Welcome And Guest Introduction

SPEAKER_00 0:01

Welcome back to the Texas Family Lawyer Podcast. My name is Alex Hunt. I'm the managing attorney at Hunt Law Firm. And today I am very excited to be joined by Denise French. She's the managing partner at Stuart Hearst French Dodson Forensics. She's a forensic accountant among the other many other credentials that she has. I'm excited to have a conversation with her about business valuations, pensions, and finding hidden money. So, Denise, welcome.

SPEAKER_01 0:30

Thank you. Thanks for having me. I'm happy to be here.

SPEAKER_00 0:32

So, Denise, uh, introduce yourself to the audience a bit. I I've worked with you in your capacity as a forensic accountant and as a business valuation expert. Um, but if I were to read your resume and all the credentials that you have after your name, we'd be here all day. Tell me

Denise’s Path Into Divorce Finance

SPEAKER_00 0:50

a little bit about your background.

SPEAKER_01 0:51

Um, well, I've been in finance for 30 years. I actually grew up a little differently than most people in this field. I grew up on the investment side. So I started with investments and then I went through my own divorce and realized there's such a need for people to get help with their finances when they're going through divorce. It's kind of like your head leaves your body and goes and sits over beside you for the year you're going through this and you can't think clearly. Yeah. And so I've saw so many people make mistakes. I made silly mistakes that I wouldn't normally have made. And so as a result of that, I started working with people getting divorced. And then I started working with attorneys getting who were hiring us to do tracing or different things. And it just morphed into now we have this wonderful financial expert firm where we do separate property tracing and we get hired regularly as experts in divorce.

SPEAKER_00 1:40

And I've mentioned uh previously that I've worked with you in a couple different capacities many times. The first is you've valued my clients' businesses, and we've also worked with you where you've valued a business that's owned by both parties or just by the other side. Um, and you provide expert testimony in court and back up those valuation reports. And then also you will go in and find money that is maybe hidden or unaccounted for, and you will trace separate property claims. Correct. Um, how did you get particularly into this niche of it is such a niche?

SPEAKER_01 2:16

It's like a niche in a niche. I think there's maybe four or five of us. Yeah. All of there's not very many. No. And there's no college courses for this either, by the way. There is for business valuation, but not for tracing. I just started getting hired by attorneys, and that led the work product was good, and it led to more and more attorneys hiring us. And then at this point, we haven't, it's, it's a, it's a blend of understanding what the law is without opining on the law, because that's not our role, but understanding how the law blends with finance. And so it's very different than normal accounting. It's very different than normal finance. And so, and it's it's also an understanding of how do retirement accounts work, how do retirement plans work? Because we also, as you know, will be hired regularly for someone who has restricted stock units or some kind of golden parachute at their company, because that has some value to the community estate and some value to the separate estate. So we're hired for anything financial related. Sometimes it's just to help with how do I read this tax return and what does this say? And

What Forensic Accountants Actually Do

SPEAKER_01 3:15

um, there's just so much to it.

SPEAKER_00 3:17

No, certainly. And and we love working with you because the secret about family lawyers is that many of them got into the law because they don't want to do math. And then lo and behold, there's a whole world out there where you have to do math. And so hiring an expert like you where you can help help us uh is is welcome. You know, we were talking as we were preparing for this um and how to explain to folks what a forensic accountant is. And I was saying, you're kind of you're not, you know, a detective, but you kind of are you're kind of like a civil detective, and it's kind of interesting that you get to do this stuff every day. But um, one of the things that you do is you help find where's the money. Um and and often there will be a divorce where uh you know you really don't know uh where money has gone to, it's been unaccounted for, it's gone out of one account and then it's just disappeared. Um

Where Hidden Money Shows Up

SPEAKER_00 4:10

when someone suspects that their how their spouse is hiding money during a divorce, what are the places that you commonly find it and what does your process look like? That's a good question.

SPEAKER_01 4:21

So fortunately, the US tax system is very transparent. So the first place we go are tax returns. Okay. Right. So an understanding of how to read an S-corp tax return or a partnership return, and certainly an individual return is very helpful. So you can find, um, you can find we always check for Schedule B, if there's interest or dividends that were paid, schedule D, capital gains. You know, do we see that in the discovery from the other side? That's the first place to look.

SPEAKER_00 4:49

And that assumes that they accurately filled out their tax return. True. Which sometimes they don't, but but that is a good place to start.

