Virginia Family Law
A Blog by Jason A Weis, Esq.
Virginia & Maryland Family Law Attorney

Valuing a Business and Finding Hidden Money During a Virginia Divorce


Valuing a Business and Finding Hidden Money During a Virginia Divorce

Charlie Rains Charles Rains is the Founder of C. W. Rains & Associates, Incorporated located in Annapolis, Maryland.  He is one of the “go to” business valuation and financial forensics experts Northern Virginia attorneys can rely on in highly contested divorce cases.  He has the necessary credentials:  he’s a CPA (certified public accountant), an ABV (accreditation in business valuation), CFF (certified in financial forensics) and ASA (accreditation as a senior appraiser).  Perhaps more importantly though, he has a talent for breaking down complex financial structures and communicating about them in language a judge (or family law lawyer) can understand.  He’s worked with some very talented family law lawyers in the D.C. Metro area and I thought his perspective would be useful to both attorneys and spouses involved in contested divorces. Describe the type of work you typically perform in a divorce case?

  • Typically my work includes performing a business valuation/appraisal of a parties’ privately held company, forensic tracing of marital versus separate property, and/or searches for hidden assets.

Generally, how do you go about valuing a business for divorce purposes?

  • When valuing a company for divorce purposes, in its most basic sense, I analyze the present value of the future expected income stream; the aggregate value of the underlying assets net of liabilities; and arms-length transactions of similar entities or securities compared to the subject. In other words, how is an investor going to get cash back out of the company and when? As they say “cash is king.”

Assuming you are working with a business owner who sees divorce on the horizon, what types of conversations would the two of you be having?

  • Typically I am not brought in until after the business valuation is needed, but under your assumption the discussions would most likely involve determining if any portion of the business is considered separate property, whether by gift, inheritance, formation prior to the marriage or from sources that can be traced back to separate property, amongst other assertions.

Can you give readers some examples of interesting methods you’ve seen people use to manipulate the value of a business for divorce purposes?

  • It amazes me some of the methods some individuals use to “manipulate value”, but I don’t want to draw any attention to any bad ideas that I would rather see go away as it would be adding fuel to the fire. But attorneys should keep in mind that a small change in the discount rate under the income approach or changes in the pricing multiples under the market approach can have a substantial effect on the value.

What are some of the biggest mistakes you see attorneys make when it comes to business valuation?

  • Probably the most common mistake I see is, not getting the valuation expert involved early enough in the case. However, one of the biggest mistakes that I have seen was an attorney who requested a valuation as of the date of trial, however, during the process the opposing attorney had filed a motion that a different valuation date, date of separation, be used. The date of separation was a few years prior to trial. The attorney failed to inform the valuation expert of the motion. The valuation expert did not prepare a second valuation as of the date of separation. At trial, the judge did not allow the valuation expert to testify as to the value at the date of separation. Needless to say, the attorney’s client did not receive a favorable outcome.

What are some of the common areas a financial forensics expert might be needed in a contested divorce case?

  • Typical forensic accounting services in divorce matters include assistance with discovery, identification of assets, liabilities and income to the marital estate; tracing of marital/non-marital property; searching for hidden assets, undervalued assets, or dissipation of assets; income analysis; and assistance with depositions.

In your view, what are some of the most common ways people attempt to conceal or cloud their financials during a contested divorce? Have you encountered any particularly elaborate lengths people have gone to in that regard?

  • It is common for individuals to deflate income, increase both business and personal expenses, accelerate payment of personal expenses, attempt to hide assets or in some extreme cases I have seen individuals attempt to move funds offshore and sell commercial property at a loss only to repurchase the property after the divorce.

What are some of the mistakes you see attorneys make when it comes to tracking or tracing money?

  • One mistake that is made is, chasing after minimal amounts of cash or assets. Depending on the span of time that tracing is required and the number of accounts or assets that need tracing, the cost and time it takes to perform a forensic tracing exercise can quickly exceed the benefit.

Logo  What’s the best $100.00 you spent in 2014?

  • The best $100 spent in 2014 would be $100 towards the cost of our family vacations. I cherish each and every one of them.

What’s the book you’ve given most often as a gift?

  • This may sound funny, but the book I have given most often as a gift seems to have been to high school graduates and it is Oh, the Places You’ll Go! By Dr. Seuss.

What films do a particularly good job of exemplifying what you? I can’t think of too many films that exemplify the type of work that I do, but the best example that I can think of would be The Untouchables.  The character, Elliott Ness, was a Forensic Accountant for the Justice Department’s Prohibition Bureau.  He was best known for bringing down Al Capone for tax evasion.

