What happens when you contribute separate money to the marital home in divorce with Amy Adler, CPA, CFE, and CDFA

Speaker 1 (00:00):

Good morning. Uh, I'm Wendy DeBruin with Divorce Lending Association. I'm a C D L P and today we have Amy Adler with Amy Adler and Associates <laugh>. Is that with Adler Speaker 2 (00:12):

Consulting? Speaker 1 (00:12):

Oh, Adler Consulting. Thank you. So with Adler Consulting, so tell us a little bit about yourself and what you do. I know you have, uh, lots of, of, um, acronyms or whatever behind your, behind your name, C D F A. So tell me a little bit about that and what they all mean. Speaker 2 (00:32):

Sure. So I'm a C P A, first and foremost, also a certified Broad Examiner and a certified Divorce Financial Analyst. Ok. And, um, so yeah, I was in the c p a audit and invest fraud investigation world for, uh, quite a while before I pivoted my career to focus my business entirely on the divorce space. So now I do, uh, all like forensic accounting and, um, divorce financial consulting for people considering going through the divorce process. And then some, some work with them afterwards too on occasion. Speaker 1 (01:06):

Okay. So do you mainly work with, um, clients that are working with attorneys or are they handling their own divorces? Speaker 2 (01:16):

I actually do both. So as a, um, I'm also a licensed mediator, although I don't use my official mediation license for this work because my, my business model is such that I can help people avoid the use of attorneys until the very end of the process and save a whole lot of money and have much more valuable and, um, lucrative outcomes in the situation when they're able to be forthcoming about information. So I help them to mediate their own settlement so that they can then just bring it to the attorneys and, and get the de the paperwork filed and the divorce finalized, um, in the, in the court system. So, uh, it is essentially a mediation process. It's much more in depth. There's a lot more planning involved that I do with them on the financial side. And, and then the outcome tends to be better because we've really thought through what all the options are.
(02:08)
We've really brainstormed about what they can do and how they can all get the best out of their marital estate and, and set them up to move forward successfully. So that's, um, that stuff doesn't involve attorneys until the very end. But the other work that I do on the forensic accounting side, the forensic definitely means supporting litigation process. So those, those types of, uh, projects that I work on are supporting attorneys and that's when I am doing things like, um, validating or, uh, making an opinion about someone's separate property versus the community property or if I'm doing some investigation into some waste claim related transactions or if there's concerns about hidden assets in the discovery process. Speaker 1 (02:54):

What do you mean by waste claim? Speaker 2 (02:57):

Oh, that's a good question. So it really depends on the state, but, but for the most part, a waste claim is when somebody has concerns that the other spouse has spent money in the, in the marital estate, um, inappropriately. So for example, in Texas, the standing orders are that once you file for divorce, you're not supposed to spend money on anything other than your basic living expenses and your attorney fees. So if one spouse decides to take a, you know, $20,000 cruise, that's probably not part of their normal living expenses unless that's something they do, you know, on the regular anyway naturally, um, and can prove it. So if, if that's a concern because they're trying to spend down their marital funds and not have to share them, then somebody like I can come in and, and trace those transactions to validate that yes, in fact, they did book a cruise for $20,000, um, after the divorce. Speaker 1 (03:58):

So you typically do that through credit cards and bank statements as far as tracing that? Yes, Speaker 2 (04:06):

Yes. The waste claim transactions are usually through the, both of those two avenues. Um, there's occasionally cash type transactions, especially when people start getting concerned about drugs or, um, prostitution. So, you know, there's all kinds of crazy things that people do and they'll, and they'll do that with cash. But otherwise yes, the, the, um, the bank transaction check checking, savings, account transactions and credit cards are usually what I'm looking at. Speaker 1 (04:36):

Yeah. Wow. It sounds like a, a lot of digging deep. Um, and I'm sure it's sometimes difficult to, for someone to turn over those records, but I, I'm assuming you have to get a court order for that. Speaker 2 (04:51):

Yeah, sometimes. So when, when one spouse is being pretty ornery about the process and doesn't want to disclose the information, then they will make it very expensive and difficult for the other spouse to get that information, which would then require the attorney to go to ask a judge for an order, or they can just write a subpoena directly to the bank that, that will then require the bank to provide the statements and documentation directly, uh, the existing attorney. So Speaker 1 (05:21):