SPEAKER_01 4:56

That is a good place to start. Transcripts from the IRS can be can be received pretty easily. Um, and then the other places, a lot of times, if we just have one little piece of the pie, then we can start digging other places. And so it's a mix of um the client. Let's let's use the one example of a woman thinks that her husband's hiding money. Um, she sees a bank statement come in the mail from Wells Fargo. Well, she uses Bank of America. They've always used Bank of America. So then you, the attorney, can go subpoena Wells Fargo. We get the statements, we put those into Excel spreadsheets, and voila, we know where money has come and gone from that Wells Fargo account. So it's it's taking one little piece and then finding, well, that leads to another piece that leads to another piece. So it always starts with tax returns and bank statements.

SPEAKER_00 5:44

And I'll tell my clients this all the time is that having a uh an attorney that has a cadre of professionals that they work with and that they work with well is really important because we or our clients can't simply come to you and say, something's fishy here, go and figure it out. Yeah. Um, there needs to be a real collaboration between the attorney and the financial professional. And like I've said, we've done this many, many times on these cases where you'll find something fishy and then you'll say, Okay, I'm gonna put the ball back in your court and you need to go and subpoena these documents.

A Real Case That Started Small

SPEAKER_00 6:15

I'll get them, and then you can continue with your work.

SPEAKER_01 6:17

Yes. One of the first cases I ever worked on was um really eye-opening for me. This was years and years ago. A woman had a special needs child and her husband had a really good paying job, but everything they had was used and small. Like, like she just didn't understand. They didn't spend any money on their lifestyle or their home. And and he had cut off um funding for horse riding for this special needs child, and it was really helping her. And that was kind of her last straw. She didn't even know how to do an email. She knew nothing about finance for sure. So I just told her, I need you to go find any kind of tax document or any document you can find in your house and bring it to us. She, for the next three months, found all these different little things. She brought 1099s in, she had no idea what they were. We found with those little documents two houses, rent houses in California, and hundreds of thousands of dollars in a bank account that she didn't know existed. Wow. So in that, it really the US bank's bank system is so transparent. We just need a place to start. And that was a conglomeration of the attorneys subpoenaing things. And us, you know, here's a 1099, go subpoena fidelity. And then we also have PI reports, and a lot of law firms do as well, where we can find anything but those PI reports that runs through a a database, like uh driver's license addresses, LLCs, real estate owned. So that also is a nice thing that we have.

SPEAKER_00 7:41

And we work with private investigators where um, you know, I know that it's not easy for you to go and figure out where the money is if you don't have something tracing it there. Um, but we've worked with private investigators before where they'll be able to see if somebody has money in a certain financial institution. They might not be able to tell us how much money or how many accounts there are, but they'll they'll know. They'll give us a thread that we can then start pulling at. That's all you need. And we can um do a subpoena and try to figure out what's going on there.

SPEAKER_01 8:10

Even if they take money, and we've had a lot of where it's um they've taken money to other countries, right? You have family in Mexico, you have family somewhere in the Middle East. Yeah, we've seen that a lot. I've had actually attorney conversations with attorneys in the bush in Africa, which is was really fun to do. Because sometimes you have to hire attorneys in those countries. But even then, you see the money leaving the US bank system. So I may not know where it is over there, but I saw it leave here. So then we have a reimbursement claim to put on the spreadsheet.

SPEAKER_00 8:39

Certainly.

Crypto And Overseas Transfers

SPEAKER_00 8:40

Cryptocurrency is something I get a lot of questions about. Are you seeing uh cryptocurrency come up more in your practice? And are people using that to conceal money during divorces?

SPEAKER_01 8:50

Some, you know what? People I think think it's more complicated than it really is. The majority of the cases we have, it's a Coinbase. It's a it's an account with a statement on it. It's not that complicated. There are people who will put it into the real cryptocurrency, right? That doesn't flow through, doesn't have statements. We do see that some. And we actually have a cryptocurrency expert that we usually use. If we see a case with a ton of crypto, we'll bring her in. And she's literally written the book.

SPEAKER_00 9:16

So when you're saying that it's part of Coinbase, it's part of some type of institution.

SPEAKER_01 9:21

Yes, it's type of institution. It's just another account. It's an alternative asset that you can have you can easily find with a statement.

SPEAKER_00 9:29

Because I've heard stories about, you know, folks that have cryptocurrency and they literally put it on a USB drive and it's encrypted. And if you lose that password, you are testing the crypto. But I I haven't seen very much of a I don't see a lot of it.

SPEAKER_01 9:41

I've maybe five w of 15 years of doing this and thousands of cases, I've had to hire that crypto expert twice.

SPEAKER_00 9:49

Okay.

Red Flags And DIY Money Tracking

SPEAKER_01 9:50

Right.

SPEAKER_00 9:50

So what are the red flags that spouses that are going through divorce need to be worried about? You know, what are the kitchen table issues that they need to, you know, look out for?

