What CPAs Need to Know about Tying and Untying the Knot

By Arlene G. Dubin and Rebecca A. Provder In Brief Even the most romantic decision has monetary implications, and CPAs can help individuals weigh the financial consequences of their deci- sion to get married. This article describes important provisions of prenuptial agreements, as well as postnuptial agreements and other -related financial planning considerations.

SEPTEMBER 2015 / THE CPA JOURNAL 39 any CPAs enjoy a close, trust- In the midst of a significant intergener- the validity of the agreement, each party ing relationship with their clients ational transfer of wealth, a growing should be represented by separate and inde- and their families. As a result, number of people enter into prenuptial pendent counsel, selected by each party. M they are in a unique position to agreements to protect their current or Financial disclosure. In matrimonial help clients (as well as their children and prospective inheritances. In addition, indi- matters, parties are entitled to broad parents) who are entering into or ending a viduals (or their relatives) might strive to financial disclosure. Although this right marriage. The following is a discussion of keep family businesses in the immediate may be waived, both parties should be the various ways that CPAs can assist indi- family and out of the hands of in-laws. advised to provide full financial disclo- viduals before, during, and after marriage. touches many people, whether sure before entering into a prenuptial agree- firsthand as a participant, or as a child, a ment. The disclosure should accurately Why Get a Prenup? close friend, or a family member. Con - set forth each party’s assets, liabilities, and Approximately 40% to 50% of first mar- sequently, individuals may decide to mini- income. An expectation of a material gift riages and more than half of second mar- mize the chances of an acrimonious and con- or inheritance also may be disclosed, as riages end in divorce. Prenuptial agree- tentious divorce by entering into a prenup- well as the terms of any trusts to which a ments allow couples, when they are in a tial agreement, which provides important party is a beneficiary. Typically, the dis- more reasonable and amicable mindset, to protections for traditional clients of CPAs. closure is set forth on a schedule that is limit the issues that can arise in the event They are beneficial for high-net-worth indi- referenced in the and of a divorce. viduals who are striving to protect their annexed as an exhibit. CPAs can partici- Public policy favors individuals reach- assets, as well as for older couples with chil- pate in the disclosure process to help ensure ing their own agreements through contracts. dren from prior , by serving as an that full and accurate information is pro- Therefore, in New York, properly execut- estate planning mechanism to fairly allo- vided. ed prenuptial agreements are typically cate assets between a new and chil- upheld. dren from a previous relationship. Postnuptial Agreements Prenuptial agreements may clarify or With an upcoming wedding, individuals Similar in intent to a prenuptial agree- override statutory provisions that govern are often starry-eyed in love, with divorce ment, a postnuptial agreement is entered what happens to a couple’s financial assets far off their radar. It is often prudent for into after the marriage has taken place, not in the event of death or divorce. Through CPAs to raise the possibility of a prenuptial before. Unlike a separation agreement, such agreements, couples may tailor the agreement for a client’s long-term protec- which is entered into in contemplation of law to meet their individual needs and tion. Advice from a professional advisor is divorce, a postnuptial agreement is entered goals. They also have the opportunity to often perceived as neutral and objective; thus, into in contemplation of an ongoing mar- prescribe terms regarding property division it can be more effective than advice from a riage. Common reasons people enter upon divorce, financial responsibilities dur- family member. At a minimum, it may be postnuptial agreements include insufficient ing marriage, spousal support, and estate advantageous to encourage engaged clients time to finalize a prenuptial agreement rights upon death, among other issues. to consult with a lawyer to find out the poten- before marriage, modification of a prenup- tial benefits that may be derived from a tial agreement, a significant change in net Who Should Get a Prenup? prenuptial agreement. worth, or the presence of marital difficul- Prenuptial agreements are no longer ties and an ensuing reconciliation. reserved for the rich and famous. Rather, Bulletproofing a Prenup A prenuptial agreement is generally they have a much broader appeal. (Editor’s Don’t wait until the last minute. preferable to a postnuptial agreement. It is note: As the definition of marriage Prenuptial agreements should be drafted, more difficult for a party to waive rights broadens, advisors should also consider negotiated, and finalized as far in advance after they have vested. Postnuptial agree- the circumstances that apply to same-sex of the wedding date as possible. Although ments also tend to languish without a dead- marriages. For a discussion of the tax con- signing a prenuptial agreement a few line, whereas a wedding date creates siderations for these couples, see “Federal days before the wedding does not render momentum for prenuptial agreements. Tax Implications of Windsor: Major Issues it invalid, agreements should be executed Because married couples are fiduciaries Confront Same-Sex Married Couples,” by at least 30 to 60 days prior to the wed- in New York, postnuptial agreements Scott Ahroni and Benjamin Rue Silliman, ding date. Ideally, a prenuptial agreement may be held to a higher standard than The CPA Journal, July 2014, p. 58.) should be finalized before a public engage- prenuptial agreements. Despite these draw- The average age of men and women ment announcement or before the wedding backs, postnuptial agreements can serve marrying for the first time has substantial- invitations are mailed. an important function, and CPAs should ly increased. As couples are marrying later Separate and independent counsel. keep them in mind as an option when in life, it is more common to enter into Prenuptial agreements have far-reaching appropriate. the marriage with assets, such as a home, implications. A couple has adverse inter- a 401(k) plan, or stock options. If the ests with respect to the agreement, so Breaking Up Is Hard to Do: couple does not have assets, they may have they should not be represented by the same How CPAs Can Help business or professional prospects; if the attorney. Instead, to demonstrate that each Prepare net worth statements. Net couple has no assets or prospects, they may party entered into the agreement voluntar- worth statements are one of the most sig- have student loans or credit card debts. ily and knowingly, and thus to buttress nificant discovery devices in a divorce case.

