Common Financial Affidavit Mistakes
In any divorce, states typically require both parties to share financial information. This consists of sharing your assets, liabilities and income and expenses.
In California, the forms that are used are labeled FL-142 Scheduled of Assets and Debts and FL-150 Income and Expense Declaration. These are important to provide full disclosure of all the financial affairs of the marriage and the parties’ current income situation for support purposes.
Most people do not have experience filling out these forms and make a host of mistakes in completing them. This article highlights some of the common mistakes so that the forms can be completed competently and thoroughly.
1. Pay period
Knowing how frequently one is paid is essential to calculating the actual income received for the year. This could be monthly, semi-monthly or bi-weekly. While the first two options are usually not a concern, the bi-weekly amount means there are really 26 pay period in a year. The correct denotation should be used.
While the professionals can ascertain how many to use by reviewing the pay stubs which should be attached, these are not always available.
2. Pay Stubs
As described above, pay stubs for the past two months should be attached to the FL-150 Income and Expense Declaration. But often these are overlooked and not attached. In addition, any other information describing the income should be attached. These documents may be bonus letters, offer letters for new jobs recently obtained, restricted stock awards, incentive stock options, partnership capital, and other deferred compensation or executive compensation structures. Again, this is a major non-compliance problem and should be attended to with the disclosures in an effort to avoid formal discovery.
3. Life Insurance or Annuity Cash Values
If the parties own whole life or universal life insurance or own annuities, there may be cash value built up over time in those instruments. Often, parties forget that their individual life insurance policies have built up a cash amount through the years and that this cash value represents a community and/or separate property asset. The cash value should be listed on FL-142.
If allowed by the policy, a loan may be taken from these accounts or the cash may be withdrawn. These are considered assets to be divided equally between the parties or to be offset with other assets if the parties agree.
On the other hand, parties often list their group term life and disability policies on the FL-142. These policies are not considered assets as they are contingent upon employment and not portable if employment ends. Moreover, they have no actual value that could be divided. They should not be listed on the FL-142.
The cash value on annuity accounts should be reviewed for any surrender charges and that amount should be deducted from the cash value.
4. Restricted Stock Units, Incentive Stock Options and Non-Qualified Stock Options
While parties typically acknowledge on their FL-142 that they have vested shares, they often mistakenly believe that any unvested shares are not community property. In CA, the grants awarded prior to the marriage and vested during the marriage and grants awarded during the marriage and vested after the Date of Separation have some component of community property. The actual percentage is calculated with formulas. It is important to include the number of unvested shares or the current valuation (based on current stock price or 409A valuation) of these shares on the FL-142.
5. Digital Assets (Cryptocurrency/NFTs)
With the advent of cryptocurrency, digital assets are often held in a cold or hot wallet. Parties tend to forget that those assets need to be listed on the document under the “other” section of the FL-142.
6. Income from Other Sources
In addition to the W2 employer, often parties have gig economy jobs and income from those jobs including influencer income and YouTube revenues need to be reported on the FL-150. All 1099 income should also be reported on page 2 of this form as well, and all bonuses, stock awards and other compensation received in addition to the actual paystub for regularly worked hours should be listed.
7. Paid Time Off (PTO)
A typically overlooked asset is one’s accrued vacation time, or paid time off. While this may not seem like it is an asset that may be divided, it can be valued by the employee’s hourly wage as customarily stated on the pay stub. The spouse has a right to one-half of the accrued vacation time because it was earned and awarded during the marriage. Once taken, vacation time is then paid and appears on the pay stub. PTO should be listed on the FL-142 in the “other” section.
8. Dividends, interest income
A frequent mistake is forgetting to account for dividends and interest from investments. This unearned income needs to be documented at least at a 50% valuation on page 2 of the FL-150 to represent that particular spouse’s interest in the payments received on a regular basis. This does not include capital gains distributions because those are not regular but rather paid in uneven levels as the fund manager determines.
9. Rental Property Income
If the parties own rental investment property, the rent that is received each month should be documented on the FL-150 Income and Expense form. This should be reported as gross income and then as the calculations are performed, the net income from rental properties can be used for support purposes.
Again, at a minimum 50% should be denoted on the form.
10. H.S.A Plans
H.S.A. or Healthcare Savings Plans are pre-tax accounts that are similar to Roth IRAs except even more advantageous tax-wise. The funding of these accounts typically occurs through payroll deductions and parties often overlook that this is another asset that needs to be reported and eventually divided. The H.S.A. should be reported in the “other” section of the FL-142.
11. Business Assets/Personal Assets
This category is complicated and will require further analysis to determine whether assets are community assets but used partially for business purposes or should be considered business assets and valued as part of the business valuation. Nonetheless, these assets such as computers, vehicles and other assets need to be listed on the FL-142 and noted that they are quasi-personal and quasi-business.
12. Tax Refunds/Tax Loss Carryovers
An important item often forgotten is any refund to be received from the federal tax return or CA tax return. This is a community asset or receivable that has not yet been realized. Refunds should be listed on the FL-142. Similarly, tax loss carryovers are offsets against future capital gains and/or ordinary income. They should be tracked and listed as they can have huge benefits in the future as they last indefinitely as offsets against taxable income sources. These should be listed in the tax section on the FL-142.
13. Accumulated Depreciation
Tax deductions taken for depreciation on home business use and rental properties are tracked each year and upon sale of these assets, a tax is levied as recaptured accumulated depreciation. On the FL-142, there is a column for encumbrances. The amount of depreciation that will be recaptured should be noted there as it reflects a deduction in the value of the asset since it is a liability that will need to paid from proceeds and typically assessed at 25% of the depreciation taken during the years.
14. Loans on Qualified Plans (401(k), 403(b), 457(a))
There may be loans against the actual value of qualified retirement accounts and these should be listed as an additional asset to be ADDED back to the valuation of the account. These loans typically have to be repaid through payroll deductions over 5 years max and in substantially equal payments.
Note: This article is for informational purposes only and is not intended to provide either tax or legal advice. Please contact your attorney or accountant and rely on their independent research and advice for these matters.
