Plano attorney Thomas Greenwald interviews Bryan Rice, a Weatherford CPA with 30 years of experience and 20 years in forensic accounting. In this episode, Bryan and Thomas discuss the correct steps to take if you are going through a divorce and believe your spouse may have withheld assets from you.

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This is the “Family Law Advisor” podcast, I’m Tom Greenwald. My guest today is Bryan Rice. Bryan’s been a CPA for 30 years and he’s been doing forensic work for the last 20 years.

Let’s talk for a minute about three different areas here. We’ll start by talking about a client that comes to us and says, I think my spouse is hiding money or that my spouse has wasted money. And then second part is, I’ve got some separate property. I want you to help me with tracing, and third, valuation. So, when a client comes to me and says, I think my spouse has hidden money, or I think my client or my spouse has wasted money, I will typically ask them to get in touch with you, Bryan. And I’d say, meet with Bryan Rice, explain to Bryan why you think your spouse is hiding money or why you think your spouse is wasting money. And once you have that meeting with the client, what types of documents or information would you want from a client to initially assess whether or not they may have a claim that would be worth pursuing further?

So, first, I would want to sit and talk to them and get an understanding of what their financial circumstances are. For example, how much money has each spouse been making or not making, what kind of lifestyle they’ve lived, how long they’ve been married, and is there…say they’ve been married for 10 years, were there three years of everything was great and wonderful and everyone was in love and then after that, it started going downhill slowly. And so, at what point in time do they believe the hiding of money started or the wasting of money started. Because it’s a rather expensive endeavor a lot of times to go and try to piece together several years of financial information and sometimes the information doesn’t exist. For example, most financial institutions keep their records for only 5 years. And generally, people who have been engaged in hiding or wasting money don’t say the evidence of it. Some do, strangely. But, so I would sit with them.

And the other thing a lot of people don’t realize is just how much money they spend to live. It’s easy, we all know what our monthly mortgage payment is, what our monthly car payment is. You know, we know how much we spend on our kids’ extracurricular activities but a lot of times we don’t have a good handle on what we just spend for incidentals. And I mean, the daily trips to Starbucks for $4.50 starts adding up. Another, sounds like a silly example, but a lot of people just don’t understand that that’s how money gets frittered away. So, the question is, are the documents available? Two, is it feasible there could be missing money or wasted money? And sometimes the person has the evidence, they have the canceled checks, they have the receipts from whatever thing happened. The flowers sent to the girlfriend, you know, for a tried example, you know, once a week, 70 bucks a week or something for 2 years, I don’t know. So, sometimes the evidence is already partially there.

Now, sometimes people believe that if they see a little smoke, there must be a fire. And while that could be true, that may not be true. Because a lot of times you have to think about the totality of the marriage and when times were tough and when times were good, and sometimes the bad financial acts kind of go hand in hand when things were bad in the marriage. Like, say there was a family member who had a bad illness and it put a ton of stress on somebody. And so, maybe to relieve that stress, they went and did a bunch of gambling. They needed to get out and do something fun, I don’t know. So, a lot of times you have to kind of look at it in the overall context of what was happening in the marriage. So, kind of the hidden money is something that… I mean, I remember a case years and years ago where a gentleman swore up and down he had no overseas accounts and he happened to be a tax lawyer. And he, I think he drove his car home, put it in the garage, and I think he opened his trunk to get something out and he didn’t shut it all the way. And then his wife came home, pulled her car in the garage and noticed that her husband’s trunk was not shut all the way, so she would be nice and shut it. But for some reason, she decided to open it.

She looked in it first.

And there was an entire set of files regarding the man’s skillful and lengthy transfers of money to overseas accounts. And that case was almost over and it had run out of steam and she thought that had happened. But so, a lot of times, those things are kind of happened on by accident.

So, I mean, and there’s a lot of stories like that, but that’s kind of the hidden money, money that has been…you know, or another great example of hidden money on the other side is, say you have a person who goes to the grocery store once a week and they spend maybe $300 at the grocery store, I don’t know. But in that $300, there’s a $50 gift card, you know, the ones you can buy right at the checkout line. And so, 2 or 3, $50 or $100 gift cards over a long period of time are, you know, and I know that sometimes they expire but are used and used to buy things, that’s kinda hidden money. And so, it comes in all shapes, forms, and sizes.

So, one thing I do, to wrap up this little part, is when I’m confronted with somebody who believes there’s missing money, I literally take their tax returns for the last several years and I schedule them out. And the taxable income on the tax return is not necessarily the same as the cash flow. For example, if someone took a standard deduction on their tax return, that’s not really cash, that’s just a number the government gives you as a deduction. So, I would take taxable income and I would add that back. And then I might deduct, say, you know that we can’t deduct mortgage principal payments, but we can deduct mortgage interest. So, I would subtract the mortgage principal payments if the mortgage interest was being deducted on the return. So, I’ll take a number of steps to convert taxable income to cash flow. And then I sit down with the person and I say, okay, so in each year we can see that you had a cash flow before personal expenses and other things of maybe $50,000 a year or $100,000 a year.