Pensions, 401(K)s and IRAs in Divorce


Pensions, 401(k)s and IRAs in divorce are often among the largest assets divided during the property division. Below is a quick primer on how these assets may be addressed during your divorce.

Most retirement accounts fall into one of two categories: (i) Defined Contribution Plans or (ii) Defined Benefit Plans.

A “defined contribution plan” is a plan in which the employee and/or employer make monthly defined contributions to a qualified retirement account in the employee’s name. 401(K) accounts, Individual Retirement Accounts (IRAs) and the Thrift Savings Plan (TSP) are perhaps the most common defined contribution plans.

A “defined benefit plan” is a pension. An employee accrues this benefit as he or she works and then receives a monthly defined benefit upon retirement based on a predetermined formula. The Federal Employees Retirement Systems (FERS), Civil Service Retirement Systems (CSRC), and Virginia Retirement Systems (VRS) are all examples of defined benefit accounts. Similarly, military pensions, foreign-service pensions, and other civil service pensions are defined benefit plans.

Like other forms of property the divisible portion of a retirement account is likely limited to that portion acquired between the date of the parties’ marriage and the date of the final separation for purposes of divorce. For example, say you’ve been contributing to your 401(K) retirement account (a defined contribution account) for a total of 20 years. You contributed to that account for 5 years prior to your marriage and then for another 15 during your marriage. The 15 years of contributions during your marriage is likely the “marital property” subject to division and the 5 years of contributions prior to the marriage is likely your “separate property.” Thus, if your spouse was awarded one-half of the marital share of your retirement account, he or she would receive an amount equal to 7.5 years of your contributions (e.g. one-half of 15), plus gains and losses on that share through the date of division.

Dividing a defined benefit account works much the same way. Say you have 20 years of credible service with your employer – you worked for 5 years prior to your marriage and then for another 15 during your marriage. If your spouse was awarded one-half of the marital share of your pension, he or she would receive an amount equal to 7.5 years of your contributions, plus gains and losses on her share through the date of division. With a pension, however, the award is typically expressed as a fraction: the numerator being the total number of months of credible service during the marriage and prior to separation and the denominator being the total number of months of credible service through the date of retirement. This fraction is then multiplied by one-half.

Dividing a qualified retirement account typically requires the entry of a special order that effectuates the transfer without either spouse incurring an early withdraw penalty or contribution limit. Sometimes these orders are referred to as Qualified Domestic Relations Orders (QDROs), though the precise document you will need will depend on the nature of the account being divided.

If significant retirement assets are at issue in your divorce, I encourage you to speak with an attorney. Often the consequences of small errors in the division of these assets or the wording of the orders themselves can have large consequences. Also, a fair amount of gamesmanship may occur during the process such as withdraws from accounts for questionable purposes, forgotten or concealed loans taken from accounts, or, in the case of military pensions, shielding a portion of the pension by claiming disability.

Jason A. Weis, Esquire – Curran Moher Weis P.C. – jweis@curranmoher.com – 10300 Eaton Place, Suite 520, Fairfax, VA 22030 – 571-328-5020.

Frequently Asked Questions About Virginia Property Division During Divorce


Frequently Asked Questions About Virginia Property Division During Divorce

What kinds of assets are divided in a divorce?

The Commonwealth of Virginia recognizes three types of property: separate property, marital property and hybrid property.   Generally, in a divorce all of the parties’ respective assets are identified, valued and allocated between the parties.  This includes small things such as pots, pans and silverware; larger things such as furniture, cars, boats and planes; and even larger things such as businesses, real estate and retirement/investment accounts.

 

What is my separate property?

Separate property is generally considered to be any property that was acquired either prior or subsequent to the parties’ marriage or acquired by separate gift or inheritance during the marriage from anyone other than your spouse.  In most cases, you retain your separate property.  Under certain circumstances, however, you can transform (“transmute”) separate property into marital property.

 

What is marital property? 

Marital property is generally considered to be any property acquired during the marriage by either party, regardless of who paid for it.

 

How is property divided?

