The Importance of Financial Documents in Family Law Cases

Transcript

Introduction and agenda

Nice to see everyone, and I hope everyone's had a lovely week. It's Thursday, April 15th. My name is Regina Campbell, and I'm coming to you from The Campbell Law Group. We're here today for an important seminar on something that affects quite a lot of people's lives in one way or another. Today we're going to talk about the importance of financial documents in family law cases. This is a subject that has probably touched a family member, a friend or someone you know, whether with regard to a divorce, a paternity action, or drafting a family law agreement such as a premarital agreement, a postnuptial agreement or even a marital settlement agreement.

So today we're going to talk a little bit about why financial documents are so important in these types of cases. They really can make a crucial difference in how the case goes: in protecting your rights, in making sure your rights are not trampled on and that you're not giving away more than you're required to, and in understanding the nature of the distributions, whether you're creating a prenuptial or postnuptial agreement, a marital settlement agreement, or going through divorce proceedings. You want to make sure you understand why you're asking a judge for certain relief, because you might be surprised to learn that you're asking for an asset in the distribution that's actually not as valuable, or not worth what you think it is.

So today we're going to talk a little bit about how you make those determinations, and the use of financial documents in family law cases to make choices, to strategize and to protect your rights, and to be able to see what's going on with the other party's financial circumstances. Often a financial document, on its face, doesn't tell the full story. So we'll go into that a little bit now.

This is the agenda. First, we're going to talk about mandatory disclosures and why they may not be enough. Financial affidavits and certificates of mandatory disclosure fall within that category, and we'll discuss that a little further. We're also going to discuss alimony: determining income for alimony purposes, and why it's so difficult. We're going to talk about why it's not just "Hi, I make this amount of money." You must look beyond the surface of the W-2. Depending on what type of wage earner the other party is, they may have other sources of income. Unfortunately, it's not a black-or-white question. It would be a lot easier, and judges would love it if that were the case, but it is not. Most of the time it's one of the most heavily contested areas of a family law case. The second part of alimony is determining a spouse's need for alimony purposes.

We're also going to talk a little bit about child support: determining income for child support purposes. We're also going to talk about equitable distribution. Some of the topics underneath it are understanding your assets and liabilities for division, the importance of appraisals and valuations, and protecting non-marital assets. I'm going to show you a little bit about how to do that, and also how to protect the marital portion of a non-marital asset, if you're on the other side and that is the case. And we'll talk about recovering marital assets, which often seem to disappear in the years before a divorce. Also, most people don't think about this, but financial documents are important when drafting prenuptial and postnuptial agreements, as well as marital settlement agreements.

Why mandatory disclosures may not be enough

So, mandatory disclosures: why are they not enough? Financial affidavits are actually really important tools in a family law case, particularly in Florida. The financial affidavit requires each party to fill out all of their expenses and income, and the assets and liabilities they have, either at that point or potentially prospectively, which is kind of tricky to do. You're supposed to indicate your current financial circumstances, but sometimes people do a prospective financial affidavit, or a portion of it, aligned with what their needs are going to be after the divorce. For instance, presuming they won't have a mortgage anymore, their rent or a new mortgage would be X amount. Especially when you get closer to trial, you might be accounting for what you believe the expenses are going to be after the divorce. But often it reflects current circumstances, and potentially what you might need now on a temporary basis.

One of the most important things to think about when you look at financial documents is: what am I looking at? What does it really reflect? What does this really say? Is it telling me the way things are now? Is it telling me what they could be like in the future? Is it telling me a false story about the way things were in the past, when the financial circumstances have since changed, so these documents no longer reflect the current circumstances? These are all things you want to keep an eye on for litigation purposes, for strategizing a settlement, and in general to understand what you have to work with.

Certificates of mandatory disclosure are the minimum disclosures required by the state of Florida, and they are a limited amount of disclosure. I like to say "minimum mandatory." It might be three months of bank statements, a couple of years of tax returns, one year of brokerage statements, or insurance. But there is a limit. It's limited, and I'll talk a little more about when this may be enough. But in most cases, unless you're very familiar with the other party's financial circumstances, it will often not be enough.

So we go into... I love this. This is my litigation manager, Ricardo. I was chuckling when I saw him put these pictures in, but it's actually so apropos. So, mandatory disclosures: why they may not be enough. As we were talking about a moment ago, they are limited in time. Sometimes they're good for strictly W-2 wage earners with limited assets. For instance, when you know what the other party makes, there's not much concern about the other party having another source of income or assets you may not be aware of, and you're familiar with each other's assets, this may be sufficient under those circumstances.

Tax returns don't always tell you the whole story, especially when a business is involved. So it's really important to look a little deeper, and often the certificate of mandatory disclosure requirements just do not say enough. You may have to get into business financials and understand business expenses, in-kind expenses, and other compensatory avenues, whether it's stock options, or retained earnings that are being held without really a need, in order to skew the income flow for support purposes. So it can get a little complicated. We'll talk a little more about that later in the webinar.

Employment compensation has become increasingly complicated. This is also why mandatory disclosures may not be enough. Once again, if it's strictly a W-2 party and there's no indication of a lot of cash flow somewhere else or another source of income, it may not be so complicated, and it's fine. However, you have circumstances where you have stock options. The exercise of stock options might be a one-time event, not recurring, in which case you cannot use it as income for support purposes. You can also have skewed numbers when you look at W-2 forms, and you have to look and see if there have been any retirement distributions or contributions to a plan. We have to see whether they're mandatory or voluntary, because if they're voluntary, that could be money that you can potentially require to be added back in for income purposes.

