt can have serious consequences to them if these are found out before the Collaborative process is settled, and even after settlement. If it is before settlement, it could easily end the Collaborative process and the clients would have to go through litigation. If it were found out after settlement, they could very well end up in some litigation to have a judge decide the fate of the decision where information was withheld or misrepresented.
Part of the responsibility of the financial professional. and to some extent the rest of the professional team is to cover all the bases. This could be as simple as listening to the clients in offline meetings to ferret out anything that could be a potential lack of transparency. Some methods are better than others, depending on the personality of the client. It is important to not be too shy in asking questions about their finances. Usually, one spouse takes care of the bills and finances of the household and the other tends to be less involved. I would like to be sure that both clients and the entire team are educated about the entire estate. I work with both clients and a few others if necessary to cover all the bases including their financial planner, their tax person and maybe even their banker. The key is Show me the Money!
Several sources are appropriate for searching to make sure we are covering all the bases. The clients’ IRS 1040 tax returns can be very illuminating.
Schedule B – Lists names of income sources, amount of dividends, interest received plus foreign country accounts and trusts.
Schedule D – Capital Gains/Losses on sales of stocks, other assets.
Schedule E – Income/Loss on Partnerships, Rental Property, Royalties, S-Corps.
Schedule K-1 – Distributions, profit/loss and capital accounts for business interests.
The other area to make sure we are covering all bases is to analyze the clients’ lifestyle. The trick here is to see if there have been recent changes in spending habits, stock transfers to relatives, baseball card auctions, new safe deposit box, excessive credit card use, company reimbursement of expenses delayed, lavish furniture in the office. Ask if they have given a Personal Financial Statement to banks for any loans they have taken out. We also suggest doing a Public Record Search to find or confirm debt with UCC lien filings, Deed Records and County Tax Assessor for real estate holdings, Secretary of State for business interests owned, State Parks and Recreation for any ownership of boats and County Assumed Name Records for small closely held business ownership. We always ask for all three credit report agency reports, Trans Union, Experian and Equifax to cover the bases on debts.
An exercise I encourage, regardless of the level of income earned, is a separate post-settlement budget for each client. Many times, this is the first opportunity the clients have taken to actually assess and quantify their spending habits and obligations. Of course, a budget to address the children’s needs is essential as well. One advantage of being a member of Collaborative Divorce Texas is that members can access so many proven and excellent forms that help the professional in the Collaborative process, a budget template is a good CDT form to use.
The key is to be thorough in your research and, as the financial professional, assist in keeping the Collaborative divorce process at its highest level of integrity. Don’t rush the gathering information part of the roadmap. This could very well save time and fees later in the Collaborative divorce roadmap during option generating and option evaluation. The most anxious part of divorce is the fear of the unknown. Once we make known the unknown, the client gets some relief from their anxiety in their divorce. At the end of the day, we want our clients to know that we have done our very best to cover all the bases so they can confidently adjust to their new normal, financially educated.