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Alex Hunt:
Welcome back to The Texas Family Lawyer Podcast. My name is Alex Hunt. I'm the managing attorney at Hunt Law Firm. And today I am very excited to be joined by Denise French. She's the managing partner at Stewart, Hurst, French, Dodson Forensics. She's a forensic accountant among the many other credentials that she has. I'm excited to have a conversation with her about business valuations, pensions, and finding hidden money. So Denise, welcome.
Denise French:
Thank you. Thanks for having me. I'm happy to be here.
Alex Hunt:
So Denise, introduce yourself to the audience a bit. I've worked with you in your capacity as a forensic accountant and as a business valuation expert, but if I were to read your resume and all of the credentials that you have after your name, we'd be here all day. Tell me a little bit about your background.
Denise French:
Well, I've been in finance for 30 years. I actually grew up a little differently than most people in this field. I grew up on the investment side. So I started with investments and then I went through my own divorce and realized there's such a need for people to get help with their finances when they're going through divorce. It's kind of like your head leaves your body and goes and sits over beside you for the year you're going through this and you can't think clearly. And so I've saw so many people make mistakes. I made silly mistakes that I wouldn't normally have made. And so as a result of that, I started working with people getting divorced. And then I started working with attorneys who were hiring us to do tracing or different things. And it just morphed into now we have this wonderful financial expert firm where we do separate property tracing and we get hired regularly as experts in divorce.
Alex Hunt:
And I've mentioned previously that I've worked with you in a couple different capacities many times. The first is you've valued my clients' businesses and we've also worked with you where you've valued a business that's owned by both parties or just by the other side. And you provide expert testimony in court and back up those valuation reports. And then also you will go in and find money that is maybe hidden or unaccounted for, and you will trace separate property claims.
Denise French:
Correct.
Alex Hunt:
How did you get particularly into this niche of-
Denise French:
It is such a niche.
Alex Hunt:
... finance?
Denise French:
It's like a niche in a niche. I think there's maybe four or five of us. There's not very many.
Alex Hunt:
No.
Denise French:
And there's no college courses for this either, by the way. There is for business valuation, but not for tracing. I just started getting hired by attorneys and the work product was good and it led to more and more attorneys hiring us. And then at this point, it's a blend of understanding what the law is without opining on the law because it's not our role, but understanding how the law blends with finance. And so it's very different than normal accounting. It's very different than normal finance. And it's also an understanding of how do retirement accounts work? How do retirement plans work? Because we also, as you know, will be hired regularly for someone who has restricted stock units or some kind of golden parachute at their company because that has some value to the community estate and some value to the separate estate.
So we're hired for anything financial related. Sometimes it's just to help with how do I read this tax return and what does this say? And there's just so much to it.
Alex Hunt:
No, certainly. And we love working with you because the secret about family lawyers is that many of them got into the law because they don't want to do math. And then lo and behold, there's a whole world out there where you have to do math. And so hiring an expert like you can help us is welcome. We were talking as we were preparing for this and how to explain to folks what a forensic accountant is. And I was saying, you're not a detective, but you kind of are.
Denise French:
Kind of are.
Alex Hunt:
You're kind of like a civil detective and it's kind of interesting that you get to-
Denise French:
Super fun.
Alex Hunt:
... do this stuff every day. But one of the things that you do is you help find where's the money.
Denise French:
Yes.
Alex Hunt:
And often there will be a divorce where you really don't know where money has gone to. It's been unaccounted for. It's gone out of one account and then it's just disappeared. When someone suspects that their spouse is hiding money during a divorce, what are the places that you commonly find it and what does your process look like?
Denise French:
That's a good question. So fortunately, the US tax system is very transparent. So the first place we go are tax returns.
Alex Hunt:
Okay.
Denise French:
So an understanding of how to read an S corp tax return or a partnership return and certainly an individual return is very helpful. So you can find, we always check for Schedule B, if there's interest or dividends that were paid, Schedule D, capital gains. Do we see that in the discovery from the other side? That's the first place to look.
Alex Hunt:
And that assumes that they accurately filled out their tax return.
Denise French:
True.
Alex Hunt:
Which sometimes they don't, but that is a good place to start.
Denise French:
That is a good place to start. Transcripts from the IRS can be received pretty easily. And then the other places, a lot of times, if we just have one little piece of the pie, then we can start digging other places. And so it's a mix of the client. Let's use the one example of a woman thinks that her husband's hiding money. She sees a bank statement come in the mail from Wells Fargo. Well, she uses Bank of America. They've always used Bank of America. So then you, the attorney, can go subpoena Wells Fargo. We get the statements, we put those into Excel spreadsheets and voila, we know where money has come and gone from that Wells Fargo account. So it's taking one little piece and then finding, well, that leads to another piece that leads to another piece. So it always starts with tax returns and bank statements.