Also, more than likely, mandatory disclosures will be insufficient, like we're talking about, in a case where there's a lot of cash flowing around, or there's a likelihood that financial gamesmanship or divorce planning has occurred, because often they're just not going to tell the full story. So you're going to need to go a little deeper than the mandatories, especially in those particular types of cases, and where you see complex assets and complex income, so to speak.

Determining income for alimony

So, determining income for alimony purposes. We're going to go into this a little further. This is the Florida statute that indicates how the statute defines income for the purpose of figuring out how much money someone has for alimony, to see whether you have the ability to pay. Alimony has two particular components: ability to pay, and need. First, you establish that the party with lesser income, or less ability to make money, has a need. The other aspect is ability: does the other party have the ability to pay for the other spouse's needs? A party can have a need, but if the other party doesn't have the ability to actually pay for the other spouse's needs, alimony will not be ordered. The court may decide to even out the circumstances in equitable distribution if that ends up occurring, but it's a highly fact-intensive area of law.

So you can see a little bit here. I showed you the definition because it really encompasses everything. What you don't see here are other alternative investment types, but they are meant to be picked up in here. In general, it's any kind of income that can be generated, of course if it's recurring. So you really need to look under the surface, and this is why we're talking today about the importance of financial documents and what they can tell you in family law cases.

Other reasons why income is so hard to determine: tax returns. What tax returns don't say is often more important than what they do say. People do not realize it, but tax returns are not the be-all and end-all. There's actually a lot of money that can be hidden in deductions, expenses, depreciation expenses, little tricks that people have learned. By the way, it may be legitimate for IRS purposes. It may not be anything fraudulent that someone is doing or taking. But for alimony and child support purposes, a lot of those expenses can be thrown back in and be considered income. That's where the rub is. That's why it's not so easy to determine income in many cases.

Again, we talked about employment compensation: how much did you make? Another question here is income versus cash flow. A lot of times someone can report income on a K-1, and they're being taxed on it, so to speak, but it may not actually have flowed down to the personal level, where they actually received it. That's the best way to describe it. So they're not actually receiving it. Part of the problem is whether that's a one-shot thing or whether it's going to be frequent, and whether they're likely to receive it in the future. For instance, with expenses related to depreciation, write-offs or other capital expenditures, you can't really use that as income for support purposes. So you have to keep an eye on that. It's not fair to require someone to pay alimony on money they never actually received.

Now, the opposite is also true. A lot of times you have spouses who will hold back distributions and keep money in the company purposely to reduce their income. That's also something you need to look at, because if they control the ability to issue distributions, or can play with the numbers and the in-kinds and so on, you want to look further into it. That's where additional money could actually be flowing to the personal level as income for alimony purposes, but they're purposely hiding it, holding it back. Again, this also doesn't include anything related to stock options or alternative types of investments that actually produce income. For some higher-net-worth individuals it becomes even more complicated, and you really need an accountant and a chart to figure out all the income from all the different sources, so you really understand income for those purposes.

And then there's what we like to call divorce poverty. We are back to The Wolf of Wall Street with this one, or Madoff-like behavior. We just received news that he passed away yesterday, after being responsible for a $20 billion Ponzi scheme. But divorce poverty is something courts are well aware of, and attorneys are well aware of. It's amazing how quickly the money dries up: "The business is not doing well, and we have to start selling the assets, honey." This weird behavior starts to occur a year or two years, sometimes just months, before the divorce. But some people plan a couple of years ahead of time, and they want to make sure they're poverty-stricken, so to speak. They may even be asset-rich but income-poor, so that they can try to avoid alimony. This is why determining income for alimony purposes can be rather complicated.

Determining a spouse's need for alimony

So let's move on to the next one: determining a spouse's need for alimony purposes. This can also be tricky, because it's another heavily litigated area. This is where you're going to see the payor spouse, the person likely to be paying the alimony, say, "Hey, my wife doesn't need anything," or "My husband doesn't need anything. They don't need vacations. They don't need food. They don't need help. They don't even need alimony. Just because they've been a homemaker for 40 years doesn't matter. They don't need it. They can live on their own." It's amazing how all of a sudden the other spouse's needs are nothing when it comes to figuring out their needs for alimony purposes. On the flip side, the payee spouse sometimes all of a sudden believes they once lived in Versailles, that they had 20 maids, and that they would like to maintain that lifestyle.

So you see each party has its own specific incentives: one to decrease the needs, so that the alimony amount is potentially less or nothing, and the other spouse wants to increase them, to continue to live the way he or she lived during the marriage, and potentially even beyond, so that they get a windfall in some cases.

So here is where the importance of financial documents comes into play. We talked a little about this on the income side too, so just to go back for a moment: looking at business financial documents can tell you a little more about the actual expenses. Are there any family members on payroll whose income could be attributed back to the overall profitability of the company? Just to give you some ideas. You look at the financial statements and the balance sheets. You want to look beyond the surface, at the actual detailed ledgers on expenses, in-kinds and car expenses, so that you may be able to derive additional income from there, and you're able to assess the veracity of what these financial statements say.

