Tuesday, November 20, 2018

Tips for Preparing a Short Form Rule 401 Financial Statement-Frequently Asked Questions


1.  Do both parties need to fill out a financial statement?  Yes. Both parties must fill out the financial statement.  People often ask if they can simply fill out one financial statement if they agree.  The answer is a definitive no.  Whether parties have an agreement or not, they each must fill out the financial statement. The reasons for this are discussed further below.

2.  Do the financial statements have to be done weekly or can they be done on a monthly basis? The financial statements must be done on a weekly basis.  This is the cause of more confusion and frustration than almost anything else.  The forms ask for weekly income and weekly expenses.  The frustration is understandable as most people do not manage their finances on a weekly basis. To get to a weekly number if you are going from monthly to weekly, divide by 4.32, not by 4.  This is a very common mistake. The other option is to multiply by 12 and divide by 52.

3.  Why do we need to fill out the financial statement anyway?  Another variation of this is “do we need to fill out a financial statement?”  There are four primary reasons why the financial statements are required. First, it is a way to make sure that each party sets out a full and accurate representation of their finances signed under the pains and penalties of perjury.  Secondly, it is a way to make sure that each party is fully informed about the other party’s finances and thus the agreement is based on full information.  (This of course assumes that the parties have exchanged financial statements before signing a divorce agreement which they should absolutely do). Third, it allows a judge to get a full picture of each of the parties’ finances on a form that judges see every day and a form that is uniform. Finally, it essentially requires parties to create a budget.  Particularly if there are issues of child support or alimony, the financial statements require parties to calculate their expenses and income so that they can see on paper whether they have a weekly deficit or excess.

4.  How important is the financial statement?   The simple answer is that it is extremely important. Next to the divorce agreement it is the most important document the parties will file in a divorce case.  It is important that the financial statement accurately reflects the parties’ income, expenses, assets and liabilities.  If a party misrepresents an asset on a financial statement, it could be grounds for reopening the divorce later if it is discovered that information was not accurate or true.  It is also signed under the pains and penalties of perjury so if a party misrepresents something on the financial statement they are subject to a claim that they committed perjury.

5.  Can we submit our tax return instead of the Rule 410 Financial statement?  No. The financial statements are required in every case. Tax returns are not required. In fact, if the parties have an agreement, the judge will not request the parties’ tax return and will not likely see their tax returns. The judge will review the parties’ agreement and financial statements.  In addition, while tax returns may be evidence of a parties’ income they do not show expenses, assets or liabilities. 

6.  Why are the financial statements on pink paper?  Short form financial statements should be completed on pink paper and long form financial statements should be completed on purple paper. I don’t think there is any particular reason for those colors but the reason they are on colored paper is that financial statements filed with the court are impounded. That means that they are kept separately from the rest of the divorce file including divorce agreements. The divorce file, including agreements are open to the public.  Financial statements are not. So, having them on colored papers makes it easier to easily pick them out of the file to make sure they are in fact kept separate.

7.  Do Rule 401 financial statements need to be notarized?  Interestingly enough long form financial statement needs to be notarized. The short form financial statement does not need to be notarized.  Both forms however need to be signed under the pains and penalties of perjury by the party.

8.  Are we going to need to fill out the financial statement more than once?  Most likely, you will need to fill out the financial statements more than once. While in mediation, it is important that each party has a financial statement filled out and exchanged with each other. This is so that all the financial information is clear and open to the other party to explore.   The likelihood is though that the financial statements will need to be filled out at least one more time and possibly more times. Depending on how much time goes by between the beginning of mediation and the end, if there have been significant changes in finances, a revised financial statement will need to be completed. A signed financial statement will be filed with the court when the divorce papers are filed with the court. Typically, there is a 30- 45-day lag (or more depending on the court) between when the papers are filed and the hearing.  The judge is typically going to want to see a financial statement that is signed and dated on the day of the hearing. This is to avoid a scenario where there have been major changes between when the papers were filed and the hearing date that are not reflected on the financial statements. Sometimes, a judge will simply ask clients to initial and re-date the financial statements they already filed (if there are no changes).

