inventory Archives - Tracy Stewart, CPA

The Flip Side of Control

June 11, 2010 by Tracy 1 Comment

In collaborative law divorce cases, my role is as a neutral financial advisor. I collect the financial information from both spouses and create a net worth statement (known as an inventory). The process of collecting the documents translates to homework for the clients. When the spouses have unequal financial knowledge, most often it is a situation where one spouse has controlled the money, the investments and the income while the other spouse has little or inaccurate understanding of the family financial situation, the income, the total spending, the investments and the savings level.

Glossary moment:

Monied spouse = the spouse who controls the money, investments, income. He/she has the bank statements, credit card statements, investment statements. He/she established or was given control over the finances early in the marriage for whatever the reasons.

Non-monied spouse = the spouse who has not participated in the family finances. She/he has not seen the statements and has signed but not read the tax return. Typically this spouse has not asked questions.

Note: In any partnership, there is a division of duties. Marriage is a partnership. Early in the marriage, couples divide the duties. I am not judging this arrangement, but I wish more Americans were financially literate.

So long as the monied spouse is doing the right thing, this can work well for a very long time. But, if this couple finds themselves in divorce, it creates some interesting aspects to the divorce process.

In the beginning of the case, when I start to gather financial information, the monied spouse is laden with all the financial homework. During a divorce, everyone is living under stress at home and at work. Piling this homework on top causes more stress and is time consuming for the monied spouse. One such spouse called this homework phase his “other job”.

The longer it takes the monied spouse to gather all the required documents, the longer the divorce will drag on. When this spouse is particularly eager to get to the end of the marriage, the irony is that his/her own inaction can be the cause of the delay.

This is the flip side of having control of the family finances.

Tax Effecting Inventory Items

July 23, 2009 by Tracy Leave a Comment

Tax effecting inventory items means to put them on the inventory at their after-tax values. Some people want to do this. But it is a bit tricky and never, in my opinion, is it accurate.

Example: The balance in a bank account is not subject to income tax upon withdrawal. But the contents of a traditional IRA or 401(k) account will be subject to income tax upon withdrawal. In this example, to tax effect the retirement account is to attempt to compare apples to apples.

However, the tricky part comes in with the calculation of the future taxes on the retirement account.

Shall we assume the retirement account is drained and taxed at the time of divorce? I think not, since that is usually unlikely. Shall we assume the retirement account is drained and taxed when one spouse retires? Which spouse? And when will that be…. for certain? At what tax rate shall we tax the retirement account withdrawals? What will the tax rates be at that point in the future? What deductions and credits will be used by the spouse (which spouse?) at that future point?

If we are all in an agreeable mood, we could agree on some assumptions. But those assumptions could be wildly inaccurate when the future arrives.

House Selling Costs on the Inventory

July 1, 2009 by Tracy Leave a Comment

When creating an inventory or net worth statement for a divorce, some couples prefer to factor in selling costs for the house. Selling costs are deducted from the estimated value of the house. Usually, the person who wants to deduct selling costs is the person who is intending to keep the house. The reduction in house value from the deduction of selling costs means that person has less on his/her column, leaving room for more assets or money to be placed in their column.

The discussion over whether selling costs should be deducted can be a lively one. Couples talk about the likelihood of actually selling the house soon. After all, where do you draw the line on timing? If he/she intends to sell the house within 6 months, then they get to deduct the selling costs now? What if he/she has a change of heart and decides not to sell the house after all? What if he/she plans to sell the house in 4 years after Johnny has gone off to college?

Then there is the discussion of how much are selling costs? Are they only the real estate agent’s commission? Are they all the costs to sell (whatever those are in your geographical area). Do they include fixing up the house, such as repairs and painting? Then there is the differing opinion about whether painting the living room will produce a higher selling price anyway.

I don’t have an answer here. Just issues to consider. Every couple deals with this in their own unique manner.

Vehicles

June 13, 2009 by Tracy Leave a Comment

The usual way couples handle the division of vehicles in a divorce is that each takes their own vehicle and the debt that is attached to that vehicle.