In some cases, of course, the personal tax returns may not be sufficient. You may want the business tax returns, which have various schedules. The schedules will tell you whether other companies or affiliates exist. They tell you the assets the company owns. They tell you the write-offs of depreciation. If all of a sudden you have someone who's front-loading a depreciation expense, that's usually a red flag that they're trying to reduce their income in a relatively short period of time. Look at the business. Look at the salaries, at who is receiving a salary. The car expenses: are they really necessary? All of that information is contained in these business financial statements and tax returns, and can be used as an add-back for income purposes.

On employment compensation, just to briefly go back to it for a moment: the kinds of documents you would want to get an idea of it are not just pay stubs, but also payroll summaries and end-of-year statements. You want a detailed explanation of where every deduction and every amount went, with the gross wages of the party. Often, for instance, the top line of a W-2 only indicates taxable wages. So it's going to exclude anything set aside as contributions into a retirement account, because those aren't taxed. They may be tax-deferred, in which case it's not a true reflection of the person's actual gross wages. You need to look at that.

Plus, you need to look at stock options. Are they vested or not vested? What are the conditions for them to vest? Is there any value in the period of time prior to vesting that might be considered a marital asset? Pension accounts, too: a lot of times portions of them are marital, so you want to look into that and have a plan benefits person do an analysis, or give a report on what they believe the marital portion is. You also need to look at whether someone is going to have deferred income in the future. Is that potentially a source of income? And if it's not income, it could also be a source for equitable distribution, depending on the nature and characteristics of the compensation, when it's intended to vest, and why it's being deferred.

Not on this list, and it kind of goes under divorce poverty: a lot of investment documents will show you transactions. They'll show you people moving money around, and you've got to look at brokerage statements. When you see proceeds coming in and going out, are they just from reallocation, rebalancing the portfolio, or is it a sign that someone has actually liquidated some assets, and they may be transferring them? You want to look at withdrawals and wires. That's why it's important not to have just a year or three months' worth of documents, but really at least three years, to get a good idea. And of course, once you look at the three years, those documents in any one of these categories might tell you, "You know what? I've got to go further back. It looks like they've had an account for some time that I was unaware of," or they may have received income or sold a property you weren't aware of and put it in their mother's name or their sister's name. So I usually try to shoot for a minimum of three years, and depending on the circumstances I might go up to five, to be able to trace back some of these pre-planned runs from the marital estate. In other words, people were planning ahead, and you want to see what's really going on beneath the surface.

So, for purposes of actually determining needs, the financial documents are important for both sides. In other words, if the wife or the husband tries to indicate they used to live in Versailles with 20 maids, your bank statements and your expenditures, your credit card expenditures, are going to show the true story of what the person's needs actually are. And there are often components that people cannot claim as a need for alimony. For instance, if the wife or husband used to save money, they can't say, "Well, I used to save $400 a month, so that's part of my expenses." That's not going to be permitted. There are certain things that are not permitted. So it's really important to take apart those numbers and actually go to the financial documents to prove, "This is the amount that she actually needs, what we actually used during our marriage."

The same goes if someone is trying to say that you did not have those needs: "We didn't have those expenses, and we didn't take those ski trips to Europe." Well, here are the documents. Here's my credit card statement. Look at the picture of us on the beautiful slopes with all our children. That becomes very hard to refute. Then of course it becomes a battle over "I don't make the same amount of money as I did before," but that's the other issue, more related to income. So financial documents can be very important.

Also, in determining need, if some of the needs were met through the sale of assets, you want to be able to show that. Part of the problem is: were those one-time needs, where we had a little bump of money that year so we spent more? Or did you consistently have sales of assets or other things that brought in money and allowed you to live a certain lifestyle? So you want to be able to document your lifestyle and your needs as well as possible. It will also make litigation less expensive if you're able to do that.

Determining income for child support

So, determining income for child support purposes. This is very similar. This is also the statute for determining income, all the income you pull together to figure out what somebody, the parents in this case, is making. It's very broad, just like alimony. The only difference with child support is that we need to get to a net number. Alimony does ultimately deal with a net number, which takes taxes into consideration, depending on how the judge figures it out. Some judges use percentages of the gross numbers between both parties to figure out a rough number that's necessary for alimony. But most of the time the judge needs to take into consideration an end result, which includes reducing the gross wages by the required mandatory deductions, which include income tax, and child support or alimony being paid for a prior wife or child. So that's something to think about. It's not necessarily so different.

Here, the statute specifically says that in order to come up with the child support number, the parties' income is a very broad definition, broader than what the IRS determines as income, and then only the proper deductions can be deducted to get to a net income number. They are: mandatory retirement payments; health insurance payments, excluding payments for the child; court-ordered support for other children, which is actually paid; spousal support ordered by a court for a prior marriage; federal, state and local income taxes, of course; federal insurance contributions or self-employment tax; and mandatory union dues.

So we take the parent's income, including, for the parent receiving alimony, the alimony. They don't have to deduct taxes from their alimony payments, at least as of now. You take that number, and you're already at a net number with the wife's or the husband's alimony amount. You plug them in here, you get to a net number for the other party, and then you can figure out, based on the child support guidelines, what percentage of the child support each party is required to pay. Most of the time, of course, you're going to have one party who makes more than the other, so they're going to be paying the other party the difference of what their share should have been, which also takes into consideration overnights and credits for health insurance, child care and things of this nature. It's an equation that goes together.

