Case Studies:
Guidance for Individuals & Families in Transition

Helping our client learn to manage subsequent to asset dissipation

When we first met our client, she was overwhelmed with the paperwork of re-establishing her post-separation independence, including months of unpaid bills (among them medical bills for the chronic illness of a child), and unapplied-for medical insurance reimbursements.

Our first job was to bring paperwork and financial obligations current, and to help her learn how to do things for herself.  Income and cash available to spend had never before been a constraint (after a decade of $1.5 million annual income), and she was accustomed to other people handling routine, day-to-day matters on her behalf.

We set up filing systems, on-line access to banks and securities accounts, disbursement registers (and helped her learn the discipline of knowing that checks had been written--in what amounts, payees, dates and in payment of what invoice), how to move money between her accounts, and so on.

Later, we established the extent of family assets dissipated during the marriage, and helped the client work through a realistic budget for her new life, part of compiling net worth financial disclosures and budget statements for the divorce court.  We even helped coach her reentry to the workplace by drafting her résumé and providing background research in preparation for job interviews.

Our client, a very successful investment banker, had initiated litigation to terminate his seven year marriage.  Although a pre-nuptial agreement had declared the existence of certain hedge fund assets that would remain his separate property, the delayed quarterly reporting of those funds combined with market volatility at the time had caused a significant understatement of their value.

During the marriage those hedge fund assets had grown substantially, but also had been redeemed and reinvested several times with other money managers, sometimes overlapping and sometimes with gaps in time when cash sat idle.  Titling of accounts had been careless such that in some cases the account title was altered to joint name or that of the spouse when, in fact, the underlying base capital and substantial passive accretion remained that of our client.  Millions of dollars were involved and so our client was determined to keep those funds out of equitable distribution

Our objective was to determine the fully-invested accumulated principal balance that rightfully would be stipulated to be separate property.  From each year’s tax return and various K-1s we worked backwards to determine the unrealized versus realized gains and actual tax burden on each holding, and so established a defensible valuation of his separate property at the deemed separation date.

Security Survivor Benefits

Our client, a mother with two teenage children, had been divorced several years previously and the divorce agreement stipulated that the husband would provide monthly child support and maintain life insurance coverage.

He died an untimely and unexpected death at age 52.

In that he had never fulfilled his child-support obligations, our client asked us to help collect whatever assets had been willed to his children, and the life insurance in place for their benefit.

What we found was that he had died with negligible monetary assets and had reneged on his obligation to maintain life insurance.

Investigation on our part did turn up a group life policy, a benefit of his employment, payment of which we arranged.  In addition, we arranged for the Social Security benefits available even to divorced spouses when dependent children are involved.  We were able to secure monthly survivor benefits for each child until age 18, as well as caregiver’s benefits monthly for our client.

Forensic accounting

Our client had been surprised by her husband’s unexpected announcement of his intention to divorce.

Our first job was to assess family net worth by compiling assets and liabilities (from incomplete and unorganized piles of unopened statements--spanning years--of banks and securities firms).

What we found was that, even after a decade of $1.5+ million earnings of the husband every year, liquid net assets were minimal, with the bulk of family net worth being tied up in the partnership interests of his professional services firm (neither transferable nor assignable as collateral), artwork (possibly unsaleable), retirement accounts (subject to withdrawal only upon payment of penalties and tax), and several highly mortgaged residences.

Unexplained transfers of six-figure amounts between various accounts over recent years raised suspicion of diverted family wealth, and so the essence of our work plan was forensic accounting: tracing cash flows and assessing the value of whatever tangible and illiquid assets we could find.

Later, we helped her develop living expense budgets for both negotiations and the divorce court and advised legal counsel during negotiations as to liquidity and valuation issues.

Untangling a Confused Division of Assets

We were first contacted by divorce counsel in apparent distress having lost control of the process of dividing clients’ assets.  Much of our initial effort was forensic, documenting the initial pool of assets as of the division date, subsequent substantial market losses (during a period of extreme market volatility), verifying agreed-upon transfers, appropriate and fair sharing of losses, and searching to recapture particular tax-favored accounts that had disappeared without explanation.

More complicated was coming to understand the trade-offs during negotiations that had notionally exchanged certain monetary assets for a portion of the marital residence.  Without an appreciation that all money is fungible, both counsel and client were confused as to whether particular funds had been properly transferred in exchange for particular non-cash assets, both as to what had appropriately been transferred and what remained.  Without a plan and updated monitoring thereof, neither client nor counsel was able to figure out where things stood.

We established a global view and ex post facto created a plan to divide particular liquid assets, tax-advantaged retirement assets, a cash settlement and, finally, purchase by one spouse of the half-interest in the marital residence held by the other.

Protected by a Pre-Nup, but reported to the IRS

Adjunct to divorce proceedings and in an attempt to negotiate a settlement more favorable than that stipulated in their pre-nuptial agreement, the spouse of our client had reported to the IRS the possibility of tax fraud.

Our client insisted that the charge was without basis or evidence, and so engaged us to review various tax filings and underlying financial transactions, just in case.

Surprises that we did find included several egregious errors in prior years by the tax return preparer, including overstatement of the basis of a marital residence, based on the misreading of documents, resulting in a reported $5 million loss; a reported capital loss of $9 million, based on an internal error of the brokerage house, corrected but never communicated to the tax preparer; and the resultant years of net operating loss carryovers that required correction.

Working with tax counsel in anticipation of audit and in preparation of years of amended returns, we applied forensic techniques to establish corrected bases of assets sold, with documentary backup demonstrating institutional errors and individual miscommunications. We analyzed the flow-through effects of revising the NOL carryover, which led to preemptive remittance of substantial back taxes and interest in advance of examination.

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Crallé & Company, Incorporated
Bronxville, New York
914-779-3331