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The Integral Role of Forensic Accounting in High Net-Worth Divorces – part 2

Dealing with a high net-worth divorce is undoubtedly complex, especially when considering the multitude of intricate assets that may be involved. One of the key aspects that can affect the outcome of such cases significantly is forensic accounting. In this second video on the topic,  Charles M. Green provides a detailed walkthrough of how forensic accounting impacts these intricate cases, focusing particularly on the concepts of ‘carve out’ and ‘support analysis.’

A carve out, as explained in the video, is an intricate procedure of separating community interest from a separate property asset owned before marriage. This can be applied to both businesses and properties owned by one spouse prior to the union. The challenge lies in precisely calculating the ‘carve out’ value – a community interest developed during the marriage in a separate property business. The determination of these carve-outs requires expert analysis and forms a significant part of the forensic accounting project in high net-worth divorces.

The video also addresses the importance of creating a community and separate balance sheet as part of the forensic accounting project. This balance sheet consists of all assets, including separate property businesses and homes, as well as any community carve out within these properties. Detailed procedures are performed on these assets to identify the community and separate property interest, allowing for a fair division of property during the divorce proceedings.

In addition to assets division, another crucial aspect highlighted in the video is the concept of ‘support analysis.’ Support analysis aims to determine the amount one spouse should pay the other post-divorce. This process typically considers multiple factors, such as the cash flow available for support during different stages of the marriage and the marital standard of living.

The support analysis aims to establish whether the couple’s standard of living directly relates to their cash flow. There are instances where couples live above their means, accumulating debt or depleting their savings or inheritance, resulting in a disconnect between cash flow and standard of living. On the flip side, some couples live below their means, saving and investing, which also creates a disparity between cash flow and standard of living.

All these varying scenarios are considered in a comprehensive support analysis to provide a fair recommendation for spousal support. In essence, this helps to determine whether support should be based on the marital standard of living or cash flow, aiding in a fair and equitable settlement.

Also highlighted, is the importance of business valuation in these cases, especially for businesses established before or during the marriage. Valuing a business in a high net-worth divorce is not a simple task. Unlike property valuation, where an appraiser can provide an estimate, business valuation requires an intricate analysis of financial statements, tax returns, and litigation principles within forensic accounting. Furthermore, the video underlines that there can be a significant difference between an economic value (the value if the business was sold) and the value determined by forensic accounting for divorce purposes.

To sum it up, forensic accounting plays a pivotal role in high net-worth divorce cases. It aids in providing a clear picture of the couple’s assets, helping to determine fair asset division and support terms. Understanding these processes is crucial for any high net-worth individual going through a divorce, as it significantly impacts the outcome of their case.

If you’re facing a high net-worth divorce, it’s imperative to have a team that understands the intricacies of forensic accounting on your side. With the right legal and financial expertise, you can navigate through this complex process with confidence and peace of mind

Charles M. Green is Certified as a California Family Law Specialist through the Board of Legal Specialization of the State Bar of California. He has worked extensively in both financial accounting fields and as a litigation attorney specializing in Family Law Cases. He is also diversely experienced in a number of other legal practice areas of importance to individuals, families, and businesses.

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