But for the purposes of today, we're just going into the importance of the financial documents and why they're important for child support income purposes as well. Everything I've described and discussed about alimony, the need for certain documents to figure out income, applies equally to child support. The needs are different, though. The needs are decided according to the statute, unless you have high-income earners or special needs, in which case there's the ability to deviate from the guidelines. But for the most part, you need to get to a net income number, which is a little different from alimony, and then you run the guidelines. There are guidelines from the state. So far, the state of Florida has not adopted any guidelines for alimony, which is also why it's so heavily litigated. It's not an easy task to do, even if they tried. But in any case, this is what we have right now.

So we're going to move on a little bit here. This is what we basically talked about, and here is how to figure out the difference: who pays. Each party has to pay something. And by the way, if you have an underemployed or unemployed parent who is intentionally underemployed or unemployed, and is not needed at home, for instance, or that's not the normal, customary behavior for that parent in taking care of the child, either way income will be imputed to that parent. Every parent in the state of Florida is required to contribute to the support of their child. Obviously everyone's ability is different, so the state tries to take that into consideration. In the child support calculations, it will also indicate each party's prorated percentage for the additional child support, which covers such things as extracurriculars, unreimbursed medical and other expenses.

So I tried to simplify child support income a bit. It's brief. Obviously it can become more complicated depending on the circumstances of the child, but that's the nuts and bolts, so to speak, of income for purposes of child support. And the types of documents you need are very similar to the ones needed for alimony.

Equitable distribution: assets, liabilities and taxes

So, equitable distribution. Often people think a little more in black-and-white terms with equitable distribution: "Okay, I'll take that brokerage account. That's $250,000. Okay, you keep the house. That's $250,000 over there." It's not necessarily wrong, or necessarily going to make a difference, but you'd be surprised. Some of what I'm expressing today, about why financial documents are so important in family law cases, is about understanding your assets and liabilities for division.

Actually, you know what, I'm going to take a step back. We'll go through the terms, and then I'll go one by one into the importance of each, to give you examples of why financial documents are important for understanding each of these areas. We're also going to briefly touch on appraisals and valuations, protecting non-marital assets, and recovering marital assets.

So, to go back to the example: one party keeps a brokerage account, and the other party keeps the house. Part of the issue here is that you need to make sure you're looking at the obligations that come with the house. Is there a mortgage? Is there a balloon payment? In other words, is there something you won't be able to pay? Are you intending to sell it? What are the after-tax dollars you're going to receive after closing costs and so forth, if you are going to sell it? That gets a little tricky for litigation purposes. If you don't intend to sell a house, you can't necessarily claim in Florida a reduction of the equity in the property by the cost of closing. But those are little nuances.

Overall, this is about how you select assets. The house may seem like the more logical, stable choice. It may check certain boxes for that particular party: "I don't have to worry about moving. The kids and I are going to stay here. It's close to their school." That has value too, in addition to whatever the equity amount might be. So we do want to put that in a column and take it into consideration. The kids are happy here; they've been here 10 years, 12 years. Those are some of the non-financial considerations. But today we're talking about how you look at it from the financial point of view.

The brokerage account: "Okay, it's $250,000. Great, I'm going to take this asset." What that party may not be understanding is, first of all, it fluctuates. That $250,000 could potentially be $200,000 tomorrow, or a month later, if there's a drop in the market. The brokerage account could also contain large tax liabilities, depending on the cost basis of the assets in it, whether it's a stock, an alternative investment, a partnership, whatever you have, because they're all taxed differently. If there's a huge tax liability, when you go to actually sell it, instead of $250,000 in money or value you might end up with $190,000.

So you can start to see, with those types of decisions, it's not always apples to apples. It's not like cash, for instance. If this checking account is $100,000 and that one says $100,000, I'm not so concerned, unless there's something strange with those checking accounts or with what the money represents. They're pretty much going to be the same in terms of the tax effect, so to speak, of the distribution you receive. You're going to get $100,000, and this is $100,000, barring of course someone taking money out before you actually get the distribution. That's more of an apples-to-apples comparison. Other assets are not that easy, in terms of determining whether or not you should choose them.

So when choosing which assets, or even liabilities, to take or to agree to in a settlement, or potentially at trial, you want to look at all aspects of them. Some investment vehicles, such as hedge funds and certain other types of alternative investments, have capital calls. It might seem great: it might be producing some income, with a fairly low cost basis, and a relatively low tax at the end when you sell it, depending on how it's structured and the characteristics of that particular fund. That's rare, but if that's the case, you may want to look underneath the surface and see: is there a capital call in the event of certain circumstances? You take that asset, and you might be required to fork over $100,000 on a capital call. That may not be what you're intending. You may not be used to those types of investments, and it may not be beneficial for you.

There are also times when there's more value to one spouse in taking assets that have losses, because they will offset their income. So there are various reasons why working with an accountant and your broker is very, very important, and a financial planner, especially if you're not used to planning for the future as far as your expenses, and to understanding these different vehicles.

So, in other words, how do you pick these assets and liabilities? You have to look at their different characteristics and actually understand what it is you're getting. What is the actual value of the asset you're getting? Are you inheriting additional obligations and liabilities you didn't want? What are the tax implications when you go to sell it, whether now or in the future? And does it remain fair and equitable to each party when you actually take each of the assets? You put them on a piece of paper, you tax-effect them, and you figure out what kind of income they'll produce in the future. By the way, some of the income produced by an investment property would reduce someone's alimony need, or it's going to increase someone's income over here. These are things that need to be determined, so you can also figure out the other equations related to income, alimony and so forth post-divorce, assuming you're at that stage. This is why documents are invariably important.

