In Part 1 of this series, we discussed the importance of hiring an expert and the documents needed to prepare the marital balance sheet including tax returns and a personal financial statement.
In this article, we discuss the documents needed for analyzing support and need, otherwise known as a Lifestyle Analysis or a Pay and Need Analysis.
Analyzing what would be a reasonable amount for alimony is based upon both a division of assets as of the divorce date (covered in Part 1 of this series) and expectations for future income and expense. We frequently perform a Lifestyle Analysis for divorcing parties. This analysis examines and documents each party’s sources of income and expenses. As noted in our article on Lifestyle Analysis, it is used in the divorce process to demonstrate the standard of living during the marriage and to determine the living expenses and spending habits of each spouse. It is typically a more in-depth analysis required in the divorce process and is prepared by an expert credentialed in forensics.
As part of the divorce proceedings, each party typically files a financial affidavit, which is simply an expected monthly budget post-marriage. The historical status quo, or lifestyle, usually serves as a basis for developing these expenses. However, two households going forward sometimes cannot be similarly supported by the historical marital budget. For example, a married couple with a mortgage provides shelter for both spouses whereas post-divorce, there will be an additional mortgage or rent expense. Sometimes the marital residence will be sold, and each party will live in accommodations more commensurate with what is affordable within the divorcing parties’ new budget.
While rent/mortgage is one of the largest monthly expenses, the financial affidavit will include a variety of categories including home, maintenance, vehicle, utilities, food costs, and other typical “fixed” or “shared” monthly expenses captured in a budget. Sometimes financial experts help with this process, while other times attorneys and clients gather and determine these budgets. Attorneys typically provide a template for monthly expenses, but clients may need to corroborate their entries with the following documents:
It’s important to note that these expenses, where possible, should reflect those of the divorcing spouses, not child-related expenses. Child expenses such as tuition, extra curriculars, etc. should be considered separately in the award of child support paid to the primary care-taker and/or spouse with lower income potential depending on the facts and circumstances of the case.
While understanding a couple’s expenses is important to determining alimony, reasonable expectations for future income is also very important. For a couple with a simple W-2 job, this analysis may be more straightforward. Still, there are many instances where income fluctuates from year-to-year based on bonuses or company performance, requiring more analysis and more documentation than what is provided on a W-2, 1099, or tax return. Helpful documents for determining income include:
As noted above, the goal of this analysis is to determine ongoing earnings capacity. If a divorcing party was recently promoted where his/her compensation structure either increased or was materially changed (i.e. equity vs. W-2), a simple average of historical compensation likely will not be sufficient.
In many divorce cases, one spouse has taken on the primary responsibility of raising children. Depending on the facts and circumstances, a vocational expert may be needed to opine on the potential earning power of that spouse based on their experience, qualifications, education, credentials, and other pertinent information. While a credentialed financial expert should be able to make a reasonable determination for someone currently in the workforce, a specialized vocational expert may be required for a spouse who has not recently worked. All else equal, a higher earnings capacity for that spouse tends to reduce the “need” in determining alimony, and it becomes a more contested area in the process, which leads to the potential use of a vocational expert.
Tip for business owners: It is important to understand how much the party’s income is from services performed in his/her capacity as an executive versus how much of the income is a return on the capital invested in the business. How this gets analyzed in a Pay and Need Analysis can become complicated and is a hotly debated topic. Triers of fact may disagree on whether valuing the business also inherently considers some of this income, known as the “double dip.” Because officer compensation can be a key discussion within the valuation of a business, we will cover it in greater detail in a future part of this series.
A financial expert can help focus the scope of a divorce case, saving time and money throughout the process, particularly if brought in early to the process with ample time to assist with the various stages of the case. We make our engagements as efficient as possible, in hopes of reducing the need to update our analysis, which can drag out the process and lead to higher costs for clients.
For more information or to discuss your matter with us, please don’t hesitate to contact us.
Essential Financial Documents to Gather During Divorce Series