Alex Hunt:
And I'll tell my clients this all the time, is that having an attorney that has a cadre of professionals that they work with and that they work with well is really important because we or our clients can't simply come to you and say, "Something's fishy here. Go and figure it out." There needs to be a real collaboration between the attorney and the financial professional. And like I've said, we've done this many, many times on these cases where you'll find something fishy and then you'll say, "Okay, I'm going to put the ball back in your court and you need to go and subpoena these documents." I'll get them and then you can continue with your work.
Denise French:
Yes. One of the first cases I ever worked on was really eye-opening for me. This was years and years ago. A woman had a special needs child and her husband had a really good paying job, but everything they had was used and small. She just didn't understand. They didn't spend any money on their lifestyle or their home. And he had cut off funding for horse riding for this special needs child. And it was really helping her. And that was kind of her last straw. She didn't even know how to do an email. She knew nothing about finance for sure. So I just told her, "I need you to go find any kind of tax document or any document you can find in your house and bring it to us." She, for the next three months, found all these different little things. She brought 1099s in. She had no idea what they were. We found with those little documents, two rent houses in California.
Alex Hunt:
Wow.
Denise French:
And hundreds of thousands of dollars in a bank account that she didn't know existed.
Alex Hunt:
Wow.
Denise French:
So in that, the US bank system is so transparent. We just need a place to start. And that was a conglomeration of the attorneys subpoenaing things and us, "Here's a 1099, go subpoena fidelity." And then we also have PI reports, and a lot of law firms do as well, where we can find anything with those PI reports that runs through a database like driver's license addresses, LLCs, real estate owned. So that also is a nice thing that we have.
Alex Hunt:
And we work with private investigators where I know that it's not easy for you to go and figure out where the money is if you don't have something tracing it there. But we've worked with private investigators before where they'll be able to see if somebody has money in a certain financial institution. They might not be able to tell us how much money or how many accounts there are, but they'll-
Denise French:
But they'll know.
Alex Hunt:
... give us a thread that we can then start pulling at.
Denise French:
That's all you need.
Alex Hunt:
And we can do a subpoena and try to figure out what's going on there.
Denise French:
Even if they take money, and we've had a lot of where they've taken money to other countries. You have family in Mexico, you have family somewhere in the Middle East. We've seen that a lot. I've had actually conversations with attorneys in the bush in Africa, which was really fun to do because sometimes you have to hire attorneys in those countries. But even then you see the money leaving the US bank system. So I may not know where it is over there, but I saw it leave here. So then we have a reimbursement claim to put on the spreadsheet.
Alex Hunt:
Certainly. Cryptocurrency is something I get a lot of questions about. Are you seeing cryptocurrency come up more in your practice and are people using that to conceal money during divorces?
Denise French:
Some. You know what? People, I think, think it's more complicated than it really is. The majority of the cases we have, it's a Coinbase. It's an account with a statement on it. It's not that complicated. There are people who will put it into the real cryptocurrency that doesn't flow through, doesn't have statements. We do see that some. And we actually have a cryptocurrency expert that we usually use. If we see a case with a ton of crypto, we'll bring her in and she's literally written the book.
Alex Hunt:
So when you're saying that it's part of Coinbase, it's part of some type of institution.
Denise French:
Yes, it's type of institution. It's just another account. It's an alternative asset that you can easily find with a statement.
Alex Hunt:
Because I've heard stories about folks that have cryptocurrency and they literally put it on a USB drive and it's encrypted. And if you lose that password-
Denise French:
You are toast.
Alex Hunt:
... you lose the crypto.
Denise French:
Yes.
Alex Hunt:
But I haven't seen very much of that.
Denise French:
I don't see a lot of it. Of 15 years of doing this and thousands of cases, I've had to hire that crypto expert twice.
Alex Hunt:
Okay. So what are the red flags that spouses that are going through divorce need to be worried about? What are the kitchen table issues that they need to-
Denise French:
That's a good question.
Alex Hunt:
... look out for?
