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How Financial Affidavits Can Help With the ED Case
When a case involves support issues, both parties must also file financial affidavits. These affidavits can reveal information about the party's assets that may not have previously been disclosed. If a party lists a car payment of $600 a month and the last marital car they were known to drive is a 1985 Honda, this should raise red flags. Did the party get a new car? Were marital funds used to purchase that car? The pay stubs that must be attached to the affidavit can show retirement contributions, and direct deposits into certain accounts that may not have previously been identified. There may also be loan payments listed. Is the loan a secured or unsecured debt? Was marital property used as security? Marital debts and debt payment is commonly seen on affidavits. Marital debt is debt incurred during the marriage for the joint benefit of the parties regardless of whose name is on the debt. Geer v. Geer, 84 N.C. App. 471, 353 S.E.2d 427 (1987). The party who wants to classify the debt as marital has the burden to show the joint benefit for which the debt was incurred. Atkins v. Atkins, 102 N.C. App. 199, 401 S.E.2d 784 (1991). Paying close attention to debt payments on marital debts as shown on the financial affidavit may give good insight into the other parties' position at trial on that issue. There generally is an "assets and debts" portion of the financial affidavit that is similar to the table below.
Asset Value Debt Balance Due Monthly Payment
Real Estate Real Estate (Mortgage)
Vehicles Vehicle
Stocks & Bonds Loans
Accounts & Cash Credit Cards
TOTALS
This table should be examined closely to make sure that nothing is listed that has not already been disclosed. Is the other party being consistent on their EDIA and Financial Affidavit? There are often things presented in the support portion of the case that can be helpful with ED, so cross check all court documents.
BANK RECORDS AND CASH FLOW
Analyzing documents is an important part of any ED case, especially when one side has been less than forthcoming with information about what marital accounts may exist. Bank account statements and investment account statements can be especially helpful when trying to locate all of the assets. A paralegal should look closely at account statements for several reasons. Sometimes there can be more than one account on a single statement. Often, overdraft or equity accounts are listed on bank account statements as well. It is also necessary to examine any deposits or withdrawals from the account. Often, the account statements will list the account number for the account of final destination of a deposit or the account from which the funds came for a withdrawal. The paralegal should trace the account number to assets she is already aware of (could be listed on the spreadsheet listed below). If the paralegal has not yet seen the account number listed, it may be an account not previously identified. Canceled checks, if written by a detail-oriented person, might also have useful information. To whom were the checks written? Is an account number noted on the bottom as a notation? From what account was the check written? What is the check number? Is it a new account or an old account? Detailed analysis can often be a lengthy process, but one that is often worth the time spent. The paralegal should also include the client in the analysis process. The client has the most invested in the case and is more likely to look for and recognize any strange or out of place expenses.
BUSINESS VALUATIONS
Because the valuation of marital property is a vital part of any ED case, a business valuation may be needed if one of the marital assets is a business. This is especially true if the case is headed to trial and expert testimony will be needed as to the value of the business. It is important to contact the expert that will be engaged (usually a CPA) early on in the case because extensive document gathering may be needed. The paralegal should get from the expert a list of documents that may be needed to perform the valuation. This list of documents should be included in any request for production of documents that the paralegal drafts.
A case to be familiar with when dealing with business valuations is:
1) Poore v. Poore, 75 N.C. App. 414, 331 S.E.2d 266 (1985). This is the seminal case regarding business valuations and discusses fair market value and goodwill. See also, Sonek v. Sonek, 105 N.C. App. 247, 412 S.E.2d 917 (1992), and Locklear v. Locklear, 92 N.C. App. 299, 374 S.E.2d 406 (1988).
The paralegal, when putting together exhibits for an ED trial should make sure that if a business valuation is to be introduced, a copy of the CPA's (the expert) Curriculum Vitae is included to assist the attorney with qualifying the CPA as an expert. In addition, the paralegal may want to add to the trial notebook a copy of Howerton v. Arai Helmet, Ltd., 358 N.C. 440, 597 S.E.2d 674, (2004). Howerton is the current standard in NC for the introduction of expert testimony at trial.
The valuation of businesses is a very complicated area of family law that should be approached with caution. Outside of gathering documents and preparing the trial notebook, this area of an ED case should really be handled by the attorney and the expert due to the advanced level of knowledge needed and the inconsistencies in the valuation methods that the caselaw presents.
PENSION AND RETIREMENT PLANS
Types of Pension Division Orders and Retirement Benefits Division Orders
QDRO - Qualified Domestic Relations Order: The order which is necessary pursuant to federal law to divide retirement benefits for plans qualified under the Employee Retirement Income Security Act of 1974 (ERISA). ERISA is contained in Title 29 of the U.S. Code. See http://benefitslink.com/erisa/crossreference.html for a table of contents for Title 29. It is not uncommon for people to call all orders related to retirement benefits "QDRO's." However, the term QDRO only applies to ERISA retirement plans and not to governmental plans, IRA's or other non-qualified plans. Some common plans that require a QDRO are 403(b) (of IRC), Tax-Deferred Savings Plan (TDSP), 401K (of IRC), IBM, Nortel, and TIAA-CREF. 