So, now let’s talk about all the other things. What were the car payments? What was insurance? What were your…you know, just all kinds of things that he was…how much did you spend on utilities? Did you send kids to private school? All these things. What do y’all spend on clothes? And so, we look at that $100,000 a year and we whittle it down to an amount that is unexplained. And so, maybe we started with $100,000 a year and we’re down to $4,000 or $5,000 of unexplained cash flow. And so, at that point, we might say, well, you know, this was somewhat of an imprecise venture and more than likely in that year, there probably wasn’t any money hidden unless there’s money that was never reported on the tax return, income that was never reported on the tax return, which probably would have already been figured out. But so, we do kind of…and that’s kind of a feasibility analysis. And I’ve done that. I did that in a case here that I worked on for an attorney here in your firm several years ago and we definitely found that the person had a lot of unexplained cash flow. And then after further digging, we found where it went, it was for a paramour and the man’s income had gone up dramatically. He had finally started doing well and he kind of let it go to his head. And then the other question was on tracing.

Yeah. So, if a client says, well, I brought some money to the marriage, or during the course of the marriage, I inherited some money, I’m not sure where it is today. I would say you’ll need to go meet with Bryan Rice and kind of walk him through it. What information are you looking for from a client initially if they feel like they have some inheritance or some separate property that may be part of their overall estate?

That’s a great question. So, of course, if a person is a beneficiary of an estate, an heir, so to speak, they should have received documentation from the executor of the estate or executor saying, here is what you’re getting under the will of your Uncle Joe Smith and here’s the will and we’re settling up the estate now, or we’re paying the bills of the estate, we’re selling assets and you’re going to get, you know, 25% of the residue of the estate. You know, it’s going to all be turned to cash.

And so, maybe after all of the estate’s non-cash assets have been sold and turned into cash and all the debts have been paid, so maybe there is $1 million.And so, we’re gonna see documentation of all that and that would be important to get to prove up that the person did actually get the $250,000 in the inheritance. And then we would want to see the bank account to which the person deposited the $250,000. And hopefully, those bank account records are still there. And then we literally would look at what was done with that $250,000. I mean, maybe the next week they took that $250,000 and used it to pay off the community mortgage. And if that’s the case, we know that essentially the $250,000, the community, in that case, would owe the separate estate $250,000. And so, we’re pretty much done at that point.

Now, it also could have been that the $250,000 was retained and sat in a brokerage account and was used to buy a number of stocks and bonds and maybe those stocks and bonds just sat in the account and appreciated in value. So, we would need to see all of those brokerage account statements from the time the $250,000 was deposited until current, and employ rules of tracing. And maybe in that account, there was more money put in that was say community money, maybe the salaries of the individuals were being deposited or a portion of the salaries were being deposited into that account. And so, we can segregate the amount of community money in the account and the amount of separate property in the account. That’s exactly what I was being deposed about today. I was simply tracing a man’s separate property. He got married say in the middle of 2013 and now we’re in early 2019 and he sold a house that he had before marriage and deposited that money into an account and then some of that money was used to pay down on another house.

And so, you can see the myriad of situations, but before somebody gets started onto tracing, the main thing to understand is, is the information available to do the trace? Because if a person comes to us and says, “Well, I inherited some money 10 years ago and I’d like you to trace it.” And then if we spend…or say maybe 20 years ago. So, we spend time, we do 15 years’ worth of tracing from the beginning of the marriage until 5 years ago and then all of a sudden, “Oh, I don’t have the last 5 years of statements.” Well, I just did that person a great disservice and wasted a bunch of money because that tracing will probably fail because of a lack of information. So, the first thing I would do is make sure that all of the statements or the vast majority of the statements were available. And so, that’s the key thing.

The third part we talked about was valuation. So, a client comes to me and says, “I’ve got a business, I’ve got an interest in a business.” And again, I say, “Well, what we’ll have to do is meet with Bryan Rice and talk to Bryan about the business.” What information are you looking for from a client initially, if, for instance, they have a business interest?

So, first, we sit down with a client and talk to them, what kind of business is it? What does it do? How long has it been around? Did you help found it? Did you help start it? Was it started before the marriage? If so, maybe it’s a separate property business. Was it started during the marriage? It’s maybe a community property business. So, getting the initial facts about the nature and history of the business, and then we’re gonna need maybe up to 5 years of financial statements and/or tax returns, sometimes both. Then we want to see things like, what kind of employees does it have? Are there key employees? Does the business lease its premises? Does it own its facility? Does it own any patents or trademarks or trade secrets? Then we start finding information on our own. We look at what similar businesses are doing in terms of performance. I mean, we have a lot of databases that have the performance of comparable businesses in the area even though they’re privately held companies, just kind of like a realtor has comps on houses in your neighborhood, we have comps for businesses.

Then we would look at say, what’s the economic outlook for the area, I think, and to some degree the nation as a whole. But mostly it’s about how the business is doing and is the business sustainable in terms of, you know, getting a refreshing stream of an ongoing stream of customers and relationships and what’s happening in the industry. Are there any big disruptions?You know, several years ago, many years ago, I appraised some pretty large taxi cab companies in a metropolitan area for estate tax purposes. And, of course, back then, none of us even dreamed or thought about Uber, it wouldn’t have even been on our horizon. But we knew at that time that…it was actually Las Vegas. They were building the monorail at that time. So, we had to deal with the impact of that, what we thought the impact was going to be. But now, you would have to consider, say things like driverless cars or all these little scooters they have around, what kind of impact, and say also, what’s the industry regulation? You know, because at first we saw Uber coming in and there wasn’t any regulation, and now, some municipalities are really pushing back and making Uber drivers register and pay more fees and to try to level the competitive landscape. And then often we want to go visit the business and actually talk to the involved owner, if there is one, or the management of the company.

Well, Bryan, I want to thank you for being here today.

Very welcome.