Denise French:
I would say one, just follow the money. So you can easily download your transcripts from your bank account. You can go into your account and say, "I want transcripts of all the activity for the last three years." Anybody can do that. Go look through there. If you see crazy things going out, you can tell if there's pornography or... I mean, you can see the red flags, you can sort it by item, and you can kind of tell. The other thing is too, often I see, especially with women who come in barking about the money's gone, they don't realize how much money they're spending. You don't realize how much money you're spending. I see that more often than not. Women who come in and bark that their husband has spent all this money or there's all this gone and it was really them buying purses and shoes and lunches.
I mean, know how much you're spending before you go barking about what you think. And that may defuse the tension as well. It's just so easy to overspend in our society.
Alex Hunt:
I mean, that's true for all of us.
Denise French:
That's true for... Oh, I know. I know. I'm kind of preaching to myself.
Alex Hunt:
Yeah.
Denise French:
Yeah. Those transcripts with the banks really are eye-opening. Go run transcripts on your credit card.
Alex Hunt:
And another tip for folks is that if you don't have access to say a joint bank account online is you can go to the bank and you can get statements printed out for you or you can get online access. A lot of times clients will come to me and they'll be like, "Yeah, he or she cut me off from the joint account. I can't go to bankofamerica.com anymore." Well, if you're on that account, you can go and get access to it.
Denise French:
Yes, you can. You also have a right to your tax returns. You can get those as well.
Alex Hunt:
Yeah. And you can request those online pretty easily.
Denise French:
Yes. You have a right to anything with your name on it.
Alex Hunt:
So if somebody can't afford a forensic accountant, let's be honest, not everybody can. What would they be able to look for in their own? What would your advice be for them?
Denise French:
I would say first they need to come to their lawyer because this is a legal issue. And so the claims, what we're doing is doing the math on the legal issues. So you first need to understand what you're looking for before you go digging. And then also, again, like we're saying, go pull your tax returns. Go talk to your CPA. If your CPA is buddy-buddy with your spouse, go find another CPA. Pay them $300 for an hour to sit down. "Explain to me what I have. Walk me through my tax return." And they'll show you, you have a bank account here, a brokerage account here, blah, blah, blah. Do that. Also, if you're looking at getting divorced and you don't understand what's in your estate or you want to know more, go have a meeting with the financial planner that you guys have. Go have an estate meeting with an estate attorney because you have to list everything that you own in those meetings or the advisor will list it, and that gives you a good idea of what you own and where you're at.
And again, if you're worried about money being lost, you really need to go talk to the lawyer first because that gets real, as you know, really, really litigious. What's a waste claim? I've had people want me to put on paper that he was wasting money and spending frivolously for Ubers and McDonald's and things. And that's just not reality.
Alex Hunt:
Well, and on our side, if you are trying to prove a waste claim, which is also known as a community waste claim, which is essentially saying that the other person didn't know about the spending and it didn't benefit them in any way, it's fraud. Me taking the time to research and prepare a $6 meal at McDonald's and then presenting that to the court is going to cost you probably 10 or 20 times as much.
Denise French:
Right.
Alex Hunt:
And so my recommendation for clients is if there is community waste is number one, you need to make sure that you meet the elements that you truly didn't know about it and it didn't benefit you in any way. But also you usually need to have some sort of cutoff and it's just a cost benefit analysis. And it usually is somewhere 250, $500.
Denise French:
Thousand dollar, yeah.
Alex Hunt:
Anything below that is just not worth your time. Because you not only have, if you've got a forensic accountant involved, you've got their time, you've got the attorney's time. And then if you're presenting it in court, you've got your spouse's attorney.
Denise French:
It adds up real quick.
Alex Hunt:
You need to do the math and figure out if it's even going to be worth it for you. And I really caution people against bringing claims just based on principle because in the end, if you can win the argument, but you won't have as much money in your bank account at the end of the day-
Denise French:
It doesn't make any sense, yeah.
Alex Hunt:
It doesn't make any sense.
Denise French:
I always have the conversation, is the juice worth the squeeze? And it becomes a math equation.
Alex Hunt:
Certainly. So let's talk about spouses that have a business, either one spouse or both the spouses together. Part of the divorce process is we need to figure out how much that business is worth. What does that process look like and how do you actually value businesses?
Denise French:
That's a good question. So if you are a business owner out there, then your business probably needs to be valued. Maybe not always. It's a fair market value situation. We have to value it as if you were going to sell it on the open market. So we know you're not, but as if you were going to sell it. So is it a going concern? Is it going to keep going? Or is it in disrepair and it's a liquidation sale? So that is decided. And then we look at the three elements of any business valuation. What is the baseline asset approach? The assets minus liabilities. What is the market approach? Let's go out to other companies that are similar and look at comparables. And then third, what is the value of it today based on future cash flows? So we look at all three of those.