DRO - Domestic Relations Order: These orders are used for non-qualified state plans such as, the Teacher’s and State Employee’s Retirement System of North Carolina (TSERS), Local Governmental Employees' Retirement System, and Judicial Retirement System.
COAP - Court Order Acceptable for Processing: These orders are used for division of national governmental plans. These include Federal Employees’ Retirement System [FERS], and the Civil Service Retirement System [CSRS]. Go to www.opm.gov for further information on these plans.
RBCO - Retirement Benefits Court Order: These orders cover the Thrift Savings Plan (governmental plan). For more information on this plan, go to www.tsp.gov.
IRA dividing Order - These orders are used to divide IRA's when the plan requires an order. Some plans do not require an order, but only completed forms or a Letter of Instruction/Acceptance. In addition, some plans require the entry of the Divorce Judgment before they will process the division request.
MPDO - Military Pension Division Order: These orders are used to divide military pensions and provide former spouse coverage under the Survivor Benefit Plan (SBP) pursuant to the Uniformed Services Former Spouses Protection Act (USFSPA), 5 U.S.C 8345(j)(1). The Defense Finance and Accounting Service (DFAS) that administers retired pay and pension payments have an excellent website loaded with valuable information, www.dfas.mil.
Defined Benefit Plans - These plans are generally pensions that do not have a set value today, but rather the value is calculated at the time of retirement of the member by a formula the plan administrator uses. Be careful, some defined benefit plans end out yearly statements to their members indicating the accumulated contributions, but the accumulated contributions is not the actual value. A CPA can be hired to determine the present value (or FMV) of a pension.
Defined Contribution Plans - These plans are generally 401K type plans where the contributions made by the employee and/or company is the actual value.
Now that the phrases commonly used have been defined, discussing division is the next step. Division of pensions is a huge malpractice trap and should be handled primarily by the attorney. The division of pension rights/retirement benefits is generally done two ways, a present-value offset or a future percentage of payments (N.C.G.S. § 50-20.1 provides other ways to distribute the pension). The former of these involves calculating (or estimating) the present value of the pension right now and setting it off (trading it) against the value of another asset, such as the other spouse's pension or the marital residence. A present value calculation may need to be done to help in the determination of whether a trade-off is fair or even possible. Such an evaluation is a difficult task and should be handled by an expert (CPA). It would typically involve projection of the life span of the member, estimation of when he or she will retire, and their position and salary at retirement. The second approach puts off the division until whenever the employed spouse starts receiving pension payments. At that time, the non-pensioned spouse would receive a share of each monthly check equal to one-half (or some other percentage) of the marital share. The marital share is that which accrued during the marriage. The marital share can be calculated by dividing the years of marital pension service by the entire number of years of pension service. N.C.G.S. 50-20.1(d). Generally, the orders needed for future payments can be done now and submitted to the Plan Administrator.
If a separation agreement or court order calls for division of a pension, the first step for a paralegal is to call the Plan Administrator (PA) to get any summary plan description or sample order they may provide (also, check the web for information). Remember, if pension division is called for in a separation agreement and there is not outstanding lawsuit for ED, a "friendly" ED claim may need to be filed for the limited purpose of entering the order. There must be a vehicle for entry of an order and a lawsuit is that vehicle. After the summary plan documents and sample orders are received (as well as any monthly statements or benefit statements from the party whose benefits are being divided), the attorney will need to decide if they want to hire an expert to prepare the order. There are cheap experts and good experts, gut usually not both. A qualified expert on pension division will usually cost more than the quick preparation services that advertise preparation of an order for $150. Quality over quantity is the golden rule when finding an expert (or co-counsel).
For more information on how the courts handle pension division, look at the following cases:
INCOME TAX CONSIDERATIONS IN DIVORCE SETTLEMENTS
Tax issues in ED cases are very complicated and should be approached carefully, and if needed, with the help of tax attorney or CPA. Section 1041 of the Internal Revenue Code (IRC) deals with the transfer of property between spouses, incident to divorce. In general, transfer of property between spouses as a tax-free event should be done within 6 years of the "cessation" of the marriage, but there are quite a few exceptions to this rule. For example, transferring stock options from one spouse to the other may have tax consequences no matter when they are transferred. The paralegal should talk to their attorney for more detailed information on how this section of the IRC affects a specific case.
Filing of joint tax returns is a common issue that clients often inquire. They should consult a tax professional to determine what is best given their situation. Married taxpayers who are living together are not required to file joint returns, but only married taxpayers are eligible to file joint returns if they so desire. For tax filing purposes, a person is considered unmarried if a final divorce decree was entered by the last day of the tax year. There may be both advantages and disadvantages to filing separately. For example, spouses who file separate returns report their own incomes. However, if one spouse itemizes deductions, the other must also itemize and cannot claim the standard deductions. The best idea is to make the decision about filing separately or jointly, if the client is entitled to do so, after discussing with their tax advisor the best way to minimize the tax paid to “Uncle Sam.” The parties may agree to file jointly, if that is most advantageous, and then provide a method for sharing the tax savings (or dividing the liability).
