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Preparing Financial Statements in Massachusetts Probate and Family Court Cases

Massachusetts divorce lawyer Nicole K. Levy reviews the preparation of Financial Statements in Massachusetts Probate and Family Court cases.

Under Supplemental Probate and Family Court Rule 401, financial statements are a necessary component of every divorce or probate and family court case involving child support or alimony in Massachusetts. Indeed, producing a draft financial statement is one of the first tasks I assign to my clients in every case with a financial component. Preparing a financial statement is a detailed and daunting process, and not always easy to navigate. An individual’s financial statement is signed under the pains and penalties of perjury, and must be notarized for individuals earning more than $75,000 per year. Elements of an individuals financial statement may change during a case, but major changes that cannot be explained rationally can be highly problematic. This makes it critically important for a party’s first financial statement filed to be clean, accurate, and explicitly clear.

Financial statements are required for hearings including temporary orders for child support or alimony, complaints for contempt for alleged violations of financial orders, pre-trial conferences, uncontested hearings to approve separation agreements and trials involving financial issues.

In this blog, I will provide an overview of Massachusetts financial statements by commenting on each section of the 9-page official Long Form Financial Statement, which is required for any individual who earns gross income of more than $75,000 per year. The Short Form Financial Statement, which is required for all individuals earning less than $75,000 per year, is a 4-page document, which includes abbreviated versions of most of the sections I discuss in this blog. In other words, everything called for by the short form financial statement is covered in my discussion of the long form financial statement. (For a review that focuses exclusively on the short form, take a look at this helpful guide. Readers should also note that Massachusetts Juvenile Courts use a slightly different long form financial statement, that is similar but not identical to the Probate and Family Court form.)

Table of Contents for this Blog:

  • Section I – Personal Information
  • Section II – Gross Weekly Income/Receipts from All Sources
  • Section III – Weekly Deductions from Gross Income
  • Section IV – Net Weekly Pay
  • Section V – Gross Income from Prior Year
  • Section VI – Weekly Expenses Not Deducted from Pay
  • Section VII – Counsel Fees
  • Section VIII – Assets
  • Signature Page

Preparation for Filling Out a Financial Statement: Gathering Relevant Documents

Before filling out a financial statement, it often makes sense for client’s to gather documents such as paystubs, tax returns and account statements, so they can make a full inventory of their income, expenses, assets and debts. Other helpful documents can include utility bills, car payment bills, and checking account and credit card statements for the accounts used by an individual for his or her routine living expenses. In addition, readers might want to check out the state’s official instructions for financial statements, as well as surfing the web for any additional how-to guides about Massachusetts financial statements.)

Long Form vs. Short Form Financial Statements

As mentioned above, in Massachusetts there are two types of financial statements – the long form and the short form. Parties who earn more than $75,000 per year must fill out the long form. Parties who earn less than $75,000 per year fill out the short form. This blog focuses on the long form, since it is more comprehensive and encompasses all the areas in the short form.

    Section I – Personal Information

    Page 1 of the long form examines personal information, such as name, address, birth date, and employment information. This data may seem benign, but I have seen judges refuse to consider a financial statement accurate and complete because a litigant has left off a piece of personal information. Part of the reason for requiring employer information in the financial statement is to enable the opposing party to verify income and employment through financial discovery. If a party’s address is impounded due to an abuse protection order, the party should not include his or her address in Section 1.

    Section II – Gross Weekly Income/Receipts from All Sources

    Page 1 of the financial statement also requires parties to disclose and report all sources of income, including base pay, part-time employment, commissions, pensions, trusts, social security and SSDI, rental income, as well as a catchall category for any other source of income, such as stock options and RSUs. While this may seem simple, it is not just a matter of calculating one’s annual income. You may receive overtime, but not always. A part-time job may have commenced after child support was ordered, changing the treatment under the Massachusetts Child Support Guidelines. Bonuses may be contingent on your performance, but also company performance. Your stock options may not be vested. There are generally ways to explain any inconsistency in your sources of income without being deceptive or dishonest, but disclosure of all sources of income is always a must.