SPEAKER_01 10:01

I would say one, um just follow the money. So um you can easily download your transcripts from your bank account. You can go into your account and say, I want transcripts of all the activity for the last three years. Anyone can do that. Go look through there. If you see crazy things going out, you can you can tell if there's pornography or you know, I mean you you you can see the red flags. You can sort it by item and you can kind of tell. The other thing is too, uh I'll often I see um, especially with women who come in barking about the money's gone, they don't realize how much money they're spending. Like you don't realize how much money you're spending. I I see that more often than not. Women who come in and bark that their husband has spent all this money or there's all this gone, and it was really them buying purses and shoes and lunches. I mean, like, know how much you're spending before you go barking about what you think. And that may diffuse the tension as well. Like, like it's just so easy to overspend in our society. I mean, that's true for all of us. That's true for I know. I know I'm kind of preaching myself, but yeah. Yeah. But those transcripts with the banks really are eye-opening. Go, go, go run transcripts on your credit card.

SPEAKER_00 11:17

And another tip for folks is that if you don't have access to, say, a joint bank account online, is you can go to the bank and you can get statements printed out for you, or you can get online access. A lot of times clients will come to me and they'll be like, yeah, uh, he or she cut me off from the joint account. I can't go to bankofamerica.com anymore. Well, if you're on that account, you can go and get access to it. You also have a right to your tax returns. You can get those as well. Yeah. Yeah, you can request online pretty easily.

SPEAKER_01 11:45

You have a right to anything with your name on it.

SPEAKER_00 11:47

So if somebody can't afford a forensic accountant, let's be honest, not everybody can. Um, what would they be able to look for in their own? What would your advice be for them?

SPEAKER_01 11:57

I would say first they need to come to their lawyer because this is a legal issue. And so the claims, what we're doing is doing the math on the legal issues, right? So you first need to understand what you're looking for before you go digging. And then also, again, like we're saying, go pull your bank, your tax returns, go talk to your CPA. If your CPA is buddy buddy with your spouse, go find another CPA. Pay them $300 for an hour to sit down, explain to me what I have, walk me through my tax return, and they'll show you you have a bank account here, a brokerage account here, blah, blah, blah. Um, do that. Also, if you're looking at getting divorced and you don't understand what's in your state or you want to know more, go have a meeting with the financial planner that you guys have, go have an estate meeting with an estate attorney because you have to list everything that you own in those meetings, or the advisor will list it. And that gives you a good idea of what you own and where you're at. Then again, if you're worried about money being lost, you really need to go talk to the lawyer first because there's the that that gets real, as you know, really, really litigious. What's a

Community Waste Claims And Cost Math

SPEAKER_01 12:59

waste claim? What, what you know, is him, you know, I've had people want me to put on paper that he was wasting money and spending fruitlessly for Ubers and McDonald's and things and it you just that's just not reality.

SPEAKER_00 13:11

Well, and on our side, if you're trying to prove a waste claim, which is also known as a community waste claim, which is essentially saying that the other person didn't know about the spending and it didn't benefit them in any way, it's fraud. Um me taking the time to research and prepare a you know a $6 meal at McDonald's and then presenting that to the court is going to cost you probably 10 or 20 times as much. Right. And so I my recommendation for clients is if there is community waste, is number one, you need to make sure that you meet the elements that you truly didn't know about it and it didn't benefit you in any way. But also you usually need to have some sort of cutoff and it's just a cost cost benefit analysis. And it usually is somewhere $250, $500, $1,000. Yeah. Anything below that is just not worth your time because you not only have, if you've got a forensic accountant involved, you've got their time, you've got the attorney's time. And then if you're presenting it in court, you've got your spouse's attorney. It it adds up real quick. You you need to you need to do the math and figure out if it's even going to be worth it for you. And I really caution people against um, you know, bringing claims just based on principle, because in the end, um, if you can win the argument, but you won't have as much money in your bank account at the end of it. It doesn't make any sense. It doesn't make any sense.

SPEAKER_01 14:39

I always have the conversation is the juice worth a squeeze? That's just uh that's the that and it becomes a math equation.

SPEAKER_00 14:45

Certainly. So let's talk about spouses that have a business, either one spouse or both the spouses together.

Business Valuation Basics In Divorce

SPEAKER_00 14:52

Part of the divorce process is we need to figure out how much that business is worth. What does that process look like? And how do you actually value businesses?

SPEAKER_01 15:01

Um, that's a good question. So if you are a business owner out there, then you know your business probably needs to be valued, maybe not always. It's a fair market value situation. We have to value it as if you were gonna sell it on the open market. So we know you're not, but as if you were gonna sell it. So is it a going concern? Is it gonna keep going, or is it in in disrepair and it's a liquidation sale? So that is decided. And then we look at the three elements of any business valuation. Like what is the baseline asset approach, you know, the assets minus liabilities? What is the um market approach? Let's go out to other companies that are similar and look at comparables. And then third, what is the value of it today based on future cash flows? So we look at all three of those.