Sounds like you are at all levels, like you'll work with both spouses helping them, you know, if it's very amicable and easy I guess you would call it. I don't, I don't know if any of 'em, I dunno, easy, easy, <laugh>, I dunno if any of 'em are easy. I guess the easiest of them would be, you know, that and then at, at, at the other end. You're not necessarily working with both, but you're working with one, um, representing one, I'm assuming on the forensic side of it. Um, so yeah. So that's, so how, tell me again, how long have you been focusing a hundred percent on divorce cases? Speaker 2 (06:03):

Well, so my own second divorce finalized in, um, September of 2017, and it was about a year later that it occurred to me that people could benefit from having some financial expertise and a rational mind behind them in the process. So I think it was, yeah, it was about, um, late 2018 when I started doing this. So it's been about five years now. Speaker 1 (06:28):

Yeah. Okay. So are there any, like, is there any one most memorable case that you've had that was the most interesting to you? And, you know, how did, did it change the way that you do things? Speaker 2 (06:44):

Well, every case is in the snowflake. I always say that to my clients because so many of them ask me, well, what's typical and what's normal in this situation? And I'm like, there is no typical and no normal <laugh>. Yeah. Um, but to, to answer the question about a, a case that was really, that sticks with my mind. There's, there's a couple that I remember very, um, vividly because of how significant they were in terms of dollars and impact to the people involved. And both of these cases were, um, well, one of them is still ongoing, so I can't talk about it too much. But, um, the other one, while both of them, um, were essentially fraud cases, they were bringing me in to investigate, um, potential for, for fraud. Of course there's allegations, but, um, and fraud is difficult to prove because in the legal sense fraud ha the term fraud means an intentional deception and not just a mistake.
(07:42)
So it, there has to be proof that it was intentional, which is very hard to do in the legal system. So, um, anyway, I was hired by the client, um, to investigate concerns about my client's spouse who was, um, allegedly transferring money out of the marital estate, um, into potentially other businesses or other accounts that he held that he did not disclose in the, in the divorce process because, um, in, when you're compiling your marital estate, you're supposed to list out every, every account with every institution that you have, whether it's in your name only or yours and your spouse's name or your spouse's name, whatever you're aware of, you're supposed to disclose it in that process so that everything gets awarded to somebody. And, and under some basis, whether it's your separate property or community property or marital, um, all of it has to be listed in order to be considered like disclosed and forthcoming.
(08:46)
So if somebody chooses not to include that information, uh, it could be considered fraud on the marital estate. And judges really don't like that from what I hear, um, from what the attorneys share with me. Of course, I'm not an attorney and I can't give legal advice, but I do hear anecdotal stories all the time from my attorney, um, colleagues and, um, connections and they share that judges really don't like it when, when spouses commit fraud by withholding information from the divorce process. And they will oftentimes award a hundred percent of whatever was not disclosed to the other spouse, regardless of whether it was separate property or community property, whatever it was. It doesn't matter. The judge is judge's just punitive and board. Yeah. So, um, in this case, the client was very, was very concerned because there were transactions of flat 200, $300,000 just, just withdrawn from the account and no, no information about where it went, whether it was transferred to another account or whether it was a check that was written and, and there's no asset to show for it. There's, there was nothing, it was just money that was coming out and it was all happening during the divorce process. And this particular client's divorce took three years. Oh, Speaker 1 (10:12):

Wow. So Speaker 2 (10:12):

It was, it was kind of a minute and a half really <laugh>. Speaker 1 (10:16):

So did you ever find out where that money went? Speaker 2 (10:19):

No, the case settled before it went to trial and the, the, a spouse who was potentially hiding the assets had, um, made her a cash offer Speaker 1 (10:32):

Yeah. Speaker 2 (10:32):

To be able to avoid investigating and digging into this. So, Speaker 1 (10:37):

Wow. It was, Speaker 2 (10:38):

There were a lot of issues with this case and it's more than just that particular thing. So my client was highly motivated to just get it done and move on. Yeah. Especially after three years. So yeah, unfortunately we never knew, but I, I have a very sneaking suspicion that there was money held in another account somewhere that he did not disclose. Speaker 1 (11:03):

Wow. Well, it sounds like very interesting, interesting. Tedious work. Um, let's talk, yeah, let's talk, uh, quickly. I know that we had, um, touched last time we talked, we touched on the marital versus separate property. Um, so what, how, what's your role in that as far as, um, determining all of, you know, all of that? Who, which is marital, which is separate? Speaker 2 (11:30):

