Presenting a live 90-minute webinar with interactive Q&A High Net Worth Divorce: Child Support, Property Division, Investments, Alimony/Spousal Support WEDNESDAY, DECEMBER 6, 2017 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Martin S. Varon, Partner, IAG Forensics & Valuation , Marietta, Ga. Linda J. Watson, Founding Partner, Watson Law , Peoria, IL. Anne Marie Jackson, Principal, Ain & Bank , Washington, D.C. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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High Net Worth Divorce: * Determining Income, * Establishing Alimony/Child Support, * Property Division Considerations Linda Watson, Watson Law, Peoria, IL Anne Marie Jackson, Ain & Bank P.C., Washington, D.C. Martin “Marty” Varon, IAG Forensics & Valuation, Marietta, GA 5
OUTLINE • WHAT IS “INCOME”? – Statutory Definitions – Sources of income – Deduction considerations – A word about Fraud – Tax Forms to be familiar with • ESTABLISHING SUPPORT – Statutory Calculations – Establishing Need – Deviations – Add-Ons – Modifications • DIVIDING UP THE MARITAL ESTATE – Step One: Identifying the type of asset • Is it “in” or “out”? – Step Two: Valuations – Step Three Divide the Estate • Identifying Tax consequences – Is it better for my client to have this or that? • What is “equitable”? – 50/50? Maybe – Factors to consider – Case Examples 6
I. WHAT IS “INCOME”? • Examples of Statutory guidelines • Cash flow income vs. taxable income • Mathematical calculations vs. spousal “need” • Base salaries vs. bonus or commission income • Trust income • Lifestyle analysis 7
Examples of statutory guidelines – Illinois • 750 ILCS 5/505 a(3): defines “income” as gross income: income from all sources • Only exceptions are for public assistance, which is not an issue in high net worth cases – Virginia; 20-108.2 • All income from all sources: salaries, wages, commissions, royalties, bonuses, dividends, severance pay, pensions, interest, trust income, annuities, capital gains, social security benefits (unless excepted), WC benefits, unemployment insurance benefits, disability insurance benefits, veteran’s benefits, spousal support, rental income, gifts, prizes or awards. • Subject to “ reasonable business expenses for persons with self- employment, a partnership or a closely held business. 8
High Net Worth Divorce: Child Support… • Determination of Income for High Salaried Executives ** Salary ** Expense Reimbursement ** Bonuses-indefinite ** Fringe Benefits ** Stock Options/Deferred Compensation 9
Where is the income coming from? • If the entire income is from variable income: Establish an average • If only part of the income is from variable income, break apart the support into two parts: the base salary, and an additional payment [usually a percentage] from any variable income: bonuses, commissions, etc. – Be SURE to build in safeguards for the obligee to verify the existence and payment of any variable income. 10
Where is the income coming from? Cash flow income vs taxable income • Always get a copy of the employment contract • Look for bonuses, commissions, paid for expenses, • If they are an owner: always get a copy of the articles of incorporation (DBA or S Corp) or organizing document (LLC): verify ownership and % of ownership • These are filed with the Secretary of State, in most states there is a searchable SOS web site • Need to understand the basic types of business entities: • DBA’s & S Corporations • LLC’s • Publically traded companies 11
DBA’s & S Corporations DBA’s, Sole Proprietorships, and S – Corporations : these are business entities that have pass through income, losses, deductions and credits through their shareholders for federal tax purposes. i.e. the gross receipts less deductions and losses (ie taxable income) are assessed at their individual tax rates. NOTE: Reality Check: there is a $300 billion gap in gross reported taxable income each year. A large part of that gap is believed to come from small businesses, particularly S corporations = the most common corporate entity. S Corporations must file a Form 1120S with their tax filings each year. A sole proprietorship must report profits and loss using a Form 1040, Schedule C. (the DBA name is noted on line C). Neither of these types of companies can leave profits in the company or reinvest them in capital assets without also claiming them as income. 12
Underreporting of income • How do we know? • Common size financial statements • Industry ratios • Life Style Analysis 13
Determination of Income-Self Employed • Sole proprietor, Subchapter S shareholder, Limited Liability Company member, Partner in a partnership • Salary/Guaranteed Payments • Ordinary Business Income • Profits reinvested or distributed 14
Determination of Income Self-employed (cont. • Georgia case-minority owner, minimal distributions, judge ruled K-1 income (portion of ordinary business income) was INCOME for purposes of child support 15
Cash Flow Income vs. Taxable Income “Reasonable business expenses” Reasonable and necessary for the production of income. Income tax statute authorizing deduction of ordinary and necessary expenses incurred for production of income implies that the expenses must be reasonable in the amount and must bear a reasonable and proximate relation to the production of the business. This does not include expenses that a person would have whether or not he/she owned or ran the business. * Expenses for meals, entertainment, gas, auto repairs, and insurance premiums are not deductible from net income. 16
Look Out for: • Personal expenses buried in computation of ordinary business income • Items used for both business and personal reasons (fuel for auto, cell phone, meals) • Are profits being reinvested instead of being distributed? (capital expenditures) • Determination of recurring sustainable income • Variation over last few years 17
Look out for: (continued) • Double Dip • Excess Profits generate value AND income for possible support • Is this equitable? • How is value computed ? 18
Active Factors • Evidence? • Depose key people? • How much does your spouse know? • Prior year tax returns, W-2s, K-1s, other owners-do they tell a different story? 19
Child Support • Georgia-child support worksheet calculator • Income must be computed • Separate worksheet for self employed people • Non cash expenses (depreciation) added back • Latest year, average? 20
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No receipts? No deduction • https://www.irs.gov/businesses/small-businesses-self- employed/what-kind-of-records-should-i-keep • Gross Receipts • Purchases • Expense receipts (cancelled checks, invoices, etc.) • Travel, Transportation, Entertainment, and Gift Expenses – Elements of the expense must be proven • Assets • Employment Taxes 24
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