Alex Hunt:
So let's separate out a business and you're valuing it based on going concern versus liquidation value. Let's start with liquidation value. What does that look like? And can you give an example of if you were to have a business and you're trying to get the liquidation value, what is that process going to look like?
Denise French:
So that is if someone, they're in the middle of... For example, we had a case like that where someone had died and his insurance wasn't current. And so he was being sued by everybody and their mother. His business was going under. So that was going to be a liquidation value. And then in the middle of it, he's getting divorced. That guy was having a bad, bad year. I felt really bad for him. So that was a liquidation premise. So what we did then was we looked at the fair market value of his assets as if they were being sold in the next four months, four or five months.
Alex Hunt:
And it's really just assets minus debts.
Denise French:
It's assets on fire sale.
Alex Hunt:
Yeah.
Denise French:
Minus debts.
Alex Hunt:
Garage sale value on assets.
Denise French:
Garage sale value, yeah. It's a pretty ugly dim situation if you're in liquidation.
Alex Hunt:
Okay. And what are some of the methods that you use to value a business if it is going to be continuing and it does have value beyond liquidation value?
Denise French:
That's 99% of what we do.
Alex Hunt:
Okay.
Denise French:
And so we do on the asset approach, it's a fair market value. So it's what is it worth today if you were to go sell it on the open market on the assets and the debts? What are they worth right now? That includes goodwill, that includes accounts receivable, accounts payable, all of those things. And then we look at really the main one is the income approach. So if you're going to get your business valued, the main thing we're going to want to know is what is your income? What's your income that's being generated? What's the real cash flow out of this thing? But first we have to normalize it. So no, if you're going to get your business valued, we're going to Roto-Rooter your numbers because we want to know, often businesses are meant as a tax shelter. You get a tax shelter out of your business.
I get a tax shelter out of my business. There are things I can write off that I could not write off if I were a W-2 employee. And so we have to normalize those. So if you are, which we've seen, ballet lessons for a child out of a machine shop, well, obviously that's not a normal operating expense. Your car, you as a lawyer writing your car off. Okay, that's fine for business purposes. The IRS might buy that, but for business valuation, we're going to add the expense of the car back in because it's not a legitimate business expense. So we're going to go first and look for normalizing. We're going to want to know, are you paying yourself what someone of your stature, of your tenure with your experience with your revenue should be getting paid per the IRS? So we're going to normalize your pay.
We're going to normalize rent. Do you own the building that you're renting? If so, you're probably not paying market rent to yourself or maybe you're paying over rent for a tax break. We're going to normalize that. And then we're going to go look at your expenses. Did you put a bunch of personal stuff in there? And if you did, we add it back in because we're trying to figure out what would a buyer that's at an arm's length be buying this for? What would you be selling it for? What would they be buying it for?
Alex Hunt:
And you use real data based on similarly situated businesses and how much are those sold for, and you try to get as recent as possible.
Denise French:
Absolutely. That's kind of our, well, let's look at our number on the income approach, then let's go look at comparables. In the neighborhood, what are all the other law firms selling that have this much in revenue? What was the multiple they sold for? And then we look at, is our income approach right? It's a reference point for us basically.
Alex Hunt:
And some of the more complex cases, I would imagine for you, they certainly are for me, is where you have a business and you're normalizing those numbers. And you mentioned the ballet lessons out of the machine shop, but let's just take it a step further and you've got somebody that's paying basically all of their personal expenses and they're going to McDonald's and they're going on vacation. And it's more often than you would think that's an issue. How do you deal with a situation like that? Are you removing those?
Denise French:
Sometimes, we'll remove them all. Sometimes it's a pierce of corporate veil and it's not a business anymore. Sometimes it's we're going to take top line revenue. If the numbers are so ugly and so awful and it's so much of a cost to get to the bottom of it, we'll just take your top line revenue and apply a market multiple. What did the business down the road sell for with that same revenue number? It's like that's our worst case scenario.
Alex Hunt:
When you're doing a business valuation, can you tell us the difference between personal goodwill and enterprise goodwill?
Denise French:
Yeah, that's a good question.
Alex Hunt:
And how does that play into a business valuation?