Appraisals and valuations

You can also see whether, with companies, there could be huge retained earnings, or distributions planned to be issued, in which case they're not being considered in the value. This is where an appraisal and valuation, a business valuation, which we talk about a little more over here, is very, very important. A lot of people just say, "My husband says the company's worth the book value, and the company is $400,000." So the business is worth $400,000, not $100,000. Book value rarely reflects the actual value of a company. So it's important to hire someone who can do a proper valuation, and who can also assess its discretionary expenditures, which give the company potential multiples on its valuation, depending on its income and the characteristics of that particular business. It could also have tax benefits within the business itself that are beneficial. There could be additional assets.

Keep in mind, also, when looking at a balance sheet or any financials, particularly a business tax return: any value of assets listed on the tax return is going to be the historical cost, not what it is worth today. This is why I was going full circle, trying to explain to you that business or personal income tax returns do not always tell you the full story. So it's important to look beyond them, at the proper documents: financial statements, brokerage accounts, operating agreements, anything that might be necessary, retirement plans, stock option rights and plans, when they vest and their different terms, in order to make decisions. This is where an accountant and a valuator can be very important.

Often I find people also want to sell a property: "Oh, it's worth $500,000." They don't actually stop to do a formal appraisal, and later on they find out it was worth less or worth more. In that case they ended up getting less money in the division of the assets than they expected, or someone got more, and the other party gets sour grapes: "He took the wrong asset, and it devalued," and so forth. So understand what it is you're actually discussing when you're trying to settle or litigate a family law case.

Having the answers to these questions can also help lessen the cost of litigation. When we have these answers for the judge, and you're describing why a certain proposed division is unfair, you can articulate to the judge, preferably through the testimony of an expert, why it may be unfair. They can take apart its different elements, and the court can more appropriately apply case law to that division, taking into consideration all the factors, and potentially do equity somewhere else with another asset to even out the parties, if necessary. If not, you're leaving money on the table, as they like to say.

This is what we talked about before: distribution and taxes. Not all assets or liabilities are created equal, and I gave you an example of that. Understanding the true value of what you're getting, and the cost of that asset or liability down the road, is crucial to post-divorce life. You also have to understand what it is you're working with, what you can afford, your choices and what you need, whether it's to get a certain job or to move to a certain area: what assets and income do I have to rely on? That's very important to recovery, and it helps a lot to have a better transition in general. When you're financially more stable, it's an easier transition to post-divorce life, easier for the children, easier for everybody.

Also, take into consideration that, as we said, there are non-monetary considerations to take into account when you're thinking about this. Some parties prefer, for instance, something more stable: "I'd rather have the house. It's a little bit less, but it's solid. It's something I can touch, so to speak, something I feel more comfortable with." There are also people who are concerned about getting paid alimony over a term of 10 years, and they may prefer to have a little more cash, or a liquid account, even though they might be taking a little less in general than an equal distribution, or equitable distribution under the law. Those things are considerations, but you still need to understand the baseline you're working with in order to make those decisions. That's the thrust of what I'm trying to get at today on the importance of financial documents.

Protecting non-marital assets and recovering marital assets

We also have here protecting non-marital assets. In a divorce, a party is able to protect his or her non-marital assets from distribution as marital assets. However, on some occasions, depending on what the parties did, there could be crossover. There could be contributions to a non-marital asset during the marriage that convert part of it, or the whole asset itself, into marital property. So keep good financial records of expenses, of labor, of increases in value, of losses, of passive appreciation. All of this documentation discipline is important.

I know it's kind of hard, because you don't want to be thinking, "Honey, the groceries come from your account, and the light bulb for the house comes from mine." I'm not saying you have to get to that extreme level. But when you're talking about significant improvements, labor or income going into a non-marital asset, you want clear documentation of what was put in from a marital pocket and what was put in from a non-marital one. Did you pay for improvements from a non-marital source, a checking account, or other assets you may have sold, in which case there's no commingling? This becomes very, very important to protecting non-marital assets, or to proving that a portion of a non-marital asset is marital, if you're coming at it from the other way. So once again, it's another example of why financial documents, depending on the circumstances, whether credit cards or receipts for improvements, may be important.

So here, and I'm dying with this picture from my litigation manager, it just goes to show you how everyone has different perceptions. Apparently his perception is that the wife gets everything. I will not tell my best friend, who is his wife, that this is his perception. But in any case, I thought it was a really cute picture.

Recovering marital assets. Hopefully the assets are divided more equally between the two sides of the cake. Although, looking at that cake, it's very delicious. I love cake. But there are times when you can recover, in most cases, up to two years back. Sometimes you can go beyond that, if the fraudulent transfer continued beyond that time and you can trace it, but typically, as a rule of thumb, work with two years, as the statute indicates. You can go back and recover any dissipation of marital assets that the other party may have done, whether it's fraudulent transfers to a family member, use of marital funds on a girlfriend or boyfriend in an extramarital affair, or they start gambling or doing other things that are inappropriate, so that they dissipate the marital estate, so to speak, for distribution purposes.

