Top Five Mistakes to Avoid When Preparing the Financial Affidavit
Top Five Mistakes to Avoid When Preparing the Financial Affidavit
Financial Affidavits are the first step towards a resolution of financial issues. They require careful consideration to ensure that the statement is an accurate reflection of a party’s financial situation. An accurate Financial Affidavit not only ensures a fair and equitable settlement, but reduces conflict and saves your client money. It may be helpful for a financial professional to work closely with the client and their lawyer to ensure that the assets and liabilities are accounted for, all required documents are disclosed, and that no stone is left unturned.
Most family law cases involve at least one or several financial issues that needs to be resolved. In addition, most cases in family courts require that both parties prepare a Financial Affidavit and produce financial disclosure. The Financial Affidavit is a sworn document that each party relies on to be a true, complete, and accurate reflection of that party’s financial situation in order to make decisions with respect to support and property settlements.
Often, this is the first time that a client will take a hard look at his or her finances and gather all of the relevant information about their financial situation in one place. For many, this is an overwhelming endeavor. In an effort to simplify the process, clients try to cut corners wherever possible, and inadvertently leave out important information.
This is the client’s opportunity to get their finances in order, put their best case forward, and move forward with the next stage in their life. To help your clients through this process, it’s helpful to review the Financial Affidavit and alert them to the things they should consider when they prepare their first draft. Carefully demonstrate to them how to complete the Financial Affidavit—including pointing out assets and debts that are often omitted—and provide a list of documents that they will need to gather.
Failure to properly complete the Financial Statement could result in inequitable, incorrect and unfair settlements, loss of credibility, and possible costs and other sanctions.
Below is a list of five common mistakes to avoid when preparing a Financial Statement:
OVERLOOKING INFORMATION ON THE CLIENT’S PAY STUB: Most, if not all, of the information on a client’s pay stub should correspond to a section of the Financial Affidavit. The pay stub can reveal a wealth of information, such as the following: whether there are any taxable benefits; whether the client is enrolled in any medical, dental, extended health care and/or life insurance plans; whether there are any additional savings accounts or retirement vehicles (such as 401K, pensions, or other employee savings plans); if union dues are being paid; and more.
USING INCORRECT PAYROLL DEDUCTIONS: Another common mistake is to overstate or understate the payroll deductions. Once the client has reached a certain level of income for the year, certain IRS deductions are maxed out and the contributions will no longer be automatically deducted for the remainder of the year. Because of this, it is important to be aware of the income level and maximum deductions. Often, the client is either taking out too much or too little taxes from their pay, only to leave themselves with either a tax refund or taxes due at the end of the year. I always recommend that the party lists the amount of taxes that should be taken out so that the net income is accurately reported. Alternatively, all of the Child Support software calculates the statutory tax deductions form gross income which can be transferred to the first section of the financial affidavit.
OVERSTATING OR UNDERSTATING EXPENSES: Many questions will be raised if a client has significantly more expenses than income and it is unclear how these expenses are being paid for, without corresponding debts to substantiate the extra spending. Similarly, eyebrows may be raised if a client has significantly more income than expenses without clear indication of where the unused funds are going, or without significant savings to account for the excess. In the former situation, is the client receiving cash income that is not being reported? In the latter, is the client hiding excess income in unreported accounts? When recording expenses, it may be important that the client accurately records both the expense and the portion of the expense that they are covering with their income. For example, if a spouse does not earn an income, it is unlikely that they are covering 100% of the mortgage, property taxes, insurance, and children’s expenses; it may be helpful to indicate who pays for what.
FORGETTING TO DISCLOSE: When asked about a client’s assets and liabilities, the big expenses come to mind- the family home, retirement contributions, pensions, mortgages, and lines of credit. However, more often than not, the client will overlook the less common assets and liabilities, such as: credit card and loyalty reward points, timeshares, banked vacation and sick days, and retail credit card balances. While seemingly insignificant, the values add up and failing to disclose them can undermine the client’s credibility. Take the time to jog your client’s memory regarding all aspects of their financial situation to help avoid future disputes about undivided assets or liabilities.
IMPROPER TREATMENT OF EXCLUDED ASSETS: Often, a client will inform you of a gift or inheritance received during the marriage that is to be excluded. It is important for you to always ask where the funds were deposited or how they were used. A client needs to be able to clearly demonstrate that the funds were kept separate, and may only be able exclude the amount that was still in existence on the date of separation.
It is not uncommon for clients to provide account statements confirming the original amount of the gift or inheritance received, only to discover that throughout the years they had withdrawn and deposited from the account to the point where one could no longer ascertain what amount, if any, was left over from the original funds. A client should only exclude those amounts (or other excluded items) if they are able to reasonably show the source of the funds or trace the assets back to the original gift or inheritance. South Florida Mediation Services is also available to provide one hour of free mediation (on Zoom/Skype/Facetime) to any family that is facing a time-sharing issue related to the current crisis. If you or someone you know needs this service, please call my office. Together we will get through this difficult time. If you or someone you know is divorcing, feel free to contact me, Deborah Beylus, at South Florida Mediation Services to see if mediation is appropriate at (561) 789-0710. email@example.com; Website: www.Southfloridamediationservices.com