Well, that's definitely where things get tedious for, for my and my associate's roles. Um, so there are nine official community property states in this country. Texas is one of them. And um, and actually California is another one. So two rather large states are community property, which means that, um, community means all of the assets that have been acquired, um, and debts that were acquired during the marriage are considered to be community assets, which means, um, in effect it's 50% owned by each spouse. And so anything that was earned or purchased, acquired, gifted, inherited any of that stuff before the marriage belongs to one that one spouse a hundred percent. So in addition to that, if a spouse inherits money during a marriage or, um, wins a settlement of some kind or has gifted something, um, during the marriage, that also is considered their separate property, which means that a hundred percent belongs to them and is not part of the division of the marital estate in the divorce process or in the probate process.
(12:45)
So I just wanna bring up the probate thing too, because it's not always just divorce where this comes up, um, especially nowadays when people are marrying 2, 3, 4 times and have children from previous marriages that in the probate process, a lot of times the separate property question comes up as well. So in order to validate that my team has to actually trace the assets from the time they were acquired or from the beginning of the marriage, whichever happens, um, earlier, so that, you know, if the, if the inheritance came in after the date of marriage, then I would look at the date that the inheritance was received and start tracing those assets all the way through to the current period so that they can figure out exactly how much of the current balance in those accounts is related to community and separate property to be able to determine how much gets divided and what assets there are to divide.
(13:47)
Yeah. In the marial estate. So it's, um, it's tedious because the rules, the rules are really very specific and it requires a lot of like excel transaction data analysis and, and data entry because there's templates that we have to use to be able to input all of that information and really compute what the separate and community property portions are. Because think the rules, for example, are if, if you earn interest on a separate property asset, so like just say that you've got a, a money market mutual fund that's, that's been sitting in an account that you've had since before you got married, all of the interest that it's earned, whether it gets reinvested into that account or, or is taken out and moved somewhere else, is community income. So even though the asset itself is separate property, the income is community and if it gets reinvested into that account, we have to trace through all of the transactions that are community and all of the transactions that are separate to see what's left Speaker 1 (14:55):

Gotcha. Speaker 2 (14:56):

As divorce timeframe. So yeah, that, that part does get very tedious at times. Speaker 1 (15:01):

Well, you know, I, I work with, you know, real property so, and the mortgages, but when there is, you know, like let's say he had a house prior to the marriage, they end up moving into that house, she takes that inheritance and puts it towards remodeling the whole house. Yeah. <laugh> then what do, then what do you do with that? Speaker 2 (15:24):

Those are muddying the water so much. Yes. The issue with real estate is very complex and again, I, you know, I can really only speak to what the rule is in Texas right now cause that's where I'm mostly focused. But the other community property states have similar rules from my understanding and I would just need to do a little bit of research to compare and contrast them. But in Texas, if you, if you buy property before you got married, even if you live in it together while you're married, you own that property a hundred percent as your separate property. So it's based on the acquisition. So if I bought the, if I bought a house, like I have my house now and I'm not married. If I get married next year, the house that I have is still mine even though we're married and we're living in it.
(16:10)
That said, if the community pays for the mortgage payment, then the community is entitled to your reimbursement for the principal pay down only not interest, not property taxes, none of that stuff. Those are all just expenses. But the principal pay down during the marriage is considered a community asset, but that is just a dollar for dollar reimbursement. So if during my marriage I pay down the principal $20,000, then the marriage is, the marital estate is eligible to get $20,000 out of the equity in my house at the time. Gotcha. Divorce or whatever. But if, if the community or if, if like the example that you just gave, if my spouse were to contribute money to remodel, that's when it starts getting really complicated. Cause it's my house. But if he contributes money, like, you know, a certain amount of money to remodel a particular room, then the increase in value associated with that remodel is what the, that new value is of that amount. So if he contributes $50,000, for example, to remodel my bathroom and, and some appraiser comes in and says it's worth 75,000 for that bathroom at the time of divorce, then 75,000 would be what he's entitled to reimburse reimbursement for. So it's different because the community is only getting the dollar for dollar reimbursement on the principal pay down. But if he contributes money to the, um, remodel, then there's that percentage of ownership sort of like a value, a value-based Speaker 1 (17:55):

Yeah. Increase. So that's very interesting because it's like one, there's the dollar for dollar and two, but, but the, on the other side of it, it's based on the actual value, you know, in in, in the same time, if, if you spent, you know, $50,000 remodeling a kitchen, but it only really give, gave the value of, you know, another $10,000 in, you know, real market value, then, then they're, then they're not gonna get that money back basically. That's right. That's right. Yeah, Speaker 2 (18:28):

