Identifying the asset pool
As an accountant, you may find yourself in a situation where one party to a divorce is your client and they run a business in a company, trust or other structure. This will need to be considered as part of the property settlement asset pool so you will likely be contacted by a family lawyer who is seeking to pull this information together.
When there is a degree of structuring in the financial set up of a family this can add complexities. Typically business structures are not really designed around family law. Instead, they focus on asset protection and tax minimisation, which is why you as the couple’s accountant often have the best understanding of what it is that constitutes the asset pool.
Types of asset pools
It is not uncommon for business owners, or those with a level of significant wealth, to have their accountant set up their business to limit the individuals’ liability. It is also common for trusts to be used to distribute income and minimise tax. These are what would often be considered complex assets when it comes to understanding the asset pool.
One of the first steps involved in negotiating any property settlement is identifying the property to be divided. As a family lawyer, clients come into a meeting with me and they can have misconceptions about what falls into the pool of property to be divided. A wife might come in and say that her husband’s business is in a company name so that is not something that forms part of the asset pool. Or they might think that because a property is in a family trust, is not theirs either. So I always say to clients the basic rule is that if it is in your name, your ex-partner’s name, joint names, companies, trusts or entities that either of you control, then that is something that needs to be considered in the asset pool.
When acting for the person or persons who operate the business they typically have a pretty good understanding of how it is structured. However, if one party has not been involved in the business then you could be in a situation where they might not even know there is a company or trust involved.
Often during the initial gathering-of-information process, we will seek information from the party’s accountant so we can get an understanding of how they are structured and set up. Then we seek to get financial statements for those entities and look at what things are worth.
Business types and complexity
Business assets in a family law asset pool are further complicated in that these entities tend to fall into two categories – asset-holding entities and trading businesses – and occasionally there can be a mix of the two.
With an asset-holding entity, for example, someone with rental shops in a company, the company may only receive rent, pay its mortgages and expenses and has a surplus income. Valuing that entity is relatively simple. A market valuation of the piece of real estate is undertaken and the balance sheet is updated with market values rather than historical or depreciated values. We also look at the tax that might be involved if it were to be sold.
For a trading business, however, this is where problems and disputes in family law arise, because this is where people argue whether or not there is goodwill in a business. In most cases, it is a situation where lawyers will appoint a single expert accountant to do a valuation of the business and determine if any goodwill can be attributed.
This process involves the expert valuing accountant firstly reviewing the relevant financial statements and then having a meeting with the husband and wife’s accountant where they raise any questions they have. So the role of the separating couple’s accountant is invaluable because they are providing a lot of the source information for the experts to do the evaluation.
Occasionally there will be cases with less issues where the parties say they do not think they need to get an independent expert in because of the costs involved. In those instances they will sometimes get their accountant who knows their business to do the valuation. This is mainly seen in cases where both parties of the couple have had a relationship with the family accountant. As it can be very subjective working out goodwill, as an accountant it may be in your best interests to suggest getting somebody independent involved.
Identifying the asset pool and how accountants can help
As an accountant who might be brought into a family law case, you need to think about how you go about representing both parties. Say for example a family lawyer contacts you on behalf of the wife of a business owner to get the financial information about a business. What I suggest you do is provide the information with a written summary and then they copy in the husband and their lawyer. This way everyone is clear about what is being provided and there is less chance of being seen as taking sides.
Another area where the accountant’s role is crucial is what I call evidence of historical transactions, for example, in a family trust where there are beneficiary loan accounts. It is this kind of information family lawyers would typically seek from accountants to verify what the loans are and what the liabilities and assets are because it might be the case that someone has drawn more out of the trust than they were distributed, in which case they actually owe money to the trust or vice versa.
The other area where accountants play a valuable role for lawyers in family law matters is that on the balance sheet for companies there will sometimes be loan accounts and it is important to understand how money is taken out of the business.
So when a family law situation arises you will likely be called on to provide financial information to be used in valuing the asset pool. It is up to you whether you want to be the one who values a business, but in our time as family lawyers we have found a lot of accountants are happy to provide the information but have an independent expert do the valuation. This can often help in maintaining a good relationship with both of your clients into the future.
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Disclaimer: The content in this article provides general information however it does not substitute legal advice or opinion. Information is best used in conjunction with legal advice from an experienced member of our team.