Collaborative Chronicles June 2011
CPAs may be asked to participate as advisers to clients who choose an alternative dispute resolution process known as collaborative law. Unlike the adversarial interactions that take place during traditional divorce or separation proceedings, with collaborative law procedures, all parties agree to work together toward mutually beneficial solutions for both spouses. There is no neutral third party acting as mediator. Both spouses agree to resolve legal, financial, and emotional issues without resorting to, or threatening to resort to, court intervention. The collaborative law process is progressive in that it allows divorcing couples to obtain the positive advantages of legal, financial, psychological, and personal assistance in sorting out the complexities of their divorce, while at the same time, focusing on issue resolution and family growth and completely avoiding the harmful results that often occur in the adversarial litigation process. The collaborative law process allows couples to steer their divorce by pledging mutual respect and openness, determining the timetable, and working with the collaborative team towards a settlement they determine together. There may be several opportunities for CPAs to provide value to clients during these discussions. For example, sharing a deduction for a dependent child may require the parties to agree to certain arrangements at specific times during the year or over many years. Once this is decided, clients can then share the overall tax savings.
The Collaborative Process Using collaborative procedures requires both spouses and their attorneys to execute a participation agreement in which each side makes a good faith attempt to reach a mutually acceptable settlement without resorting to court proceedings. This often includes a contractual obligation between the collaborative practitioners to withdraw from the case if either spouse chooses to abandon the proceedings. Litigation is not an option for the attorneys who participate in the collaborative process. Additionally, CPAs who agree to participate in the collaborative process must remain neutral and are prevented from testifying on behalf of either spouse in any subsequent litigation proceedings. Spouses retain the right to go to court, but each party must first obtain new legal counsel and supporting practitioners, which would add significant costs. In the participation agreement, spouses:
• agree to exchange complete financial information to facilitate well-informed decisions;
• agree to identify and correct mistakes or miscalculations made by the other party instead of taking advantage of them;
• maintain absolute confidentiality during the discussions;
• agree to insulate their children from the professional custody evaluation process;
• reach a level of written agreement on all issues outside of court proceedings; and
• authorize attorneys to use the written agreement to obtain a final decree of divorce so no court appearance is required.
Additionally, collaborative practitioners must agree to withdraw from representing or assisting either client if either client engages in any form of litigation about the dispute. This final requirement mitigates the negative impact of the power-based procedures inherent in litigation proceedings. It also encourages the parties to seek creative solutions whenever there is an apparent deadlock. Once the participation agreement is finalized, subsequent collaborative team meetings ensure that each divorcing party understands his or her financial needs and the impact of the divorce on available finances, as well as the resolution of other issues, including parental responsibilities, before they reach a final agreement.
Clients are encouraged to be proactive during all stages of discussion, including the settlement, using advisers and consultants to help achieve an equitable outcome. CPAs and other advisers are a shared resource between both parties. The fees and expenses associated with these resources are split as part of the negotiation process. The CPAs can help both parties identify various settlement proposals and the particular tax consequences of each proposal. In addition to planning and advising, CPAs can provide current and subsequent tax preparation services.
Services CPAs Perform in Collaborative Negotiations as a representative of both spouses, the CPA's role supports the couple in negotiations. Representing both spouses, instead of only one, is a significant change from the client focus in traditional divorce or separation proceedings. Most often, the CPA performs services related to tax evaluations of settlement agreements. Additional services, such as preparing personal financial statements or tax returns for both spouses, are also common. The activities a CPA participates in usually depend on when the CPA joins the process.
Early Contributions. When the CPA participates in the collaborative process from the beginning, services may include establishing a clear and accurate accounting of the assets and liabilities of each spouse. This could require valuation as well as financial statement preparation. Further services include reviewing prior-year tax returns, which could potentially reveal future planning opportunities that may be part of the settlement.
Later Contributions. As the parties identify certain goals, CPAs can advise them of the income, estate, and gift tax effects of their decisions in advance of execution. CPAs can help the spouses assess potential benefits and avoid potential traps associated with allocating estimated tax payments, determining filing status, resolving dependency issues, and timing asset transfers. The CPA can review settlement agreements before they are finalized and suggest modifications to reduce taxes and increase available cash to both parties.
Ongoing Client Support. After the separation, CPAs may provide continuing services to one or both of the parties, such as annual tax return preparation and long-term tax planning. Additionally, the CPA is in a unique position to assist each of the spouses with implementing any planning decisions or modifications to the final settlement. For example, if one of the spouses later decides to dispose of his or her interest in a closely held business, the CPA can be brought in for consultation on both the financial and tax impact.
Up North Collaborative Divorce Professionals has a web site at www.upnorthcollaborativedivorce.com/
Valuing assets, liabilities, businesses, and professional practices is not always as simple as it may appear. Larry Williams, CPA, Mr. Williams is a member of the American Institute of Certified Public Accountants (AICPA), Michigan Association of Certified Public Accountants (MACPA), and Up North Collaborative Divorce Professionals.
Most divorces are settled without a trial. In addition to the more formal forms of alternative dispute resolution, the CPA can offer numerous services to assist the attorney in more informal settlement negotiations. The services rendered may take a variety of forms, but often include the following:
a. Preparation of a "Schedule of Assets, Liabilities, and Net Worth Worksheet" reflecting the spouses' entitlements and distributions of the marital estate assets and liabilities.
b. Preparation of a "Net Disposable Income and Personal Living Expenses Worksheet" reflecting income levels and historical cost of living data obtained from the personal cash disbursement records, charge account records, and other resources.
c. Preparation of differing allocations of alimony and child support payments, including schedules that reflect the tax consequences of the various proposed allocations.
d. Preparation of an "Estimated Income Taxes on Differences between Fair Market Values and Tax Bases Worksheet" to reflect the tax basis and tax consequences associated with the sale of assets.
e. Preparation of a schedule of pre-marital, gifted, or inherited assets.
f. Preparation of schedules reflecting estimated increases in retirement plan assets from the current date to the date of retirement.
g. Tax Planning
h. Discovery assistance
i. Valuation of businesses and professional practices
j. Assistance in finalizing property distributions and support agreements.
k. Business Valuation Report with conclusion of value opinion.
l. Holder's interest calculation report for divorce, when there is a small minority interest in the business.
"The Collaborative Way to Divorce: The Revolutionary Method that Results in Less Stress, Lower Costs, and Happier Kids--Without Going to Court ", by Webb and Ousky