Denise French:
Yeah. If you own a business and you're watching this podcast and you're in Texas, you need to understand this concept because it makes a huge difference on the marital inventory and what you're dividing ultimately. So in Texas, and it's not like this in all states, personal goodwill is not a marital asset. So I like to use the example of a general dentist versus a specialized pediatric dentist specializing in children that have, let's say, cognitive issues and they have special needs. So the general dentist, you're going to go sit in a dentist's chair. Do you even care who is the dentist? They come and they check your teeth, make sure you don't have any cavities, maybe fill a cavity and send you on your way. They're down the road from you. They're in your neighborhood. They're on your insurance. It's 20 bucks to go and you get your teeth cleaned twice a year.
That doesn't have a lot of personal goodwill. It's more the business is located in your neighborhood and they're on your insurance.
Alex Hunt:
And you can remove that individual generalized dentist and insert-
Denise French:
Put another one in.
Alex Hunt:
... another dental school graduate.
Denise French:
Pretty easily. Yeah, pretty easily. Now, if you have some specialty person, like for example, okay, let's use the example of my root canal guy. I have to have a root canal I found out today. Very, very displeased about this. There is only-
Alex Hunt:
Your dentist on the mine.
Denise French:
I know. I really do. I'm not happy. I hate going to the dentist, but I do like mine. So there's only one person I would go to because I had to have one other time. He'll put me under. He's very nice. He's very kind. He specializes in people who are neurotic about the dentist. I love him. He doesn't live near me. I don't even know if he's on my insurance. I'm probably going to be out four figures to do this, but I'm going to go to him, period. End of story. Because of his care and his kindness. And he's known for that. And again, he specializes in people who are terrified of going. So he has some personal goodwill. Kind of like if you have a pediatric neurologist versus the doctor at the office, same thing. General doctor who's going to take care of the flu versus someone that has a pediatric neurology specialist, a surgeon.
That person has some skill. So what we do as business valuators is take that person's skill and put a value to it, a percentage to it. And that is deducted from the value of the business. So let's say you have a business worth $2 million, but 90% of it is because of this person's ability and skill. Everybody comes to that practice because of them. If they left and went across the street and opened up a new shop, 90% of the people would come there. So 90% of that value of the goodwill of that company, it's off the marital estate.
Alex Hunt:
How does it play in? Is it a similar situation where you've got, say, Acme Construction Company, and then you've got John Doe, who's the 100% owner, and his argument is, "I am the business. Everybody's coming to me. They're not really coming to Acme. They're coming to me. I know them. I know them. I know them. If I shut down this business and I go and open it over there, every single one of my contracts is coming with me."
Denise French:
And then we look at, okay, are there contracts that are solidified? Are these 5 or 10-year contracts or even one-year contracts? Are there any contracts? Okay, that adds to the personal goodwill. If they're not, does anybody that works for you have non-competes? We look at all of that stuff. Yes, that's the goodwill. But the goodwill portion is going to be what it's worth minus the asset approach. So if he has $2 million in the bank, well, the business still has $2 million that it's worth, but the rest of it is him and that is not on the marital inventory. Exactly.
Alex Hunt:
What are the biggest mistakes that business owners make when their business is being valued? So what should they not do?
Denise French:
They should stop lying when we ask questions. That would be number one. That would be honestly, because we know, we know. They shouldn't try to hide the ball because then you look bad and the ball's going to be found, honestly.
Alex Hunt:
Why do you think people are lying? Is it because they are trying to get the value of the business lowered so it's not as big on the balance sheet?
Denise French:
Yeah.
Alex Hunt:
Yeah.
Denise French:
I mean, I get it. Again, not throwing any stones at anybody. I get it. Because sometimes the business is the biggest asset they have and it's the house and the business. That's it. The other thing is keep your books clean. So make sure that, get your personal stuff out of there. Make sure your books are up-to-date. Your taxes have been paid, your taxes have been filed, and your books are clean. That would be the number one. We see accounting firms that do terrible jobs and business owners kind of kick the can down the road. Well, when you're getting divorced, go hire a good accountant and get it cleaned up. That will save you so much money. So much money.
Alex Hunt:
Because then you don't have to do the cleanup part.
Denise French:
Yes. And we don't have to look at all this stuff and think it's really awful. Yeah. Yeah, it'll save you so much money. Get clean books before you go through this.
Alex Hunt:
Professional practices, doctors, dentists, lawyers. How is that a unique situation for business valuation purposes versus say a construction company?
Denise French:
Yeah. Service companies usually have a lot of goodwill, especially if it's one or two business owners.
Alex Hunt:
Okay.
Denise French:
Sometimes we'll tell the attorney, "Gosh, we don't really need to value this. Let's just look at what they own for what are their assets in the business."
Alex Hunt:
Okay.