The sale of the marital residence in the divorce process is not unusual. Knowing the possible tax consequences of that sale is important. The Taxpayer Relief Act of 1997 changed the law drastically as to capital gains on the sale of a home. No longer do taxpayers need to roll over the sale proceeds into another home to avoid capital gain taxes. Under the new law, regardless of age, each taxpayer can exclude up to $250,000 in capital gains ($500,000 for joint return) on the sale of the marital residence that has been owned and used by the taxpayer as his or her principal residence for two out of the five years prior to the sale. The spouse who acquires ownership of the house related to the divorce or separation can tack on the transferring spouse’s period of ownership to his or her own. This is good news for a taxpayer who didn’t qualify for the exclusion under prior law because he or she moved out of the marital residence leaving the other spouse in possession.
Retirement benefits division and any tax consequences associated with the distribution vary depending on the type of plan, the way the funds are distributed, and other factors. Sections 414, 408 and 402 of the IRC discuss tax issues related to distribution (there are also other relevant sections). In general, plan-to-plan (into an IRA or other eligible retirement plan) rollovers (401K's, IRA's, etc.) are a tax-free event. If funds are paid out directly to the other spouse, there will usually be a tax penalty.
PREPARATION OF SPREADSHEETS AND EQUITABLE DISTRIBUTION INVENTORY AFFIDAVITS
Whether the case is litigation bound or headed for settlement, the paralegal (along with the client) will need to compile a list of all marital assets and debts. Spreadsheets can be invaluable during this process as well as the best start to the document-gathering portion of the case. Just about any computer program has spreadsheet capability. This document should be started with the first ED document received from the client or opposing counsel. There are large amounts of information to manage in an ED case, and the attorney must be able to rely on their paralegal to prepare the ED case for settlement negotiations or trial (in other words, Aknow the file@). The spreadsheet will enable the paralegal to know what is going on in the ED case at any time. Do we have the document we need to prove the DOS balance of the marital bank account? Do we have the current stock price to recalculate the value of the stock options? Is the value noted for the pension the accumulated contributions or the actual value? All of these things are important for the attorney to know. If this information is summarized in one document, such as a spreadsheet, the paralegal can answer questions quite easily and not have to search the banker's boxes worth of documents to respond. The spreadsheet can also be a great starting point for the paralegal and attorney team to talk through the assets of the estate to determine if a house appraisal or business valuation will be needed.
While the paralegal is putting together the spreadsheet, she should gather the DOS and current documents that she anticipates would be needed for trial. If a paralegal has noted the date of the statement for the value listed on the spreadsheet, she needs to make sure that statement is in the file. When trial gets closer, it will be very easy to use the spreadsheet and all of the supporting documents behind it as the exhibits for the ED case. If information is gathered all along, trial preparation will not be overwhelming or a last minute struggle.
If the spreadsheet is already prepared, the next step in a litigation ED case will be much easier to tackle. In North Carolina, the statute requires each party to file an Equitable Distribution Inventory Affidavit (EDIA). N.C.G.S. § 50-21(a). This form is essentially a list of all assets and debts and additional information about them. If the paralegal has already finished the spreadsheet, the EDIA will be much easier to prepare because most of the information requested in the form has already been gathered. The paralegal will find the preparation process easier if she schedules a meeting with the client to go over the spreadsheet in detail to make sure that nothing has been omitted before preparing the EDIA. The paralegal may want to include the attorney in this meeting so that any questions the client may have during the meeting which require legal advice can be addressed at one time. It is important that the client understand they will be signing an affidavit swearing that everything listed on the EDIA is all that exists in the marital estate. During that meeting, the paralegal should give the client the option to use the spreadsheet and prepare the first draft of the EDIA. If the client is given detailed instructions, the paralegal should get back from the client a handwritten draft of the EDIA that is easily typed in, edited, and prepared for filing.
It is important not to omit any details on the EDIA. For example, if stock options exist in the marital estate, write the grant date, number of options, grant price, and vesting period. It is often helpful and more cost effective not to be too bogged down in the details concerning household goods and furniture. For example, it might be easier to lump the furniture together by room, such as, "living room furniture (couch, chair, ottoman, side table, rug), FMV $3,000." If needed, prior to trial, the paralegal can work with the client to come up with a more comprehensive list of every piece of furniture and the separate values. The paralegal needs to be careful when listing values on the EDIA when she has not seen documentary evidence to back it up. Because the EDIA can be amended prior to trial, initially it might be safer to write "to be determined" (TBD) or "unknown" until the client can provide the supporting documentation.
The paralegal can be a tremendous asset to an attorney in an ED case, but teamwork is the key. If the paralegal and attorney team meet often to discuss the direction of a case, they will find that the ED case will run much more smoothly. The paralegal should learn to recognize the complicated issues discussed herein in the cases they work on, and know when to ask for further explanation or assistance. ED cases are neither simple nor quick, so take each case as a learning experience, and when given a task, remember to ask "why?"
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