Understanding a Lifestyle/Marital Spending Analysis During a Divorce
January 31, 2023
By John O’Grady
One of the commonly requested analyses of forensic accountants during a matrimonial dispute is what is referred to as a lifestyle analysis. This analysis is primarily utilized to determine what the standard of living was for the parties in the divorce matter for a specific time period during the marriage, typically three to five years, by analyzing their spending habits. This analysis is often requested when the parties do not agree on what the marital lifestyle/spending is during divorce proceedings. Let’s examine what a forensic accountant needs to conduct a lifestyle analysis, the steps taken, and how they’re best utilized to paint an accurate picture for clients.
What Goes into a Lifestyle Analysis
In order to prepare a lifestyle analysis, a forensic accountant will need to obtain and review the following (not an all-inclusive list):
- Personal bank account statements (checking and savings), including copies of cancelled checks, deposits slips and wire transfer documentation.
- Personal credit card statements.
- Personal brokerage and investment account statements, including copies of cancelled checks, deposit slips and wire transfer documentation, if applicable.
- Business credit card statements and/or bank account statements, if applicable.
- Personal income tax returns.
- Case information statements.
- Other expenses that are not reflected in the parties’ bank or credit card statements.
Steps for a Beneficial Lifestyle Analysis
The first step in a lifestyle analysis is to obtain as much background information pertinent to the parties’ spending as possible. This would include such things as names and birthdates of the parties and their children (if any), nature of the parties’ income during the period being analyzed, an understanding if any personal expenses are being paid by a business owned by one or more of the parties, any expense reimbursements from the parties’ employers, and any non-recurring/extraordinary expenses that may have occurred during the time period.
The forensic accountant should attempt to properly identify the specific expense items, which may involve using either an internet search or speaking directly to the parties, as well as apply proper and consistent categorizations of the expense items. Forensic accountants will then categorize the expenses into the same categories that are presented on the Case Information Statements that are utilized in the New Jersey courts or the Financial Affidavit that is utilized in New York courts as well as other jurisdictions.
When preparing a lifestyle analysis, forensic accountants should try to determine what percentage of the total spending in each category is for each specific party and for the party’s children to the extent that there are any. This may not be an easy undertaking because both parties often spend from joint accounts. However, it is becoming more common for married parties to keep their finances separate and have minimal usage of joint accounts for use solely on joint expenses. For example, the parties may have their own credit card accounts and checking accounts as well as maintain a joint checking account solely for family expenses such as mortgage payments, utilities and so forth. Preparing this type of analysis will allow for more informed decision making regarding the needs of the individual parties and the expenses related to care for the children.
Pay particular attention to the spending of the parties to determine what, if any, expense items paid over the course of the analysis period should be considered non-recurring or extraordinary in nature and, therefore, should be adjusted as a non-lifestyle expense. Examples of typical items meeting this description may include home renovations or major repairs, one-time extravagant vacations or gifts, wedding expenses or other major events. Other expenses that should not be considered lifestyle spending include divorce costs, tax payments and spending on behalf of any business interests of the parties.
Spending should also be reviewed to determine any trends in overall spending, such as an increase in personal spending. There are instances in which one party, knowing that a divorce is imminent, will attempt to increase their spending in order to inflate the marital lifestyle. Additionally, the lifestyle analysis may also reveal spending that falls under the definition of dissipation. A thorough analysis will discover these instances.
Utilizing a Lifestyle Analysis to Confirm the Parties Income
Another usage of the lifestyle analysis is to confirm the income that the parties report on their personal income tax returns. A complete and thorough lifestyle analysis will incorporate deposits made into the parties’ bank (and investment) accounts. These annual deposits should then be compared to the income of the parties as indicated on their personal tax returns. Identify any discrepancies and investigate further. Some common items that may appear in this analysis that are not reported on the tax returns of the parties would include expense reimbursements, personal loans, distributions (as reflected on Form K-1s) and gifts. While it's crucial to not only understand the marital lifestyle of the parties, it is also equally important to understand how that marital lifestyle is funded.
A complete and thorough lifestyle analysis, while time consuming, may be necessary to assist in obtaining the necessary knowledge regarding the spending and income of the parties in a divorce proceeding. Such knowledge generally will allow for more informed decision making in determining alimony, child support and asset division and aid in a better understanding in settlement or at trial.