Denise French:
Yeah.
Alex Hunt:
Let's say I've had this situation where you've got a spouse that will come to us and they'll say, "Look, the business is barely breaking even. I'm having trouble paying my employees or making ends meet." But then the other side will show you, well, the lifestyle doesn't really show that they have a really great lifestyle, but how is the business only breaking even? How do you reconcile that in your world?
Denise French:
That's like a Tuesday in our world. I think 9 out of 10 cases have that, right?
Alex Hunt:
Yeah.
Denise French:
One, it's the year of divorce. Sometimes we discount that because when you're getting divorced, it really is difficult. And so you're not thinking clearly and you may not... So we don't count that year sometimes or we count it halfway and the other years are counted fully. And then also it's looking in their books. That's where we ask for general ledgers on every valuation we do. And that general ledger gives you really good idea of, "Oh look, there were $2 million in COGS. What was that?" The general ledger should tell you.
Alex Hunt:
And the general ledger, for those who might not know, that's transaction by transaction line item. You'd be going through those, see if there's anything that's an anomaly out of usual.
Denise French:
Yes. As a regular course of business, that's what we do. And I think most business valuators do that, that work in divorce world because we're on the hook. We're going to be potentially cross-examined on this. We really have to have our act together.
Alex Hunt:
Do you come across a lot of situations where the most recent year will be way different than maybe the year before that?
Denise French:
Yes.
Alex Hunt:
And is it that expenses are going up so that way it looks like-
Denise French:
I see that a lot.
Alex Hunt:
... net revenue is down?
Denise French:
I see that a lot. I also see, frankly, just like you've got business cycles where things ebb and flow. And sometimes the wives get so upset, but it is what it is. Sometimes it's just a lull in the business cycle. And this is a downtime, especially oil and gas. Good Lord. Those are up and down, up and down. Anything dependent on oil and gas, there's a definite business cycle. And if you're getting divorced at the bottom of it, we can't help that. And so that's a legitimate thing. And so we always look at that.
Alex Hunt:
How far back do you usually go back or does it depend?
Denise French:
It's a business cycle. It's typically five years, but it is dependent on the business industry.
Alex Hunt:
Okay. And I imagine that COVID probably has impacted-
Denise French:
Throughout COVID.
Alex Hunt:
We're just kind of getting past that five-year cycle now. How did that impact things?
Denise French:
You talk about the nerd brigade coming out at all these AICPA conferences for business valuation. It was, how do we deal with this? That was industry specific, but yes, it did make a big difference. Risk factor adjustment.
Alex Hunt:
Let's talk about often the largest asset for most folks that sometimes they don't really think about as their largest asset, and that's their retirement, pensions, executive compensation. After the house, the retirement is usually folks' largest assets. So what do people consistently get wrong about dividing pensions and 401(k)s in your world?
Denise French:
What I see consistently are two things. Because I want to say the man and the woman stuff both. I don't want to dig on men here. Because the men see that I earned it, it's my money, it's my retirement, it's mine. It's not hers. That is not true. The women see, "Well, he's paid for me all my life. I quit my job. I raised these kids. He owes me forever." That is not true. So both things are not true. So that's the biggest thing I see. But on these retirement accounts, actually I have these group of men that I swim with a couple times a week, this master's group, and it just happens there. It's all men and me. And one is divorced and he was talking about how he's trading in his retirement. And if he gets remarried, it doesn't matter because it's his IRA.
I'm like, "No, it does. It does matter." So just know what you had... There's three estates when you get married, right, Alex? There's your separate estate that you had before you got married, your retirement accounts, your brokerage accounts, all that stuff. It is yours. But when you get married, you create a community estate. And now the new stuff becomes you all's. And the new stuff is income. Income is community property no matter where it's derived from with a few exceptions like a revocable trust. So the income from your IRAs, God help you if you're trading options, that's all income. The dividends and interest that you earn in your separate property is community income. And that's what people don't understand. So if you're a guy with a bunch of separate property and you're getting remarried, you need to maybe do a prenup and a postnup from a good attorney like the Hunt Law Firm, because you're going to need that or the income is going to become community property.
Even if it's reinvested, even if you don't see it, the S&P 500, a third of that is dividends. So that all becomes community property.
Alex Hunt:
Yeah. And things are different. And regular viewers of the podcast will, we've talked frequently about the three different buckets, including the biggest bucket typically for folks, which is community property, unless you have some sort of prenup. But what you've got written on the account really doesn't play into the ownership at all or the characterization at the divorce. And so it's a really important point.
