In a collaborative divorce matter, the parties’ lawyers will strive to ensure that the support payments proposed will enable each party to live a lifestyle reasonably comparable to their marital standard of living. Note that in divorce litigation cases, the court will likely determine the maintenance award. Surely the Collaborative divorce process enables the parties and their attorneys to negotiate and come to an agreement on spousal support without having to rely on the uncertainty of a judge’s scrutiny and conclusion.
Whether or not the matter is a Collaborative case or a litigation case, a lifestyle analysis best establishes the economic marital standard of living. A lifestyle analysis helps the parties understand their spending habits as well as the manner in which the household was financially supported.
Who should perform the lifestyle analysis? In Collaborative divorce matters, the parties and their attorneys want to know the truth, that is, the economic reality, in each case. Perhaps the divorcing spouses will agree as to their marital lifestyle. That is, the truth may be brought to light consensually by the parties. But, that is not always the case. Divorcing spouses may intentionally or even unintentionally omit information concerning their income and/or property. In doing so, they may intentionally or unintentionally overstate their expenses and/or liabilities. A “disinterested” financial neutral possessing the skills, expertise, and experience should perform a lifestyle analysis because the Collaborative team is looking for the corroborated facts. Some forensic accountants have such skills and experience, but not all are experienced in divorce or the Collaborative process.
As the analysis proceeds, the neutral forensic accountant may have reason to believe that there is unreported income, hidden property, or other undisclosed information as the reported resources do not support lifestyle. When engaged to perform a Collaborative divorce lifestyle analysis, a neutral expert is hired to develop a sense of the couple’s lifestyle and standard of living. Is our “sense” of the couple’s lifestyle corroborated by their financial records and their Statements of Net Worth, or do we sense that there may be contradictions or inconsistencies between what we are being told and what the documents are actually telling us?
If the couple buys expensive clothing, jewelry, art, dines out often, and takes lavish vacations, but the available financial information depicts a modest income level, there may be undisclosed cash income, a privately-owned business paying personal expenses, or both. On the other hand, if the review of the personal financial records (banking, investments, insurance, etc.) indicates a modest lifestyle, but the known income sources are far above average and out of sync with the data, there is the possibility of syphoned assets and the expectation of a substantial net worth and lifestyle aspects that are not fully disclosed. The neutral forensic accountant will help determine and report on the actual lifestyle based upon total income and total expenditures.
Another lifestyle scenario is possible. An expensive lifestyle could be generated by going deeply into debt as when parties live beyond their means. If the individuals may be maintaining a luxurious lifestyle by continually increasing debt and not using their own finances, an analysis of both spouses’ credit reports may be warranted. In order to have access to the credit reports, consent from each spouse is needed.
The marital standard of living as determined and reported upon by the financial neutral through his or her lifestyle analysis can be helpful in a Collaborative case when trying to reach an understanding on the amount of support to be paid. Breaking down the sources and uses of money in making that assessment is critical to determination of spousal support. Having a financial neutral professional on the Collaborative team who is experienced in doing so is key.
Written by Stephen Linker, CPA, CVA, CFF, FACFEI