9.  Do we need to fill in information about our assets and liabilities if we have already agreed that we are each keeping what is in our name?  Yes.  Regardless of your agreement, the financial statement must be filled out in full. As discussed above, the reasons for this is that it insures that each party has made a full disclosure of his/her finances and that each has full information about the other’s finances.  So, even if you have decided that you will each keep your own retirement accounts, it is important that you list the accounts. This way the judge knows that you each know what you are waiving and keeping and it allows the judge to have information necessary to determine if the agreement is fair and reasonable.


HOW TO COMPLETE THE SHORT FORM FINANCIAL STATEMENT IN MASSACHUSETTS

First, here is the link to the Massachusetts Probate and Family Court’s Website where you can download a PDF version of the Short Form Financial Statement:



Please note that while the form that can be downloaded from this site will add up and total numbers listed, it cannot be saved.  Court instructions for filling out the financial statement can be found at:  https://www.mass.gov/how-to/file-the-short-financial-form.

My office will provide you with an excel version of this form that can be saved and that has all of the additional schedules, like Schedule A and Schedule B, as well as the explanatory notes page.

Here are a few additional tips:

1.     I generally recommend that clients not include their full social security number. It is generally not necessary and with the amount of cyber crime happening, I think it is better to not have your social security number floating around unless absolutely necessary.
2.     Gross pay:  If you are a salaried employee this section is straightforward. Simply look at your paystub and include your gross weekly pay. Remember that the form is weekly.  If you get paid every two weeks, make sure to divide by 2.  If paid monthly, divide by 4.32.
3.     If you are self- employed, you will need to fill out a Schedule A. See more about that below.  If you are doing the financial statement on the excel form, once you fill out the schedule A, it will fill in your adjusted gross income on line 2d of page 1.  If you are doing it by hand, you will need to fill in that number after finishing schedule “A”.
4.     If you receive bonuses, the best way to handle those is to include the total bonuses for the year and divide by 52. If your bonuses change from year to year, you can either include what you have received to date for that year or what you received for the prior year. In any event, you should include a notation that explains what you have done in the “Explanatory notes” page. (see below).
5.     There is a page called “Explanatory Notes” on the excel version of the financial statement.  More explanation is better than less. Anywhere on the financial statement where you feel you need to explain something, you should err on the side of explaining it on the “Explanatory Notes” page and referencing the item number you are referring to.  So for example if you receive a bonus, I would include the amount on page one with and asterisk. On the explanatory page you can reference the line number and include a note such as,  “ This was my total bonus for 20??.  My bonuses change every year and I do not typically receive the bonus until December.”
6.     Similar to self-employment, if you have rental property, you will need to fill out a schedule B. See below.
7.     Page 2-You should be able to obtain your federal and state tax deductions off of your paystub. If you are self-employed and pay estimated taxes, you will need to either estimate or look at your tax returns to determine how much tax you paid.
8.     If you have employer provided medical insurance, include the cost in #3(d).  If you do that, do not then also include it in 8(m) below. This is a very common mistake.
9.     Once you have included all of your deductions, you should end up with a net weekly income. This is essentially your “take home pay”.  It is an important number to know as it tells us what is left after all your deductions and what you have left to pay the expenses listed below that.
10.  Do not forget to include your income from last year and the number of years you have paid into social security.  You can get that by getting a statement at www.ssa.gov.
11.  The expense section is often the most difficult to fill out.  First, it is calculated on a weekly basis and most people do not keep records weekly. Remember to divide by 4.32 if you are going from monthly to weekly.  I always tell people to do the best they can when filling this out. There is not an expectation that it will be accurate to the penny. It is important to have it be as realistic as possible.  Some items will be easier than others. Rent or mortgage will be the same each week. Some bills and expenses may need to be averaged over the course of a month or year.  Some expenses (like heat) vary by time of year so in that case, take the whole year and average it.  Food costs also vary so you should average those costs.