SPEAKER_00 15:44

So let's separate out the, you know, a business and you're valuing it based on going concern versus liquidation value. Let's start with liquidation value. What does that look like if and and can you give an example of if you were to have a business and you're trying to get the liquidation value, what is that process gonna look like?

SPEAKER_01 16:01

So that that is if if someone, you know, they're in the middle of like is for example, we had a case like that where he um someone had died and his insurance wasn't wasn't current. And so he was being sued by everybody and their mother. His business was going under. Okay. So that was gonna be a liquidation value. And then in the middle of it, he's getting divorced. That guy was having a bad, bad year. I felt really bad for him. So that was a liquidation premise. So what we did then was we looked at the fair market value of his assets as as if they were being sold in the next four months, four or five months.

SPEAKER_00 16:33

And it's it's really just assets minus it's assets on fire sale.

SPEAKER_01 16:37

Yeah.

SPEAKER_00 16:38

And and uh minus debts. Garage sale value on fire. Garage sale value. Yeah.

SPEAKER_01 16:42

It it's it's a pretty ugly, dim situation if you're in liquidation. Okay.

SPEAKER_00 16:46

And what are some of the methods that you use to value a business if it is going to be continuing and it does have value beyond liquidation value?

SPEAKER_01 16:53

That's 99% of what we do, right? And so that's we do on the asset approach, it's a fair market value. So it's what is it worth today if you were to go sell it on the open market, on the assets and the debts? What are they worth right now? That includes goodwill, that includes accounts receivable, accounts payable, all of those things. And then we look at um really the main one is the income approach. So if you're gonna get your business valued, the main thing we're gonna wanna know is what is your income? What's your income that's being generated? What's the real cash flow out of this thing? But first we have to normalize it. So, no, if you're gonna get your business valued, we're gonna, we're gonna rotorooter your numbers because we wanna know, you know, often businesses are meant as a tax shelter, right? We own, you get a tax shelter out of your business. I get a tax shelter out of my business. There are things I can write off that I could not write off if I were a W-2 employee. And so we have to normalize those. So if you are, which we've seen, um, you know, ballet lessons for a child out of a machine shop. Well, obviously that's not a normal operating expense. You know, um, your car, you know, you as a lawyer writing your car off. Okay, that's fine for business purposes. The IRS might buy that. But for business valuation, we're gonna add the expense of the car back in because it's not a legitimate business expense. So we're gonna go first and look for normalizing. We're gonna wanna know, are you paying yourself what someone of your stature, of your tenure, with your experience, with your revenue would be paying, would be, should be getting paid per the IRS. So we're gonna normalize your pay. We're gonna normalize rent, you know. Do you own the building that you're renting? If so, you're probably not paying market rent to yourself, or maybe you're paying over rent for a tax break. We're gonna normalize that. And then we're gonna go look at your expenses. You know, did you put a bunch of personal stuff in there? And if you did, we add it back in because we're trying to figure out what would a buyer that's at an arm's length be buying this for? What would you be selling it for? What would they be buying it for?

SPEAKER_00 18:44

And you use real data based on similarly situated businesses and how much of those sold for, and you try to get as recent as possible.

SPEAKER_01 18:53

Absolutely. That's kind of our well, let's look at our number on the income approach, then let's go look at comparables. You know, in the in the neighborhood, you know, what are what are all the other law firms selling, right? That have this much in revenue? What were the what was the multiple they sold for? And then we look at, you know, as our income approach, right? It's kind of a it's a reference point for us, basically.

SPEAKER_00 19:11

Aaron Powell And some of the more complex cases, I would imagine for you, they certainly are for me, is where you have a business and you're normalizing those numbers. And you mentioned the ballet lessons out of the machine shop. Um, but let's just take it a step further. And you've got somebody that's paying um basically all of their personal expenses and they're going to McDonald's and they're they're going on vacation. Um, and it's more often than you would think that's an issue. How do you deal with a situation like that? Are you removing those?

SPEAKER_01 19:42

Sometimes sometimes we'll remove them all. Sometimes it's a piercing corporate veil and it's not a business anymore, right? Sometimes it's we're gonna take top line revenue. If the numbers are so ugly and so awful and it's so much of a cost to get to the bottom of it, we'll just take your top line revenue and apply a market multiple. What did the business down the road sell for with that same revenue number? It's like that's our worst case scenario.

SPEAKER_00 20:05

When you're doing a business valuation, can you tell us the difference between personal goodwill and enterprise goodwill and how does that play into a business valuation?