Denise French:
I tell people with those retirement accounts and all of that, titling is irrelevant. If you have an IRA or a 401(k) in your name, but you've had it the whole time you were married, you were married the whole time you've accrued it, it's community property. Titling is irrelevant.
Alex Hunt:
Yeah. QDROs, qualified domestic relations orders. What are they and why does getting one wrong potentially costs you...
Denise French:
Nightmare? Yeah.
Alex Hunt:
Yeah, it could be a nightmare, costs you tens of thousands of dollars.
Denise French:
Yeah. So QDROs are needed if you're going to divide ERISA plans. So they're needed, it's a federal law. You can't get around it if you're dividing 401(k) or a pension is where it really falls in. A 403(b) as well, 457, you have to have a QDRO. So it's an ERISA plan. It is a separate court order. There is definitely a process to it. So when you're getting divorced, as you know, you go into mediation, you hopefully can settle in mediation, right? 95% of the cases settle in mediation. Then you know what you're keeping of your 401(k) and what she's keeping of her 401(k). So then a QDRO firm really should be hired right after mediation to begin the process. They typically want to take your mediated settlement agreement, create a QDRO, send it to the firm for pre-approval. Even big firms that we do all the time like Exxon or Chevron, they change their forms. You want to send it there for pre-approval. That takes at least 30 days. Yeah.
Alex Hunt:
And a lot of folks will say, "Well, why doesn't Hunt Law Firm just do it?" This is a very highly technical document that is best drafted by somebody that has experience as an ERISA attorney.
Denise French:
Agreed.
Alex Hunt:
E-R-I-S-A. It's special type of employment law. And we actually have folks that we will give them the retirement documents before we go to mediation or while we're in mediation, and we'll ask them, "Give me the specific language that I should put in the mediated settlement agreement because we don't want to get something wrong or get something that will not reflect the actual intent of the parties."
Denise French:
That is so smart. I wish more attorneys would do that. That is so smart because you've got to be able to divide these after the fact. The mediation doesn't end it. And then you got to go through the whole division process. And the QDRO is just a tool in division process to divide all these ERISA regulated plans, like you said, E-R-I-S-A. So I love that. A lot of people misunderstand some of these executive compensation plans. They're not ERISA plans. So if you think about the stuff everybody gets, the pension and the 401(k), everybody gets that. That is a QDRO. But okay, ExxonMobil actually has five retirement plans. They have a 401(k), a pension. They have a supplemental pension, another additional pension, an additional 401(k) plan that only the executives have. Those can't be divided with ERISAs. They can't be divided in a QDRO because it's not an ERISA plan. It's only for executives. A lot of companies have that. So it's so smart for you to call a retirement person to say, what language do we need to put in here? Because it gets very, very specific.
Alex Hunt:
And again, having a cadre of experts that you work with-
Denise French:
So helpful.
Alex Hunt:
... is so important. Especially in the Houston area where you mentioned these oil and gas companies, the energy companies, they often have very complex executive compensation structures. And so you want to make sure that you get it right at the outset because you might be leaving the mediation room and think, "All right, I'm done. We're just doing some paperwork." But if you get that wrong, you could potentially have future litigation and you don't want to do that.
Denise French:
Yeah. And for your men listeners out there too, her executives. So you really want to make sure you have an attorney like you guys who will get somebody with some financial knowledge of this to write these incorrectly, because you don't want to end up giving her money that you've earned after the fact. Cuts off at mediation. That's the cutoff. And these executive plans have very specific wording per company on what they can do. And quite often we'll put a ceiling in there. We'll put specific language that she is going to get 50% of this amount maximum, because after he goes on and keeps working, he's going to continue to earn more of these executive comp plans. So I like doing that.
The other thing is taxes. So in these cases, the employee is a fiduciary for the other person. So they are going to actually... When you retire with these plans, at Exxon specifically, you get a huge lump sum the year you retire, and it's a massive tax hit to you. You're paying all of that, and then you're giving her half of what she got in this mediated settlement after taxes. So it's important to also put the tax wording into these mediated agreements where she gets 50% of this amount, net of my tax the year I receive it. If, as, and when received, I also like that language as well.
Alex Hunt:
We use that quite, yeah.
Denise French:
I know you put that in there. I know.
Alex Hunt:
I use it quite, yeah.
Denise French:
I've seen yours.
Alex Hunt:
So let's take it to the end of the divorce process. After the ink is dried on the mediate settlement agreement and the divorce decree, what are the most important financial moves in your view that folks could or should make?