40 SEPTEMBER 2015 / THE CPA JOURNAL This is especially true because, during mar - properly calculated and considered in divid - such an individual have sufficient assets riage, one spouse may control the majori - ing property upon divorce. set aside to timely make tax payments and ty of the assets while the other spouse is Estimate support needs. In cases in for budget accordingly throughout the left largely in the dark. which there is a disparity in the income year. CPAs should be mindful that indi - On a net-worth statement, each party sets of the parties, the monied spouse might viduals have widely varying financial forth all monthly expenses, assets, income, be obligated to pay spousal support to the knowledge, and some may need assistance and liabilities. CPAs can assist in prepar - less monied spouse. The amount and dura - in the basics. ing or reviewing net worth statements, tion of support are determined on a case- Manage investments. CPAs play a key which can help avoid omissions and errors. by-case basis. CPAs can assist clients and role in overseeing the management of The document is sworn to before a notary matrimonial practitioners in determining investments. Income and assets that had public, so it is important for it to be com - how much support a party requires to been used to support one household are plete and accurate. Perform a marital lifestyle analysis. Forensic accountants may perform a mari - CPAs can broach the topic of prenuptial tal lifestyle analysis, which involves exam - ining the income and expenses of the par - ties during the marriage. Unlike net-worth agreements before a marriage begins in order statements, which reflect expenses and assets as of a specific date, a lifestyle analysis assesses financial activity over the course to help preserve their clients’ assets. of a longer period of time. Typically, it involves a review of financial activity over the three or five years prior to the begin - subsist after divorce, and for how long. In stretched to support two after a divorce. ning of divorce proceedings. addition, CPAs can formulate a budget In certain cases—for example, when a A lifestyle analysis may be used to for postdivorce spending. spouse has been out of the workforce for help establish the marital standard of liv - Secure life insurance. Life insurance a long period of time and it is unlikely that ing, determine each party’s spending habits, generally is obtained to help secure obli - he will return to work—the financial set - and quantify a spouse’s support needs. gations required under a divorce agreement, tlement derived from a divorce may be a During the lifestyle analysis, a forensic such as , spousal support, and primary nest egg or even the sole source accountant may discover the dissipation or any future property distributions. As finan - of funds during retirement. As a result, it concealment of assets. An analysis also cial obligations lessen over time, a divorce is especially important for CPAs to make may reveal additional sources of income, agreement may provide that the amount of sure that an individual is investing wisely for example, when the alleged income is life insurance might be reduced to reflect to maximize these assets. insufficient to have met the expenses dur - the actual amount owed. CPAs can assist ing marriage. This may be significant, as in selecting the proper type of life insur - Providing Advice before and matrimonial judges are not bound by ance, as well as calculating an appropriate after a Marriage income that is reported on tax returns, amount of life insurance that should be CPAs can broach the topic of prenuptial and may impute income to a party in deter - maintained post-divorce. agreements before a marriage begins in mining child or spousal support. order to help preserve their clients’ assets. Assist with appraisals. In order to effec - To-Dos for CPAs after a Client’s During divorce, they can play an impor - tuate an equitable distribution of marital Divorce tant role in providing advice on tax con - property, the value of all relevant assets Review financial terms . It is instruc - sequences, structuring settlements, and must be ascertained. CPAs and other finan - tive to review the financial terms of a obtaining a clear understanding of their cial professionals are routinely called upon client’s divorce agreement in order to for - clients’ current and prospective financial to value businesses and other assets. They mulate a planning and investment strategy. situations. After divorce, CPAs can for - also may be called upon to perform trac - The divorce agreement also may specify mulate short- and long-term plans so that ings to quantify a separate property com - that asset transfers take place within a spec - individuals will be well positioned for the ponent of an asset. ified time period. CPAs can oversee asset next stage of their lives. q Consider tax consequences. Upon transfers and make sure that they are car - divorce, each asset may not simply be ried out in a timely matter. divided down the middle. Rather, marital Earmark funds to pay taxes. Post- Arlene G. Dubin is a partner at Moses & assets may be offset against each other in divorce spousal support typically is tax - Singer LLP and chair of its matrimonial and order to arrive at an overall equitable dis - able to the payee spouse and tax deductible practice group, as well as the tribution. In New York, tax consequences by the payor spouse. Sometimes, for the author of Prenups for Lovers: A Romantic are an express statutory factor to be con - recipient of support, it marks the first Guide to Prenuptial Agreements. Rebecca A. sidered in determining equitable distribu - time—or the first time in years—that she Provder is also a partner in the matrimoni - tion. CPAs serve an important role in help - assumes responsibility to file her own tax al and family law practice group at Moses ing to ensure that the tax implications are returns and pay taxes. It is important that & Singer LLP.

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