This is also particularly where financial documents come into play. You need an audit trail. You need to be able to say, "Okay, we used to have this money, and now we don't have it," or "He had this account I wasn't aware of. I have to track where this money went, since it's no longer in that account." You have to follow the money from point A to point B to point C and so forth, so you can show whether it has been fully spent, and what it was spent on. If it was spent on another woman or man, potentially you can ask for that portion of the money, even if it's gone, to be taken from the portion of the marital assets of the spouse who behaved wrongfully, so you can be paid back, maybe from an asset itself, although the cash may no longer be available. Financial documents become very critical: credit card statements, bank statements, investment statements, travel. You may want to go back and prove that he traveled with his girlfriend, and the expenditures on that actual trip. So that's another example of where financial documents are very, very important.

Financial documents in family law agreements

Financial documents are also important to drafting family law agreements. Keep in mind that when you're getting into, for instance, a prenuptial or postnuptial agreement, one of the most crucial things, I would say, for the success of any of these agreements, for their enforcement and validity, is transparency and disclosure. You have to disclose everything you have. If you withhold disclosures or documents, the other party can easily attack the agreement as invalid, because they were not given full disclosure and were unaware of what they were actually waiving when they waived it.

So in this kind of case, you want to be as transparent as possible: tax returns, business tax returns, trust plans, business operating agreements, brokerage statements, anything and everything you have. And keep an identification of what you've given to the other party, so they cannot say later on that they did not receive it, whether you make it an exhibit to the actual agreement or identify it somewhere else: that they have received the tax documents, so many years of tax returns, years of income, the brokerage account and so forth.

In a marital settlement agreement, it's also equally important to have documentation, so that when you're entering into these agreements, like we talked about with equitable distribution and alimony, you're entering into a fair agreement, you're agreeing to terms you know actually exist, and you're not leaving something on the table, shall I say. Marital settlement agreements are very hard to invalidate later on. Most of the time there has to be some kind of fraud. Although financial affidavits do not have a statute of limitations on them. So if someone fraudulently prepared a financial affidavit, and you indicated in the marital settlement agreement that you actually relied on the financial affidavit in entering into the agreement, that could provide an easier basis to show that there has been fraud and to invalidate some or all of the marital settlement agreement.

But for the most part, if you just agree that no further disclosures are necessary, and you agree to certain terms, and later find out there were additional assets or additional income and you could have gotten more money, it becomes hard, because you've waived your right to discovery. So you need to make sure you're fully satisfied. It might cost a little more money and take a little more time, but you don't do this every day. You want to make sure you do it right. It affects your future going forward, and potentially your ability to succeed and move faster into post-divorce life, knowing what you have.

So financial documents are very important in family law agreements too. People assume, "Well, it's an agreement. It's not as important." It's just as important. It's just as if you were going to buy a business and you didn't ask to look under the hood, so to speak: you didn't ask to see the inventory and the actual sales to check whether what the owner is telling you is true. So unfortunately, although it may seem a little mechanical, you have to remain objective in these types of circumstances. Try to put the emotion aside, which is very hard in all cases, and look at these documents to make sure you understand them.

Staying informed and engaged

A lot of times my clients originally don't want to see them. It's hard to see these documents, the credit card statements and so forth. Part of the problem is that, as lawyers at my firm, we can see things that may look funny. We can see money going out of an account and trace it. Most of the time a forensic accountant will do that, but as lawyers, in general, we do look at that to understand discovery and see whether we need more information, and if there is a forensic accountant, they will let us know. But I don't know what is usually normal. You'll know your spouse better than we will. You'll know they never go to Fort Lauderdale, so why is there a charge there? "Wow, I never even knew they went to Belize. They said they were going to New York." Those are inconsistencies we would not notice when we're looking at the documents, because we don't know your spouse's habits and behavior.

So it's difficult, but it's important that you stay engaged in this process and that you assist the attorney in producing your documents, so that we avoid the court thinking that you're being difficult and don't want to cooperate. It makes it a lot easier, when you cooperate, to make the other side cooperate, and to keep the focus on them if they are misbehaving, so to speak.

Which brings us to this picture, which just kills me. He did such a fantastic job in this movie. But the financial disclosure is me, and he's laughing. And I'm telling you, a lot of times that is the case. That's what the other side is doing: "You're never going to find the money. I hid it so well." And they smile.

So it's important, even if you're contemplating a divorce in the future, and I know it sounds difficult, to make sure you understand where everything is: the money, where the documents are, how things get paid and from what account, and what assets each party has. There's no reason not to be informed. It's really important in general to be an informed man or woman about what's going on, even if you're not doing the day-to-day work. You can also assist your partner, which may be helpful. You also see how things are spent, and why, and maybe you appreciate something, or your partner says, "Just so you understand, honey, you're spending too much," or "This is too expensive for the kids." That lends itself in general, even in an intact marriage, to helping each other out.

And if you are on your way to divorce, it's going to be helpful to keep an eye on these things from much earlier on, because much more often than not I see a lot of divorce planning a year or two years ahead of time, and it's much more difficult and expensive for the other party to catch up in litigation. It becomes a battle. So it's important to try to keep these documents together in general. And if you're about to go through a divorce, I would try to gather everything, so that you understand it before you go through the more difficult aspects of it, litigation.

Questions from the audience

So I don't know if anybody has any questions. I think at the beginning I forgot to tell everyone to put them into the chat room if you did, but I already have some in the chat room, so everyone knows what they're doing. Everyone's become a Zoom professional.

