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Tracy Stewart
Tracy Stewart

Divorcing Clients Need Their Trusted Advisor
Do you have tax clients who are divorcing? Are you prepared to continue serving both clients?

December 16, 2010
by Tracy Stewart, CPA, PFS

Your tax client, John, calls you: "Rhonda and I are getting a divorce. We're trying to do this collaboratively, but I don't want to lose everything I have ..."

He and Rhonda have been with you for many years, but Rhonda has never been interested in financial issues. You've always worked with John directly.

"The first thing to remember is that, when you are preparing joint returns, you have responsibilities to both spouses because they are both clients. This can be a touchy area and at times puts you in a gray area," says Jerry L. Love, CPA, PFS, CFP.

The AICPA Principles of Professional Conduct covers this. AICPA members "have responsibilities to all those who use their professional services" to "exercise sensitive professional and moral judgments in all their activities." (ET Section 52 - Article I — Responsibilities)

So, when does a chat on the phone become a sensitive professional activity? Probably before the end of the conversation.

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Has this phone call turned a tax client into a consulting client? The answer could be yes. Love recommends you "recognize that if you are giving advice to one spouse that may be or may be perceived as beneficial to one spouse and/or detrimental to the other spouse, you might need disclosure or a waiver signed." In divorce situations, it is not uncommon for both spouses to feel the CPA represents them. Divorcing couples will sometimes claim that their CPA gave advice that benefited the other spouse and/or was detrimental to them. It does not matter who will end up with more money or actually pay your invoices. The CPA must treat each spouse equally.

Be Careful

Working with both spouses is not necessarily a problem. It can be successful if you are careful. You should be careful to maintain your objectivity, protect your integrity and avoid subordination of your judgment. (ET Section 55, Article IV) Additionally, if you wish to work with both spouses, have them both sign consent forms. Engagement letters are good vehicles for addressing conceivable areas of conflict. Require both spouses and their attorneys to sign a release stating that they are aware of conceivable conflicts.

Furthermore, state in the release that both spouses want your services regardless of the potential conflicts. For guidance on proper language for engagement letters, refer to the AICPA Practice Aid 04-1, Engagement Letters for Litigation Services. For guidance on the divorce engagement refer to the AICPA Practice Aid 05-1, A CPA's Guide to Family Law Services.

Are You Really Helping?

Once you are well prepared to help your clients, John and Rhonda, you should be sensitive to your assistance helping and not hindering their divorce process.

Without a doubt CPAs can and should be assisting their clients before and after the divorce is concluded. Some of these matters may include:

  1. Assisting them in identifying their assets and liabilities.
  2. Consulting with the spouses and/or attorneys on proper wording for QDRO and/or alimony.
  3. Analysis of how to fund an equitable distribution of the community property.
  4. Evaluating and educating both spouses on the future tax implications of the settlement as well as tax issues related to post divorce transactions (sale of assets, taking money out of retirement accounts, alimony, etc).
  5. Tax planning and tax return preparation during separation and the year of the divorce

 

Jerry L. Love, CPA, PFS, CFP

 

Many divorces are litigious in nature. We are all familiar with that process. But when your clients choose the collaborative divorce process, you will be in uncharted territory when you attempt to assist from the sidelines if you are not familiar with this kind of divorce process. The rules of the game are different. To the uninformed, things may appear to be nonsensical when they are in fact moving along the right path at the right pace and in the right manner.

"The parties are free to make their own choices as to what their settlement models are that meet their goals. That should be respected," according to Jack H. Emmott, III, collaborative family law attorney in Houston, Texas. "They have each been fully informed. Respect their choices and do not be a third party who challenges while not knowing what has gone into the case."

I have seen the unfortunate effects of a third-party blindly challenging the agreements in a collaborative case. This was a financial advisor whom the wife consulted solely for investment advice of her proposed settlement. This was done with the agreement of the husband and the consent of the collaborative professional team. Although the financial advisor had no experience with the collaborative process, she advised the wife that the collaborative case was being poorly managed. The result was the derailment of the collaborative process just when it was nearing a successful conclusion. The couple subsequently spent over a hundred thousand dollars going to trial in a litigious case.

"Even after the collaborative case is over, someone may second guess the results of the case out of ignorance. Don't assume that litigation tools are the same for a collaborative law case," cautions Emmott.

Many collaborative divorce teams include a Neutral Financial Professional (NFP). This person is usually a CPA, CFP or both. Emmott further advises, "Before you start giving your clients advice, learn about collaborative law and learn what the Neutral Financial Professional does. It is not necessarily what you do."

Be Your Clients' Trusted Advisor

Your clients have a special relationship with you. They trust you. When you are faced with advising them before or during a divorce, prepare yourself as well as your clients for your role as trusted advisor. Openly explain any potential conflicts of interest. Use engagement letters and signed waivers. Be diligent in your application of Principles of Professional Conduct. Take the time to learn about the process your clients have chosen for their divorce. It is these things that make you their trusted advisor.

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Tracy B. Stewart, CPA, PFS, CFP, CDFA specializes in family law litigation support in Houston, Texas. She helps clients protect their wealth during property settlement negotiations. She is a member of the AICPA Personal Financial Planning and the Forensic and Valuation Services sections. Stewart is a board trustee for the Collaborative Law Institute of Texas as well as on the Executive Board of Texas Society of CPAs. You can contact her through www.texasdivorcecpa.com.

The AICPA's Personal Financial Planning Section is the premier provider of information, tools, advocacy and guidance for CPAs who specialize in providing estate, tax, retirement, risk management and investment planning advice to individuals and closely held entities. The Personal Financial Planning Section is open to all Regular Members, Associate Members and Non-CPA Section Associate Members of the AICPA. If you are a CPA who wants to demonstrate your expertise in this subject matter, become a Personal Financial Specialist Credential holder. Visit www.aicpa.org/PFP to learn more.