Personal Goodwill Versus Enterprise Value

SPEAKER_01 20:16

If you own a business and you're watching this podcast and you're in Texas, you need to understand this concept because it makes a huge difference on the marital inventory and what you're dividing ultimately. So in Texas, and it's not like this in all states, personal goodwill is not a marital asset. So I like to use the example of um a general dentist versus a specialized pediatric dentist um specializing in children that have, you know, um, let's say cognitive issues and they have to have special, they have special needs. So the general dentist, you're gonna go sit in a dentist chair. Like, do you even care who is the dentist, right? They come and they check your teeth, make sure you don't have any cavities, maybe fill a cavity and send you on your way. Like they're down the road from you, they're in your neighborhood, they're on your insurance. It's 20 bucks to go and you get your teeth cleaned twice a year. That doesn't have a lot of personal goodwill. It's more the business is located in your neighborhood and they're on your insurance.

SPEAKER_00 21:13

And you can remove that individual generalized dentist and in another dental school graduate.

SPEAKER_01 21:20

Pretty easily. Yeah, pretty easily. Now, if you have some specialty person, like for example, there, okay, let's use the example of my root canal guy. I have to have a root canal I found out today. I'm very, very displeased about this. There is only dentists on the mine. I know, I really do. I'm not happy. I hate going to the dentist, but I do like mine. But so I there's only one person I would go to because I had to have one one other time. He'll put me under. He's very nice, he's very kind. He specializes in people who are neurotic about the dentist. I love him. He doesn't live near me. I don't even know if he's on my insurance. I'm probably gonna be out four figures to do this, but I'm going to go to him. Period. End of story. Because of his care and his kindness. And he's known for that. And um, again, he specializes in people who are terrified of going. So he has some personal goodwill, right? Kind of like um, you know, if you have a pediatric neurologist versus the doctor at the office, the same thing. General doctor who's gonna take care of the flu versus someone that has a pediatric neurology specialist, a surgeon. Like that person has some skill. So what we do as business evaluators is take that person's skill and put a value to it, a percentage to it. And that is deducted from the value of the business. So let's say you have a business worth $2 million, but 90% of this of it is because of this person's ability and skill. Everybody comes to that practice because of them. If they left and went across the street and opened up a news shop, 90% of the people would come there. So 90% of that value of the goodwill of that company, it's off the marital asset, it's off the marital estate.

SPEAKER_00 23:00

How does it play in? Is it is it a similar situation where you've got, say, ACME construction company, and then you've got John Doe, who's the 100% owner, and his argument is I am the business. Everybody's coming to me. They're not really coming to Acme, they're coming to me. I know them, I know them, I know them. If I shut down this business and I go and open it over there, every single one of my contracts is coming with me.

SPEAKER_01 23:27

That, you know, and then we look at, okay, are there contracts that are solidified? Like are these five or 10-year contracts or even one-year contracts? Are there any contracts? Okay, that adds to the personal goodwill if they're not. Does anybody that works for you have non-competes? We look at all of that stuff. Yes, that's the goodwill. But the goodwill portion is gonna be what it's worth minus the asset approach. So if he has $2 million in the bank, well, the business still has two million dollars that it's worth, but the rest of it is him and that is not on the marital inventory. Exactly.

SPEAKER_00 23:58

What are the biggest mistakes that business

Clean Books And Business Cycle Reality

SPEAKER_00 24:00

owners make when their business is being valued? So what should they not do?

SPEAKER_01 24:04

They should stop lying when we ask questions. That would be that would be number one. That would be honestly, because we know, we know, um, they shouldn't try to hide the ball. You really, because it then you look bad and it's gonna be the ball's gonna be found, honestly.

SPEAKER_00 24:18

Why do you think people are lying? Is it because they are trying to get the business the the value of the business lowered so it's not as big on the balance sheet?

SPEAKER_01 24:26

Yeah. Yeah. And and and we see uh I mean, I get it. Again, no, no, not throwing any stones at anybody. I get it. Because sometimes the business is the biggest asset they have and it's gonna it's the house and the business. That that's it. Um, the other thing is is keep your books clean. So make sure that get your personal stuff out of there. Make sure you have your your books are up to date. Your taxes have been paid, your taxes have been filed, and your books are clean. That would be the number one. Like get if you have I we see accounting firms that do terrible jobs and business owners kind of kick the can down the road. Well, when you're getting divorced, go hire a good accountant and get it cleaned up. That will save you so much money. So much.

SPEAKER_00 25:08

Because then you don't have to do the cleanup.

SPEAKER_01 25:10

We don't have to look at all this stuff and think it's really awful. Yeah. Yeah, it'll save you so much money. Get clean books before you go through this.

SPEAKER_00 25:19

Professional practices, doctors, dentists, lawyers. How is that a unique situation for business valuation purposes versus say like a construction company? Yeah.