Yeah, that's right. It's a gamble. Yeah. And the, the part that that gets really confusing and frustrating for people when they go through the divorce process and find this out on the back end is that when they buy the home together and they're already re married, it's the marital home, but one of them uses inheritance money or something as a down payment for the down payment because that's the timing of the acquisition of the asset. The amount of of, or the percentage of the total purchase price that's contributed by the separate estate becomes that percentage ownership of the separate estate. So as an example to put this into numbers helps me <laugh>, hopefully will help other people. If I buy a house for $500,000 and I pay a hundred thousand out of my inheritance money, but I'm married and moving into this home with my husband, then my a hundred thousand contribution is 20% of the total purchase price.
(19:29)
So my separate estate is, owns 20% of that house, the other 80% is marital. So technically I own 60% of the house, cuz 40 of it is part is my marital half and the other 20 is my separate half. Right. So if you were to get divorced, then I would get 60% of the value of the house and he would get 40. So it's very complicated and it it, yeah. The frustrating thing for my clients is that they find this out on the backend when they're getting divorced and they've contributed their separate property like to, uh, remodel or to pay the mortgage payment thinking that they're contributing to this great investment, this real estate investment. So, you know, I inherited this money that was growing in a mutual fund somewhere and I'm using that money to improve my real estate. That feels like still an investment of my money, you know? Yeah. And it's growing and I'm gonna have access to it later. But then when they get divorced and find out, no, they only get a dollar for dollar reimbursement of the principal and they only get the value of that specific room that they contributed to. They're very angry <laugh>. Speaker 1 (20:42):

So how, what would you, I guess somebody's just starting down this path, what would you recommend, um, you know, and I know it's hard when people are just getting married, they don't think, you know, they're not planning on getting a divorce, but it's so important to, you know, you never know what's gonna happen. So what would you recommend, like just as, as a tip for someone starting out on this path? Speaker 2 (21:08):

Well, my, my recommendation would be different if it's the person that has the separate property and the person that doesn't, you know, when it's right, you're married, each person has different interests. So, uh, different different needs in this situation. Because what's gonna happen is if I'm married and I use my separate property, then my spouse is gonna lose out in the, if we end up in the divorce process or in the probate process because I have, I have a percentage investment in that house. Right. Um, what I do think is important is more about the decisions made with paying down the mortgage and doing remodeling. Right. Because the acquisition piece is a little bit easier. That's like, you know, if you're using your separate property or your community property, that whatever that is, is growing in value with the asset. Speaker 1 (22:02):

Right. Speaker 2 (22:03):

The other stuff does not really, not very much. Especially if you remodel and then 15 years later you get divorced, like that remodel money is gone probably, right? I mean you might have remodeled twice since then and then you have not gotten any value out of that. So it's really not a fair way to allocate, you know, or determine a reimbursement of those Yeah. Funds during the marriage. So I always just tell people, think about if it's a marital asset, try to use marital funds to put into it that makes things as simple as possible and makes things feel fair too because you're not worrying about whether your separate property investment is gonna stay as an investment or if you're gonna lose it. So, um, but then I also, I also recommend to clients to think about like what are their long-term plans? What are their access?
(23:03)
Do they have to funds? Are they living entirely off of their separate property in, you know, investment assets? You know, when, when people are retired, it's a very different conversation than if they're working still and earning. Um, and that's really, so it's hard to offer tips to, to just the general public. I have to have a better understanding of who it is that, that I'm talking to and what their situation is. But as a general rule, just to go into it, knowing what your contribution is going to have to come back to you on the back end if you were to end up in a divorce situation or in a probate situation, um, it makes people feel better at least that they've, that they've made decisions knowing what the consequences are of their actions. Yeah. Right. Yeah. You know, you go into it not knowing and then find out that you're, you know, screwed then. Speaker 1 (23:58):

Yeah. And, and I think the biggest problem is just not being educated before even, I mean, way in the beginning before even a divorce is even a thought, you know, when they're buying a house or when you're making these major financial decisions, you know, educating people upfront on what they can do. So for example, I mean, I guess how would you, let's just say they're buying a house and one of them's putting a hundred thousand, you know, into it. The other one's putting 50,000, you know, do you recommend any type of, um, you know, legal document that's, that that spells it out on, on who gets what or, um, what would you recommend there? Speaker 2 (24:44):