    Section II is a popular area of the financial statement for the use of explanatory notes (i.e. footnotes). For example, contributions from householder members, in line II(p) is a frequent area of complexity, where a footnote often makes sense. If a party is unsure how a certain form of income should be reported, he or she may use a footnote to disclose and explain the income source without including disadvantageous or uncertain income on the financial statement.

    Self-Employment Income and Rental Income

    If you are self-employed or have rental income, there are separate schedules that are used to disclose this income. Schedule A is provided for reporting self-employment income while Schedule B is used for disclosing rental income. Calculating self-employment income for child support or alimony purposes is a complex subject; I recommend reviewing Attorney Owens’ detailed article on the subject if you have questions.

    Rental income also includes unique complexities, where state and federal tax law is extremely generous towards landlords by offering deductions such as depreciation, which involves no out of pocket costs. In addition, big-ticket maintenance and repairs expenses to rental property must be scrutinized carefully, where capital improvements that increase the value of the rental property are not always deductible from income for child support purposes.

    Contributions from Household Members

    One notable category is “contributions from household member(s)” in line II(p). While each potential source of income presents its own unique challenges, this one often confuses clients. Do they need to include their new spouses’ income? What if they temporarily moved in with family? What if family temporarily moved in with you? The last second in my blog, Cohabitation not Grounds for Terminating Alimony in Pre-2012 Divorces in Massachusetts, reviews some of these questions.

    Section III – Weekly Deductions from Gross Income

    Page 2, Section III is reserved for expenses that appear on an individual’s paystub, such as state and federal taxes, employer-based medical insurance, and 401k contributions. Parties who are paid biweekly can simply divide all of the expenses deducted from their gross wages by two. Note that “FICA” taxes generally represents a party’s social security taxes. Even minor deductions from pay, like vision insurance, should be included if the deductions appear on a party’s paystub. Ideally, the gross income and deductions match the individual’s weekly paystub to the penny.

    Section IV – Net Weekly Pay

    Page 2, Section IV, simply calculates net weekly pay. Net weekly pay simply represents an individual’s “take home pay” – that is, gross weekly income less all of the deductions that appear on his or her pay stub. A party calculates his or her adjusted net weekly income by subtracting line III(s) from line II(r).

    Section V – Gross Income from Prior Year

    Page 2, Section V seeks a party’s gross taxable income from the prior year. In general, parties satisfy this section by reporting their gross taxable income from the previous year. Note that this section also requires parties to attach a copy of their previous year’s W2 and 1099 statements from the prior year to the financial statement. (Opinions differ on whether a party should use their gross Medicare wages from the previous year’s W2, or taxable W2 income.)

    Section VI – Weekly Expenses Not Deducted from Pay

    Page 3, Section VI focuses on weekly expenses not deducted from pay. Weekly expenses that are not deducted from pay, including rent or mortgage payments, utilities, motor vehicle expenses, and other living expenses. For seasonal expenses, such as heat, it often makes sense for parties to calculate an average weekly expense based on a 52-week year. Similarly, expenses like “clothing” and “uninsured medical expenses” are often best expressed as an average, where these costs may not arise every week. It is important to note that medical insurance costs should only be reported in this section if a party does not report medical insurance in Section II, under expenses deducted from pay. Child care expenses are particularly important to report, where such expenses can have a direct impact on child support under the Child Support Guidelines.

    The importance of weekly expenses varies from case to case. For example, for a spouse seeking alimony, weekly expenses are an important component for establishing the alimony recipient economic need for alimony. Conversely, for a party paying child support, his or her weekly expenses may be less of a focus in the case. Either way, parties should strive to be as accurate as possible throughout the financial statement as a rule.