Start with getting the fair market value of the vehicles. You can find that on the internet at a site such as Kelley Blue Book (www.kbbcom) or NADA (www.NADAGuides.com). Be sure to value all vehicles in the same manner. Either both at trade-in or both at private sale prices. I prefer the latter.

There can be some minor complications with vehicles.

Vehicle driven by a minor. In this case, one of the parents will need to keep this vehicle titled in their name. Hopefully, the couple can come to an agreement about this. Be sure to consider that the titled owner will need to have auto insurance on the vehicle.

Vintage vehicle in the garage. Sometimes one cannot find a fair market value of a vintage vehicle because it is not truly vintage. In this case, the couple is wise to come to an arbitrary agreed upon value, allocate the vehicle to one party and move on with other decisions.

Vehicles with interesting debt. Once in a while, a couple will finance an vehicle through a second mortgage on the home. This can get sticky when one party intends to keep the vehicle and the other party intends to keep the home. In this situation, the couple needs to look for an offsetting asset. The party keeping the home (and the vehicle debt) would get an asset to offset the amount of the debt. Presumably, that party could cash out the asset and pay of the vehicle portion of the second mortgage.

List Your Bank Accounts

February 26, 2009 by Tracy Leave a Comment

Your net worth statement (also called an inventory) will include cash balances. These are checking accounts, savings accounts, travelers cheques and money market accounts. Gather up all the statements – either paper or online. Try to get all the statements as of the same date. But, a few days different one way or the other will be okay.

On your net worth statement, be sure to note the description of the account. For example, “Chase Checking 2345 Mary” would describe Mary’s Chase Bank checking account with an account number ending in 2345. Note the date of the statement. For example: “Balance as of January 14, 2009”.

You are going to want to periodically update these balances throughout your divorce process. However, don’t feel that you need to constantly update them. In a collaborative case, I will usually update the account balances prior to every or every other collaborative team meeting and whenever there has been a material deposit or payment, such as a deposited annual bonus or the payment of income tax.

Net Worth Statement Series

February 23, 2009 by Tracy Leave a Comment

Now that I have talked about creating your net worth statement, I am going to do a series of explanations and discussions on the detailed items in a net worth statement. By the way, in a divorce, the net worth statement is known as an inventory.

Some items will take more than one blog entry and others will be quite short.

Generally, every item on your net worth statement should have a corresponding statement that has the name of the account holder, the name of the institution, the account number, the type of account, the date of the statement, and the dollar amount. For example with a bank account:

1. John Doe
2. First National Bank of Your Town
3. Account number 1234456
4. Checking account or Savings account
5. Statement Date: 12/23/08 to 01/22/09 (the date of this statement is 1/22/09)
6. $12,223.44 balance as of 1/22/09 (list this amount on the net worth statement)

Be sure to have a file folder with these statements. If you use online information, print the online statement.

Ideally, all net worth items are as of the same date. This is not always possible, but it is something to strive for. Get the dates as close to each other as possible. If you have an account for which you only get quarterly statements, then you might be stuck with an “old” balance.

Stay tuned for the details……

How to Compile a Net Worth Statement

February 4, 2009 by Tracy Leave a Comment

A net worth statement is simply a complete list of what you own and what you owe. During the divorce process, it is called an inventory. Start with determining what categories you will want to include. For example: real estate, bank accounts, investments (non-retirement), limited partnerships, retirement accounts (401k, 403b, IRA, pension plan), vehicles (includes boats, motorcycles, airplanes), other assets (think collections, artwork, tools), credit card balances, mortgage balance, vehicle loan balances. Assemble all the statements (online or paper) from which you have obtained the values/balances for these items. Make an extra copy of those statements and store them in the file with your net worth statement. That way, you will save time and money when you give your attorney or financial advisor a copy of your net worth statement. Think of it as a paper trail or a pile of source documents.

Bring a currently updated file to your attorney interviews and to your first appointment with your divorce financial advisor.