I am a very big proponent of prenups. I think, you know, that they're poo-pooed so often because it feels like such a buzzkill when you're getting married. You know, when you're excited and you're in love and, and I, believe me, I believe in love. I officiate weddings. So just cuz I work in a divorce space all the time doesn't mean I'm a, a curmudgeon. But I, I think that, um, having a prenup that both people have really well thought through, um, can help avoid a lot of issues, um, down the road. So I think that's a great idea. If people are already married, having, um, a postnup even is a great idea sometimes. Yeah. Um, you know, if they're considering making these types of investments. Speaker 1 (25:29):

Yeah. Um, so, so you're an officiate. So do you, do you like kind of pull 'em aside before and go, listen, this is really what you should be doing before you say <laugh>? I mean, do you counsel them on this as an efficient? Speaker 2 (25:42):

I, yeah. I mean I'm, I'm clergy, I've been clergy for a long time, so yes, I do some premarital counseling and I always tell them, you know, I don't, I don't, I don't hide anything. So I always tell them like, look, I don't wanna see you in my office again because I work with people who are getting divorced. I mean, if I see you because somebody died, then okay, that's one, you know, <laugh> Yeah. Can, can't help that as much, but Right. I don't wanna see you in my office related to a divorce down the road, so here's some things that you might wanna consider at least discussing if not doing, uh, before we walk down the aisle together. So yeah, it's a, that's the financial stuff is, is a huge part of the pre American counseling because it is the number one cause of divorce as people arguing over money, Speaker 1 (26:27):

Finances. Yeah, for sure. Um, so is there any one main lesson that you've learned in your career? Speaker 2 (26:39):

Um, gosh, <laugh> Speaker 1 (26:46):

Gotta stump you. <laugh>. Speaker 2 (26:47):

No, I mean, I, I could say, I could say a bunch of things but yeah. You know, the one that comes to mind is more of a personal thing than it is about divorce. It's more about, you know, I, my career has evolved so much from the time I got out I got outta school and you know, even when I went into school I was very anti accounting cuz my dad was an accountant and he was laid off from his job every year that I was in college. And I thought, oh God, there's no way I'm gonna be able to handle this if that's what my life is gonna be like. Yeah. But he was convinced that, you know, times were changing and things were much better for accountants, um, than they were for my dad and his generation. And so I did it and I, I, um, I was not happy.
(27:33)
I felt like I was making the greedy richer when I was working in the, you know, public accounting audit space, um, working on public companies, s e c reporting and all of that. Yeah. And I just constantly felt this whole to do something more meaningful Yeah. That had a better, bigger impact on the world and that made a difference to people, to individuals and to people. And I couldn't figure out what that was and so I just kept going and I just kept doing, even though I kept feeling this nagging pain <laugh>. Yeah. Um, so the, the one lesson is that I wish that I had listened to it sooner because now I'm, I'm, you know, I run my own business. I'm just so fulfilled and I, I love what I do. It, it makes me happy to get up in the morning every day and come to my computer because it feels so rewarding to be able to help people through this process in a way that, um, I didn't have when I was going through divorce. And a lot of other people say, you know, where were you when I was going through my divorce <laugh>? Speaker 1 (28:41):

Yeah, for sure. I actually, when I was going through my divorce 20 something years ago, I wish I had you. Um, so yeah, and it's so important to, to love what you do and be passionate about what you do and instead of going to, you know, some corporate job that doesn't really seem to make as much of an impact. So that's awesome. Um, okay, well we will wrap it up. I appreciate your, you spending your time with us today. Um, I totally respect you and what you do. Um, so give us a little bit about like if someone wants to reach out to you, um, for more information, give us all the, all the deeds on that. Speaker 2 (29:18):

Sure. And, uh, thank you so much Wendy. I really enjoyed this. Um, my website is your divorce asset.com. Um, I believe we are the divorce asset for people behind the scenes. Um, and so we have social media too where we post on the regular at least weekly tips and tricks and, you know, thought provoking ideas. Um, so, um, Adler Divorce Financial is the Facebook page and your divorce asset is the Instagram. I'm also on LinkedIn if you wanna know a little bit more about my career history and about what I do. Um, all of those are great ways to reach out to me. And if you go through the website, you can just submit a request through the Contact us function and it will go straight to my email so I can set up a consult call. Speaker 1 (30:07):

Perfect. Any other final thoughts before we leave today? Speaker 2 (30:13):

No, I think we covered it pretty well, Wendy, I really appreciate you having me. Yeah, Speaker 1 (30:16):

Lots of good stuff. So thank you so much. Amy Adler Adler Consulting.