In the Commonwealthof Virginia, the process of property division is called “equitable distribution.”  In that process, the court, with the help of the parties’ attorneys, will identify all of the parties’ property, value it and divide it.  Courts consider a number of factors in dividing property, such as:

  • The contributions, monetary and nonmonetary, of each party to the well-being of the family;
  • The contributions, monetary and nonmonetary, of each party in the acquisition and care and maintenance of such marital property of the parties;
  • The duration of the marriage;
  • The ages and physical and mental condition of the parties;
  • The circumstances and factors which contributed to the dissolution of the marriage;
  • How and when specific items of such marital property were acquired;
  • The debts and liabilities of each spouse, the basis for such debts and liabilities, and the property which may serve as security for such debts and liabilities;
  • The liquid or nonliquid character of all marital property;
  • The tax consequences to each party; and
  • The use or expenditure of marital property by either of the parties for a nonmarital separate purpose or the dissipation of such funds, when such was done in anticipation of divorce or separation or after the last separation of the parties.

 

Why is valuation important? 

In many ways, the division of property is nothing more than the division of values.  Determining a fair value of your property – whether it’s a closely-held business, an investment/retirement account or your marital home – placing an appropriate value on assets is crucial to achieving a truly equitable division.  Attorneys often have the knowledge, experience, and resources (such as access to accountants, business and property appraisers and other professional experts) to help ensure you present a well-reasoned value to the court.

Jason A. Weis, Esquire – Curran|Moher P.C. – jweis@curranmoher.com – 3554 Chain Bridge Road, Suite 100, Fairfax, VA 22030 – 571-328-5020

Dividing Debt During Divorce in the D.C. Metro Area


Dividing Debt During Divorce in the D.C. Metro Area

As our federal legislators struggle to address the mounting federal debt, family law practitioners in the Washington, D.C. Area are treading softly with diverging treatments of family debt in the District of Columbia, Maryland and Virginia.

The District of Columbia provides perhaps the clearest roadmap for dealing with debt in family law matters.  The District’s equitable distribution statute explicitly authorizes the valuation or distribution of “all property and debt in a manner that is equitable, just and reasonable, after considering all relevant factors…”  See DC Code § 16-910(b).  Dealing with debt is further simplified by the District’s property dichotomy: it recognizes only separate and marital property.

The state of Maryland is quite different.  Though case law broadly defines marital debt as debt incurred to acquire marital property and discusses using it to reduce the value of marital property for equitable distribution purposes, no express statutory authority exists to permit a court to allocate debt between the parties.  See generally Schweizer v. Schweizer, 301 Md. 626; 484 A.2d 267 (1984).  Instead, Maryland courts indirectly allocate debt under the State’s equitable distribution factors by considering “the value of all property interests of each party” and “the economic circumstances of each party at the time the award is made.”  Md. Fam. Law Code § 8-205(b)(2) and (3).

In 2011, the Virginia General Assembly changed how the Commonwealth dealt with debt.  One year prior, Gilliam v. McGrady, a 2010 Virginia Supreme Court case, briefly exempted debt from “typical” marital property presumptions (i.e. individual debts incurred during the marriage were presumed marital) and instead applied traditional guidelines that allocated the burden of proof (i.e. individual debts incurred during the marriage were presumed separate).  279 Va. 703, 691 S.E.2d 797 (2010).  This framework, however, necessarily required family law attorneys to introduce and work through scads of individual charge card statements in an attempt to shift that burden.  Thankfully, the General Assembly promptly responded to Gilliam by amending the equitable distribution statute in March of 2011 to include definitions of separate debt and marital debt, and clear presumptions regarding the treatment of same.

Jason A. Weis, Esquire – Curran Moher Weis P.C. – jweis@curranmoher.com –  10300 Eaton Place, Suite 520Fairfax, VA 22030 – 571-328-5020

















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My experience and background reflect the hallmarks of success one must demand of a lawyer in Northern Virginia's legal landscape.  As a native of this area, I have here focused my practice on providing sound and balanced representation to clients navigating the difficult legal waters of family law, including contested divorce, custody, visitation, spousal and child support, and equitable distribution.  More >>>

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Jason A. Weis, Esquire
Curran Moher Weis
10300 Eaton Place, Suite 520
Fairfax, Virginia 22030

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Phone: (571) 328-5020

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Legal Disclaimer

Thank you for taking the time to read this blog. I hope you find the information here as enjoyable to read as I find to write. Please note that reading this blog does not create a legal relationship between you and Jason A. Weis, Esquire or any other attorney associated with familylawva.com. Moreover, all postings on this blog are merely attorneys' commentary on the state of family law in the Commonwealth of Virginia. THE POSTINGS ARE NOT LEGAL ADVICE – if you have a legal issue or question, I strongly encourage you to contact a lawyer. I would be pleased to refer you to someone if I am able.