SPEAKER_01 25:29

So it's it's that service, it's a service companies usually have a lot of goodwill, especially if it's one or two business owners. Okay. So those kinds sometimes will tell the attorney, gosh, we don't even really need to value this. Let's just look at what they own for what are their assets in the business. Okay.

SPEAKER_00 25:43

Yeah. So let's say you've had us, I've had this situation where you've got a spouse that will come to us and um they'll say, look, the business is barely breaking even. I'm having trouble paying my employees or making ends meet. But then the other side will show you, well, our the lifestyle doesn't really show that they have a really great lifestyle, but how is the business only breaking even? How do you reconcile that?

SPEAKER_01 26:09

That's like a Tuesday in our world. Like that's every like I think nine out of ten cases have that, right? Yeah. Um, one, it's it's the year of divorce. Sometimes we discount that because when you're getting divorced, it really is difficult. And so you're not thinking clearly. And you're you may not so so we don't count that year sometimes, or we count it halfway and the other years are counted fully. And then also it's looking in their books. That's where we ask for general ledgers on every valuation we do.

SPEAKER_00 26:36

Okay.

SPEAKER_01 26:37

Um, and that general ledger gives you a really good idea of oh, look, there were, you know, two million dollars in COGS. What was that? The general ledger should tell you.

SPEAKER_00 26:45

And the general ledger, for those who might not know, that's transaction by transaction line item. You'd be going through those, see if there's anything that's an anomaly.

SPEAKER_01 26:53

Yes, usually, as a regular course of business, that's what we do. And I think most business valuators do that that work in divorce world because we're on the hook, right? We're gonna be potentially cross-examined on this. Like we really have to have our act together.

SPEAKER_00 27:07

Do you come across a lot of situations where the most recent year will be way different than maybe the year before that? Yes. And is it that expenses are going up? So that way it looks like revenue I see that a lot. Net revenue is down.

SPEAKER_01 27:23

I also see, frankly, just like, you know, you've got business cycles where things ebb and flow. And it may, and sometimes, you know, and the wives get so upset, but it is what it is. Sometimes it's just a lull in the business cycle. And we're just this is a downtime, especially oil and gas. Good Lord, those are up and down, up and down. Anything dependent on oil and gas, there's a definite business cycle. And if you're getting divorced at the bottom of it, that we can't help that. And so that's a legitimate thing. And so we always look at that. How far back do you usually go back? Or does it depend? It's a business cycle. It's typically five years, but it is dependent on this on the business industry.

SPEAKER_00 27:58

Okay. And I imagine that COVID probably has impacted. We're just kind of getting past that five-year cycle now. How did that impact things?

SPEAKER_01 28:06

Aaron Powell You talk about the Nerd Brigade coming out at all these um AI CPA conferences for business valuation. It was how do we deal with this? Um it it that was industry specific, but yes, it did make a big difference. We were risk risk factor adjustment.

SPEAKER_00 28:21

Let's talk about the often the largest asset for most folks that sometimes they don't really think about as their largest asset, and that's their retirement, pensions, executive compensation.

Retirement Accounts People Misunderstand

SPEAKER_00 28:33

After the house, the retirement is usually folks' largest asset. So what do people consistently get wrong about dividing pensions and 401ks in your world?

SPEAKER_01 28:44

What I see consistently are two things. So I'm because I want to say the man and the woman stuff both. I don't want to dig on men here, right? Because the men see that I earned it, it's my money, it's my retirement, it's mine, it's not hers. That is not true. The women see, well, he's paid for me all my life. I quit my job, I raised these kids, he owes me forever. That is not true. So both things are not true, right? So that's the biggest thing I see. But on these retirement accounts, I actually was um, I have these group of men that I swim with um a couple of times a week, this this master's group, and it just happens there how it's all men and me. And one is divorced, and he was talking about how he's trading in his retirement. And if he gets remarried, it doesn't matter because it's his IRA. I'm like, no, it it does, it does matter. So just know what you had. There's there's three estates when you get married, right, Alex. You you know, there's the community, there's your separate estate that you had before you got married, your retirement accounts, your brokerage accounts, all that stuff. It is yours. But when you get married, you create a community estate. And now it be now the new stuff becomes y'all's, and the new stuff is income. Income is community property no matter where it's derived from, with a few exceptions, like like irrevocable trust. So the income from your IRAs, your God help you, if you're trading options, that's all income. Um, the dividends and interest that you earn in your separate property is community income. And that's what people don't understand. So if you're a a guy with a bunch of separate property and you're getting remarried, you need to maybe do a pre-nump and a post-nump from a good attorney, you know, like the law firm because you're gonna need that or the income is going to become community property, even if it's reinvested, even if you don't see it. The S P 500, a third of that is dividends. So that all becomes community property.