12.  You will see that the expenses listed on the short form are by no means a comprehensive list of expenses.  You should not hesitate to list additional expenses on the “additional expense sheet”. For example, the form does not include such basic things as haircuts, newspapers, birthdays, entertainment, internet, cell phone, lawncare etc.  Try to be as accurate as possible. If your expenses exceed your income on the form, don’t worry. That is not uncommon and it is recognized that you are estimating to some extent.
13. One very common question is what to do if you are still living together? In other words, do you indicate current expenses and split them?  I generally recommend that if possible, assuming the couple does not in fact plan to continue to live together after the divorce, the parties should anticipate and project what their expenses will be living apart. If one person plans to stay in the house, he or she should list the house expenses as though they were paying them fully. The person moving out should project what the cost will be of a new apartment or house.  This gives you an idea for what your budgets will be living apart which is important information when trying to agree on a child support or alimony amount or how to share child expenses after the divorce.
14. #9- Counsel Fees- If you have paid a retainer to an attorney, list it here. Do not include your mediator’s fees here.
15. Page 3 of the short form is devoted to asset and debts. My general rule of thumb is if an asset is jointly owned, you should both list it on each of your statements and list the full amount rather than half. I think this is less confusing.  If an asset is individually owned, it should only be listed on the statement of the person whose name the asset is in.
16. Initially, if you do not know the value of the home or car, it is ok to estimate. Eventually, when the financial statement is signed and filed with the court, you will need to include as accurate a number as possible. You may need to go to a site such as KBB.com to determine your vehicle’s value.  You may need to get a real estate appraisal to determine the value of your house.  This will be discussed in the mediation session.   The rest of the asset and debt section is pretty self-explanatory. Here however are a few other tips and common mistakes that you should be aware of.  Do not include full account numbers (for same reason that I suggest you not include full social security number.)  If you have a term life insurance policy (8e), those generally have no cash value. Do not put the death benefit on this line. Line 8(e) is intended for whole life or universal life type policies that have a cash value.  If you have already listed the mortgage or equity line in #10 or listed a car loan on 10(b), do not list those again under the Liability section in number 11.
17.  If you have a defined contribution retirement like a 401K or 403B, list the current value.  If you have a defined benefit pension like a state pension, union pension or federal government pension, you will need to determine the value by obtaining a present value calculation.  Ask your mediator about that as this is beyond the scope of this article.
18. Schedule “A”- This schedule is not included in the court form which the state website provides.  The court provides the form but it is not integrated into the short form so you will need to fill it out and then include the number on page 1.  If you are using the excel form that I will provide you with, Schedule “A” will be integrated with the rest of the financial statement.   Schedule “A” is similar to Schedule “C” of your federal tax return. You cannot simply attach your schedule “C” however.  The easiest way to think about schedule “A” is it represents your gross receipts minus legitimate business expenses.  Make sure to not duplicate expenses from page 2 and your business expenses.
19. Schedule B is the form which lists your rental income. Once you do the calculations on Schedule B, the final number which is your income after expense will be listed on page1.
20.  Here are some final thoughts about the financial statement.  One of the challenges and confusing aspects of it is that sometimes it calls for current numbers and sometimes it calls for prospective numbers.  Sometimes it calls for actual numbers, like your monthly rent, and sometimes it is an average, like your weekly food bill.  Sometimes, the form calls for actual monthly, like automobile insurance, and sometimes it requires that you average costs over the year because expenses change month to month, like heat. The form does not include a comprehensive list of expenses so it requires you to think of other expenses that may not be listed. And, the form is a moving target.  The financial statement may change as the mediation progresses.  You will likely have to prepare it at least twice.  So, on the one hand, when it comes to expenses, I always tell my clients to do the best they can but not to stress out about absolutely precise numbers.  With respect to assets and liabilities though, the numbers need to be precise and accurate. The assets and liabilities listed on your financial statement need to be consistent with what is listed in your agreement.  In other words, if you list an asset on your financial statement, it should be addressed in your agreement. If you address an asset in your agreement, it should be listed on your financial statement.