The decision to divorce is never an easy one, and perhaps one of the most painful life events there is. Separation of finances can be one of the more contentious aspects. AAFCPAs provides the following guidance regarding the development of your divorce financial statement, which is a crucial component of divorce processes where financial relief is requested.
In Massachusetts divorce actions, Supplemental Probate and Family Court Rule 401 requires that each party complete a Financial Statement providing disclosure of current assets, debts, income and expenses. There are two options: the short form for income levels less than $75,000, and the long form for income levels more than $75,000 and for self-employed individuals. The importance of its accuracy cannot be overstated. It is the basis of the asset division and child/ alimony payments.
AAFCPAs has outlined 5 tips to help ensure your Rule 401 Financial Statement is accurate and complete:
- Do not estimate your monthly expenses. Consider hiring a bookkeeper if appropriate to help summarize your expenses from bank statements for at least the past three years. Expenses may fluctuate from year to year so looking at a three-year average will give you a better indication of what your expenses will be going forward.
- Make sure you account for all income. This seems pretty simple, but in order to file an accurate financial statement make sure you account for the correct amount of gross payroll. This can be obtained from copies of your paystubs and may be different from what you report on your tax return. Make sure you include any other income such as a small side business, bonuses, rental income, and reimbursed business expenses as appropriate. Do not report expenses on both the business and personal side of the financial statement. Inaccurate income and expense reporting could be perceived in court as intentional. Take the time and use a reputable financial divorce analyst to help determine these amounts.
- Report assets at their proper fair market value. Do not estimate. Further, online websites do not necessarily capture the true fair market value of assets. A professional real estate or business asset appraisal will give you accurate fair market value and the comfort of knowing that money is not left on the table.
- Make sure all the assets and liabilities are accounted for. Ensure all income derived from investments reported on your tax return are reported on the financial statement. Note, there are certain tax-deferred or tax-free assets not reported on your tax return that should be listed on your financial statement. Make sure you account for all liabilities, including monies borrowed from friends and relatives. AAFCPAs advises clients to document these loans in a formal note agreement.
- Update your financial statement. Many divorces take time to finalize. Make sure as time passes and situations change, such as living arrangements, that the financial statement is updated. This will save time when agreements are drafted and finalized.
The 401 Financial Statement is cumbersome to complete. AAFCPAs’ divorce financial analyst is well suited to prepare this statement in a timely, efficient and accurate manner to ensure your financial success post-divorce.