SPEAKER_00 30:42

Yeah, and and things are different. And regular viewers of the podcast will we've talked frequently about the three different buckets, including the biggest bucket typically for folks, which is community property, unless you have some sort of prenup, but what you've got written on the account really doesn't play uh into the ownership at all or the characterization at the divorce. And so it's really important point. Right.

SPEAKER_01 31:05

I tell people with those retirement accounts and all of that titling is irrelevant. It's you know, if you have an IRA or 401k in your name, but you've had it the whole time you were married, you were married the whole time you've accrued it, it's community property. Titling is irrelevant.

SPEAKER_00 31:19

Yeah. Um quadros, qualified uh domestic

QDROs And Executive Comp Traps

SPEAKER_00 31:25

relations orders. What are they? And why does getting one wrong potentially cost nightmare? Yeah. Yeah, it could be a nightmare, cost you tens of thousands of dollars.

SPEAKER_01 31:35

Yeah. So quadros are needed if you're gonna divide ERISA plans. So they're needed, it's a federal law. You can't get around it if you're dividing 401k or a pension is where it really falls in. A 403B as well, 457. Um, you have to have a quadro. So it's a it's an ERISA plan. It is a separate court order. Um, there is definitely a process to it. So when you when you're getting divorced, as you know, you go into mediation, you hopefully can settle in mediation, right? Like 95% of the cases settle in mediation. Then you know what you're keeping of your 401k and what she's keeping of her 401k. So then a quadro firm really should be hired right after mediation to begin the process. They typically want to take your mediated settlement agreement, do a quadro, create a quadro, send it to the firm for pre-approval. Even big firms that we do all the time, like Exxon or Chevron, they change their forms. You want to send it there for pre-approval. That takes at least 30 days. So while, yeah.

SPEAKER_00 32:31

And a lot of folks will say, well, why don't what like why doesn't Hunt Law Firm just do it? This is a very highly technical document that is best drafted by somebody that has experience as an ERISA attorney, E R-I-SA, a special type of employment law. And um, we actually have folks that we will give them the retirement documents before we go to mediation or while we're in mediation, and we'll ask them, give me the specific language that I should put in the mediated settlement agreement because we don't want to get something wrong or get something that will not reflect the actual intent of the parties. That is so smart.

SPEAKER_01 33:08

I wish more attorneys would do that. I is so smart because you don't you've got to be able to divide these after the fact. The mediation doesn't end it. And then you've got to go through the whole division process. And the quadro is just a tool in the division process to divide all these ERISA-regulated plans, like you said, ERISA. So I I love that. A lot of people misunderstand some of these executive compensation plans. They're not ERISA plans. So if you think about the stuff everybody gets, the pension and the 401k, everybody gets that. That is a quadro. But okay, ExxonMobil actually has five retirement plans. They have a 401k a pension, they have a supplemental pension, another additional pension, and an additional 401k plan that only the executives have. Those can't be divided with ERISA's. They can't be divided in a quadro because it's not an ERISA plan. It's only for executives. A lot of companies have that. So it's so smart for you to call a retirement person to say, how do we, what language do we need to put in here? Because it gets very, very specific.

SPEAKER_00 34:09

And again, having a cadre of experts that you work with is so important, especially in the Houston area where you mentioned these oil and gas companies, the energy companies, they often have very complex uh executive compensation structures. And so you want to make sure that you get it right at the outset because you might be leaving the mediation room and think, all right, I'm done. We're just doing some paperwork. But if you get that wrong, um you could potentially have future litigation and you don't want to do that.

SPEAKER_01 34:36

Yeah. And for the men, for your men listeners out there too, who are executives. So um you really want to make sure you have an attorney like you guys who will get somebody with some financial knowledge of this to write these in correctly because you don't want to end up giving her money that you've earned after the fact, right? Like cuts off at mediation. That's the cutoff. And these executive plans have very specific wording per company on what they can do. And quite often we'll put a ceiling in there. We'll put specific language that he she is gonna get 50% of this amount maximum because after you know he goes on and keeps working, he's gonna continue to earn more of these executive comp plans. Um, so I like, I like doing that. The other thing is taxes. So in these cases, the employee is a fiduciary for the other person. So they are gonna actually, with like when you retire with these plans at Exxon specifically, you get a huge lump sum the day the year you retire. And it's a massive tax hit to you. You're paying all of that, and then you're giving her half of what she got in this mediated settlement after taxes. So it's important to also put the tax wording into these mediated agreements where she gets 50% of this amount, net of my tax the year I receive it. If, as, and when received. I also like that language as well. Yeah, we used to say that. I know you put that in there. I know I've seen yours. I've seniors.