Here I have some questions. "What if one party refuses to disclose bank statements or accounts?" Well, it's ironic, because this happens more often than not. They don't usually come out straight and say, "I'm not giving you this document." A lot of times they'll say that pre-suit, or before any minimum disclosures are required or discovery requests have been served on them. But basically, if they're not cooperating, it's your attorney's job, or your job if you're pro se, to file a motion to compel with the court and require this person to comply and hand over these documents.

You can potentially also subpoena documents. The problem with that is that you want the other party to indicate to you, under oath, what they have and don't have, because you can subpoena documents from one bank, but you may not be aware that another bank exists. Subpoenaing documents is not necessarily a bad thing to do either, even if you've already gotten the documents, because you want to make sure none of them have been tampered with by your husband or wife. Unfortunately, Adobe is very handy nowadays, and you never know whether something's been tampered with. Unless the person is very sneaky, you don't always have to subpoena the records in addition to getting them from the other spouse. But if you have questions or concerns about it, you should even ask for IRS transcripts, to make sure what was produced is actually what they're saying.

So that's one way to do it, but unfortunately it becomes a cat-and-mouse game. They try to tire you out, and they try to tire the judge out: "Oh, here, I gave her that document." And then when you go and inventory it, you see they're missing a bunch of statements, or pages that are relevant. So unfortunately it becomes a cat-and-mouse game. The more organized you are, and the more you know what exists, the easier it's going to be for you.

We have another question here: "Can parties waive mandatory disclosures if there's an agreement?" Only if it's a simplified divorce. The courts and judges are required to take minimum disclosures, which are financial affidavits and certificates of mandatory disclosure, particularly financial affidavits. They usually like to see at least an exchange of minimum mandatory disclosures.

"When does a person have to supplement mandatory disclosures and the financial affidavit?" Actually, under family law, although this doesn't necessarily exist in civil law in the state courts, each party is under a duty to supplement when something has materially changed. In other words, if you bought a house, now you have to update your financial affidavit, and you have to update your bank statements, your loan statements and so forth. There's a duty under the rule to supplement all of your documentation throughout the case, and also to change and amend your financial affidavit, or statements, interrogatories or RFPs you may have produced in the past, amending the responses so they're accurate if they're no longer accurate.

"If I'm planning to get divorced, what should I do to plan so that the other spouse doesn't hide his actual income and expenses?" Well, we've talked a little about that before. Especially if it's pre-divorce, and you're anticipating that the person is planning their exit, and income seems to be getting reduced, and they're selling assets, and there's a lot of mayhem going on, and you can't quite confirm it because they won't confirm that this is the case: keep an eye, again, on the financial documents. Try to write things down. If they said something to you, capture the time and the moment they said it, so it's easier to go back to those financial documents if needed and trace it back. Keep an eye on where the paycheck is going, if they've now become difficult and are putting their paycheck into another account.

Do your best to keep track, to keep your ear to the ground, so to speak, about what is going on, and document it, so it's easier to go back and find this information. Also note when there are unusual expenditures, which might indicate that a bonus or additional income was received and you don't know where from. Just make a note, write it down, and ask. You're not likely to get an accurate response if they're hiding it, but at least it's going to show you that they lied to you, and that you need to keep a closer eye on things, a closer ear to the ground, and watch everything in the mail and everything else.

"What do I do if my spouse is hiding money?" Well, we did talk a little about how you can find that out through the financial documents that are produced through the process, which you should insist on. But you can also use subpoenas, requests for production of documents and interrogatories. Depositions are a great tool. They're free-flowing: the questions are just asked, and the person has to answer them. If they don't, they run the risk of being sanctioned for inappropriately stopping a deposition. So those are different things you can do.

It is unfortunately sometimes a process to chase someone when they want to hide money, and it usually has a certain level of success for them, and they know that. If they can tire you out enough, they know you may give in before you find all the money, or it may cost so much money that you decide to just give in beforehand. So the amount of money and energy you put into it really has to depend on what you're trying to chase. It doesn't always have the value you think it has. Sometimes it just makes sense to make a deal and walk away. In other words, you don't want to spend $100,000 in litigation to find $50,000, of which $25,000 would be yours. It doesn't really make sense. These are the types of questions you always need to be asking yourself: does it make sense to do this or chase this? Is it worth it? That's why understanding the value of things, and your rights, is very, very important.

Someone said, "Thank you for all this information." You're welcome. Hopefully it's been helpful.

"If there are children and also an alimony claim, which one gets figured out first, and does it affect one party's income? Is there a specific order?" Yes. Normally alimony has to be figured out first, so that you can determine the child support amount, because child support uses the alimony amount in determining the income of whoever is getting the alimony, so to speak, when they actually run the equation.

"How do gifts from family members affect a person's income in a divorce proceeding? For example, if my father pays for my car every month as a gift, will that count as income, or can it be included as an expense?" This is where we get into a little bit of a dicier area of law. If you are consistently getting help from a parent, a friend or somebody else, it's most likely going to be imputed to you as income, because it's consistent, and the court is going to determine that your parent is always going to be helping you. So it offsets your needs. The car becomes an expense for you, but at the same time, you're also going to have the income from the parent added, if it's fairly consistent. If it's random gifts here and there, nothing consistent, discretionary, the court is less likely to impute the income to you, because it's not regular and it's not consistent.