Denise French:
Should do. I think you need to hire a QDRA from the day after mediation.
Alex Hunt:
If there's a retirement that's going to pop in.
Denise French:
If there's retirement that needs to split. The other thing to do is, and I know you guys do this, in the mediation agreement, make sure that the receiving spouse knows. She's getting shares, typically. She's not getting the dollar amount that's on the statement. So let's level set expectations. So let's say you're splitting a brokerage account. So you can split those before the divorce is final, a non-retirement brokerage account. So for people who are giving that money away, like having to leave it, I would say call your broker the day after mediation and start that process. Because let's say you have an account at Schwab and you have to split a brokerage account. Well, you're splitting each individual stock-
Alex Hunt:
Right.
Denise French:
... each individual bond, each individual thing that you own. It takes a minute to do that. You're also splitting the cost basis, so you're splitting the tax hit on all of those. So I would say get the mediated settlement agreement to your broker and have them to start working on it.
Alex Hunt:
And a lot of the major brokerage houses have websites specifically for divorcing parties.
Denise French:
They do.
Alex Hunt:
If you were to just Google fidelity and divorce, they've got a whole website that has forms and all types of information for folks. And if you've got a non-ERISA retirement account, there's still some paperwork to do, but it's fairly straightforward.
Denise French:
It's easier.
Alex Hunt:
It's like a page or two-page document.
Denise French:
It's way easier.
Alex Hunt:
And sometimes they'll require the final decree of divorce, but it's way easier than doing the qualified domestic relations order, sending it for pre-approval, sending it back to the parties, getting it signed, sending it to the judge, then sending it back. And it's also less costly as well.
Denise French:
Less. Yeah, it's free. It's free. So the QDROs, yeah, again, going back to that, so that is pre-approval and then everybody has to sign, the attorneys sign, the client sign, then it gets submitted to the court, the judge signs. Then the QDRO needs to be picked up from the court with a judge's formal signature on it and sent to the company. And then the recipient is still going to be another 60 days after that before they actually have money in hand or in an IRA account for them. It's a four-month process all in. But the IRAs, yes, the minute the ink is signed on the divorce decree and you have a copy, it's just paperwork. It's so easy for IRAs, Roth IRAs, and sometimes SIMPLE and SEP IRAs. Although I really would never split a SEP because it just is so complicated to do. I'd keep that with the owner and split something else.
And then brokerage accounts are so easy to divide. You can do that the day after mediation. I would encourage people to do this stuff as soon as possible because the longer you go, the longer it waits, the more complicated it gets.
Alex Hunt:
Yeah, I agree.
Denise French:
Yeah. I had one case, it was a nightmare. This was a very, very much a learning curve. And this attorney is now actually a sitting judge and he's very, very good. But he and I had a case together and I didn't put the last four digits of the account number in my... I did the estate inventory. He didn't put the last four digits of the account numbers in the divorce decree. The client's brother died and she waited an entire year to go and have this IRA at Vanguard split. And guess what? A year from then, they wouldn't take the husband's signature from a year ago. We didn't have any account numbers in anything. And so she had to open up and her husband wouldn't sign the new paperwork.
Alex Hunt:
Of course.
Denise French:
Yeah, ex-husband. Yeah, he wouldn't sign anything. This is the same guy that had the special needs child. He's really a great guy, a piece of work. So she had to open up a lawsuit and spend 10 grand and she got it done. But yeah, Vanguard, these companies are pretty sticky. So get your stuff done right after. Just get it done. Be done with it and move on with your life.
Alex Hunt:
That's great advice. Well, Denise, you deal with these very complex financial concepts and you're able to really drill down and explain it to myself and to lay people in such an easy to understand way.
Denise French:
Thank you.
Alex Hunt:
So I really appreciate that. If folks are looking for you, where can they find you?
Denise French:
Well, we need to be hired through the attorney. I mean, we're at shfdforensics.com, so shfdforensics.com, but we aren't hired by the person directly because everything we do is under the guidance because we're, again, doing the math on legal concepts. So they need to call you and then you can call us.
Alex Hunt:
Right.
Denise French:
And that's how that works.
Alex Hunt:
And we often do.
Denise French:
I appreciate that. Thank you.
Alex Hunt:
Well, I appreciate it. Thank you for joining me. If you were looking to find Hunt Law Firm, you can find us online at familylawyerkaty.com, or you can call us at 832-315-5494. Denise French, thank you again so much.
Denise French:
Thank you for having me.
Alex Hunt:
And we'll see you next time.