SPEAKER_00 35:57

Um so let's take it to the end of the divorce process after the ink is dried on the immediate settlement agreement and the divorce decree. What

Post-Mediation Money Moves That Matter

SPEAKER_00 36:06

are the most important financial moves in your view that folks could or should make?

SPEAKER_01 36:12

I think you need to hire a quadro firm the day after mediation. Right.

SPEAKER_00 36:15

If there's a retirement that's a retirement that needs to split.

SPEAKER_01 36:18

The other thing to do is um, and I know you guys do this in the mediation agreement. Make sure that the receiving spouse knows she's getting shares typically. She's not getting the dollar amount that's on the statement. So let's level set expectations. So let's say you're splitting a brokerage account. So you can split those before the divorce is final, a non-retirement brokerage account. So for people who are giving that money away, like having to leave it, I would say call your broker the day after mediation and start that process. Because let's say you have an account at Schwab and you have to split a brokerage account. Well, you're splitting each individual stock, each individual bond, each individual thing that you own. It takes a minute to do that. You're also splitting the cost basis. So you're splitting the tax hit on all of those. So I would say get the mediated agreement settlement agreement to your broker and have them to start working on it.

SPEAKER_00 37:11

And a lot of the major brokerage houses have websites specifically for divorcing parties. Like if you were to just Google Fidelity and Divorce, they've got a whole website that has forms and all types of information for folks. And if you've got a non-ERISA retirement account, uh there's still of some paperwork to do, but it's fairly straightforward. It's like a page or two-page document that you know, and sometimes they'll require the final decree of divorce, but it's way easier than doing the qualified domestic relations order, sending it for pre-approval, sending it back to the parties, getting it signed, sending it to the judge, then sending it back. Um it's also less costly as well.

SPEAKER_01 37:53

Less, yeah, it's free. It's free. Yeah. So the quadros, yeah, again, going back to that. So that is pre-approval, and then everybody has to sign. The attorney sign, the client sign, then it gets submitted to the court, the judge signs. Then the quadro needs to be picked up from the court with a judge's formal signature on it and sent to the company. And then the recipient is gonna still, it's still gonna be another 60 days after that before they actually have money in hand or in an IRA account for them. It's it's a it's a four-month process all in. But the IRAs, yes, the minute the ink is signed on the divorce decree and you have a copy, it's just paperwork. It's so easy for IRAs, Roth IRAs, and sometimes simple and SEP IRAs. Although I really would never split a SEP because it just is so complicated to do. I'd keep that with the owner and split something else. Um, and then brokerage accounts are so easy to divide. You can do that the day after mediation. I would encourage people to do this stuff as soon as possible because the longer you go, the longer it waits, the more complicated it gets.

SPEAKER_00 38:49

Yeah, I agree.

SPEAKER_01 38:50

Yeah. I had one case, it was a nightmare. This was a very, very much a learning curve. And this attorney is now actually a sitting judge, and he's very, very good. But he and I had a case together, and I didn't put the last four digits of the account number in my I did the estate inventory. He didn't put the last four digits of the account numbers in the divorce decree. The client's brother died, and she waited an entire year to go and have this IRA at Vanguard split. And guess what? A year from then, they wouldn't take the husband's signature from a year ago. We didn't have any account numbers in anything. Um, and so she had to open up and her husband wouldn't sign the new paperwork. Of course. Yeah, ex-husband. Yeah, he wouldn't sign anything. This is the same guy that had the special needs child. He's really a great guy, but a piece of work. Um, so she had to open up a lawsuit and spend 10 grand and she got it done. But yeah, Vanguard's these companies are pretty sticky. So get your stuff done right after. Just get it done, be done with it, and move on with your life.

SPEAKER_00 39:48

That's great advice. Well, Denise, uh you uh deal with these very complex uh financial concepts and you're able to really drill down and explain it uh to myself and to lay people in such an easy to understand way. So I really appreciate that. If folks are looking for um for you, where can they find you?

How To Reach The Right Help

SPEAKER_01 40:08

Well, we really like to we need to be hired through the attorney. I mean, we're at shfdforensics.com, so shfdforensics.com, but we don't we aren't hired by the person directly. We because everything we do is under the guidance because we're again doing the math on legal concepts. So they need to call you and then you can call us. Right. And that's how that works.

SPEAKER_00 40:30

And we often do.

SPEAKER_01 40:31

I thought I appreciate that. Thank you.

SPEAKER_00 40:33

Well, I appreciate it. Um, thank you for for joining me. Um, if you are looking to find Hunt Law Firm, you can find us online at familylawyerkatie.com or you can call us at 832-315-5494. Denise French, thank you again so much, and we'll see you next time.