Let me see what other questions there are. "What is the best way to protect a premarital real estate property with a mortgage on it, without having your spouse sign a prenup, in the event that the spouse is moving into the premarital property after the marriage?" Well, I think we touched on this a little already. It's ironic, because the first thing I would say is: try for a prenup. That's the best way to protect it, and to make sure everyone understands. If the other spouse, who did not own the property premaritally, puts money or effort into it, and the prenup says they don't get any appreciation or value from that, at least that party knows before they do so.

Here, you're going to have to use the law, the defaults, and be very, very careful. The rule here, usually, with premarital property, or non-marital property, and it's non-marital because it's premarital, is that any passive appreciation normally is not considered marital. So if the house increases in value because you literally just sat there, you used the house, so to speak, for 10 years, did nothing to it, but it increased in value because of market forces, most likely that appreciation is not going to be considered marital in any portion. However, if you make improvements to the house, or you have a mortgage, as this question seems to ask, and marital money, income and efforts are used to pay down the mortgage or improve the property, and the property appreciates through active appreciation or through those payments, there's an equation for figuring out the equity, so to speak, that develops as marital from the payment of the mortgage. That portion of it will be considered marital.

Most people don't realize that, and it's a big trap. It becomes a huge, very expensive litigation mess to sort out, so to speak. That's also why the more disciplined you can be with financial documents and expenses... I know that doesn't sound exactly romantic, but it can be very helpful in these kinds of cases, especially if that's the understanding between the parties. Ultimately, I recommend a prenup right now, but you can also do a postnup, if the parties are willing to do so after the marriage.

"What is the likelihood that a homemaker in a marriage considered short-term in Florida will have more long-term alimony granted, when the working spouse was the one who told her to stop working so she could stay home and take care of the children, and now the homemaker spouse has been out of the workforce for at least five years?" Well, that's kind of tricky, because in short-term marriages you're normally not going to be entitled to much alimony. You may be entitled to bridge-the-gap alimony, or rehabilitative alimony, to get you back into the workforce if you need some kind of retraining or reskilling. Bridge-the-gap just gives you some time to adjust back into the workforce, so maybe a year or two years. You may also potentially be entitled to durational alimony, which cannot exceed the term, or length, of the marriage. And on some rare occasions, very rare, with special needs, short-term marriages can actually result in permanent alimony, but it's exceedingly rare.

So under the circumstances, unless the promise is in writing, and you can assign a certain damage amount, or a certain amount it would take, for the other spouse who promised you, in writing, and you relied on it by getting out of the workforce, and now you've been detrimentally affected, assuming bridge-the-gap or rehabilitative alimony is not sufficient, you might be able to enforce something like that. But normally they're not enforceable as a rule, and it becomes difficult for the court to determine whether that really happened or didn't happen.

So once again, this is where prenups and postnuptial agreements come in handy. If someone is going to make you this type of promise, let them put it in writing and articulate what it is you're going to get in the event of divorce, so you're not hindered. Not necessarily hindered, because you don't necessarily mind staying home, being a homemaker and taking care of the children. The problem is that it does ultimately lead to a financial detriment for you, and a weakness when you try to get out and go to work, and you relied on that promise in making the decision to stay home. So the best thing I can tell you to do is to get a prenup or a postnuptial agreement and put this in writing.

Last question: "How would a spouse's interest as a partner in a firm, such as a law firm, if the interest was obtained during the marriage, be split up at the time of divorce?" Okay. Well, thankfully, right now I'm not married. Law firms are a little different, too. There are certain professional companies and associations where you have to have a law degree, or architectural licensing, or be an accountant, to be able to actually own an interest in the company. For instance, if I were to get divorced and it was supposed to be split up, in most cases... there's never a hard-and-fast rule, but for the most part, the courts are not going to require... Well, let me step back. It also depends on whether the company is in both parties' names, and whether both parties acted in and received income from the business itself.

But for the most part, the courts cannot make the parties continue to work together after a divorce, if the parties don't want to. If there's also alimony, that could complicate the issue to some extent, depending on the actual distribution, although of course you have to distribute the assets. If someone lost income but is going to receive alimony, is there a non-compete agreement? That's a little tricky under Thompson v. Thompson in Florida, but it particularly affects the valuation for the non-business party, the one who is not going to take the portion of the business and is going to receive a cash payment for their interest in it, so to speak. That actually affects the valuation of that interest, which unfortunately I think is very negative right now. It's a disadvantage for that particular spouse, the way they figure out the valuation.

But basically, most of the time, the courts will look to buy out one of the parties, if it's possible, if there's cash or other assets they can use to offset that person's interest in the business, so they can try to preserve the business itself, because most of the time it is also an income source for one or both parties. It can get a little tricky depending on the circumstances, because you also sometimes have loans in businesses that both parties may have personally guaranteed. So it can get a little messy, in which case you have to figure out: is it just easier to sell off the business at that point and remove the assets? Is there a way to indemnify the non-business party, or remove their name from a loan or liability in the business? So it becomes a little tricky. That's an example of what may happen.

Closing

So I want to thank everybody for joining us. Stay tuned for our next webinar, "Why a Shareholder or Partnership Agreement Is Necessary." It's going to be May 6 at 10 a.m. This webinar focuses on why management agreements between partners, shareholders and owners are important and necessary to avoid disruptions in business due to circumstances such as the five D's: dispute, divorce, debt, disability and death. So please come join us. Hopefully it'll be helpful and informative. I want to thank everybody. This is our contact information if you'd like to ask us additional questions or need any assistance. Please let us know. Thank you again for being present. Thank you. Take care.