Assessment of Marital Standard of Living (MSOL)
The goal of this assessment is to determine how much disposable income
the parties had in the final years of the marriage and how much they spent in
order to support their life style.
The MSOL assessment can be prepared in two ways: 1) by analyzing tax returns filed for the last 3 to 5 years of marriage, or 2) by analyzing the parties’ actual cash flow during the same time frame. Theoretically, when all the data is readily available, both methods should produce the same or very similar result. The first method is easier and cheaper to apply and it is the one most often used.
To prepare an MSOL analysis based on tax returns an accountant needs complete copies of the returns including all statements, schedules and worksheets, copies of all W-2 and K-1 statements and forms 1099-R (retirement distributions).
An MSOL analysis based on tax returns starts with gross income as reported on the returns. Then a series of adjustments is made to this amount for tax-exempt interest and tax refunds, non-recurring (capital gains) and discretionary items (retirement and cafeteria plan contributions) and non-cash tax deductible expenses (rental property or business depreciation). Once the adjusted income is determined, taxes actually paid are subtracted from it. The resulting net income is allocated between parents and children and the children’s’ share is then subtracted to arrive at the net disposable income of the two spouses during marriage. A final adjustment is made in the calculation for an increase in housing costs, because of the need to maintain two households instead of one.
An MSOL calculation prepared by analyzing actual cash flow requires statements from all bank, brokerage, and credit card accounts used by the parties during the final 3 to 5 years of marriage, plus copies of cancelled checks or check registers from all bank accounts, and the parties’ contemporary records of spending (if such records exist).
This calculation involves sorting through all the transactions recorded on the bank and credit card statements and classifying them by their character (such as living expenses, children’s expenses, taxes, investments, debt, etc.). After the spending summary is prepared, adjustments are made to account for non-recurring and/or discretionary items, and children’s expenses are subtracted to arrive at the amount of the parties’ spending on their lifestyle. The final adjustment, as in the previous method, is for the increase in housing costs.
An MSOL assessment based on the analysis of actual cash flow obviously depends on the availability and condition of documents. It requires a substantial amount of time and is therefore expensive. While the work process can be expedited through the use of technology or by outsourcing, it is still more time consuming and expensive than an MSOL assessment based on tax returns. As a result, this method is mostly used when the parties’ income reported on their tax returns does not sufficiently approximate their actual cash flow. More often than not, such dissimilarity between taxable income and available cash flow exists for wealthy couples with substantial assets who can afford to pay for this type of analysis.
Differences of opinion among forensic accountants are related mostly to the adjustments for non-recurring items and for the increase in housing costs. Most often accountants use Family Law Code Section 4055 to allocate income to children, although I have seen USDA report Expenditures on Children by Families being used for this allocation. I use Family Law Code Section 4055 to allocate income to children and analyze actual housing costs of the parties before and after the separation to make the adjustment for the increase in housing costs.
Copyright: Irina Anissimova, CPA, CFF, 2015