    It should be noted that the expense categories listed on the financial statement are not always a perfect fit for an individual’s actual expenses. How to report cable, internet and cell phone expenses are sometimes confusing for individuals. Parties should be aware that there is nothing wrong with crossing out an unused expense category and writing in a replacement category when needed.

    Other categories that can be confusing could be described as “groceries”, and might include food, toiletries, laundry and cleaning supplies. On the financial statement, “house supplies” might include light bulbs, batteries and toilet paper, while “laundry and cleaning” might include laundromat costs, detergent and cleaning supplies, while “incidentals and toiletries” can include makeup, toothpaste and hair products. Where many of these expense vary week to week, individuals should generally seek to use a good average estimate to cover these expenses.

    Section VII – Counsel Fees

    Page 4, Section VII seeks disclosures about legal fees and costs to date. This section is typically filled in by a party’s attorney. Retainer fees typically represents the total monies paid to the attorney to date. Total fees and costs incurred represents the total amount the client has been billed to date. The anticipated range of legal fees is highly subjective, and most attorney are inclined to include a wide range of potential fees in most cases.

    Section VIII – Assets

    Page 4, Section VIII begins the asset disclosure section of the financial statement. A financial statement requires parties to disclose every asset and debt in his or her name, with an amount attributed to equity of the total amount owed. For some assets, such as real estate and motor vehicles, the party must include both the fair market value and any loans or mortgages owed for each asset. Most assets are reported in Section VIII(D). The range of assets includes real estate, vehicles, boats, machinery, pensions, annuities, retirements, deferred compensation, bank accounts, bonds, stocks, money market accounts, home furnishings, art and other collections.

    It is clear under Massachusetts law that all property owned by either party is subject to division. However, parties typically only report those assets owned individually, in their name alone, or jointly, on a financial statement. Thus, a party would generally exclude his or her spouse’s 401K account from their financial statement, even if the spouse’s 401K is subject to division. However, it is not unusual for parties to report certain “big ticket” items, like the marital home, as an asset on their financial statement, even if the property is held in the other party’s name, individually. Joint bank accounts are generally identified as “joint” on the financial statement and reported on each party’s financial statement.

    It is important for parties to disclose assets, even if they are not in “pay status” or illiquid. For example, a defined benefit pension is an asset, even if the employee has not retired or reached vesting age. Family trusts also should not be overlooked. Massachusetts courts have even found a party’s entitlement to future book royalties constitutes a marital asset. Similarly, a future entitlement to a personal injury settlement is a marital asset. Generally, a future inheritance is not an asset subject to division, but in most instances, disclosure (perhaps with a footnote) is preferred over non-disclosure.

    Section IX – Debts and Liabilities

    Page 8, Section IX addresses debts and liabilities. In general, marital debts are part of the marital estate that is subject to division in a divorce. Section IX calls for parties to report all debts, including credit cards, personal loans, school loan, IRS debts, and other outstanding debts. Where Page 8 of the Long Form asks parties to disclose both the amount owed and weekly payments due on debts, parties must be mindful to avoid double-counting certain debts that are reported elsewhere in the financial statement. For example, where outstanding mortgages principal is reported in Section VIII(A), and weekly mortgage expenses are reported in Section VI, parties should not separately report mortgages on Page 8. The same is true of motor vehicle loans, which are reported in Section VIII(B), and weekly mortgage expenses are reported in Section VI.

    For some liabilities, the weekly payment may be reported in one section of the financial statement, while the total liability owed is reported in Section IX on Page 8. For example, a 401K is typically deducted directly from an employee’s pay, and is therefore reported in Section III. Thus, a party should report the total outstanding balance for the 401K loan under “amount due” on Page 8; under weekly payment, the party should list “see Section III” on Page 8.

    Like assets, parties generally only list debts held in their own name, individually, or held jointly in both names, on their financial statement. (In other words, the other party’s individual debts are generally not listed.) Thus, a credit card held solely in the other spouse’s name would not be reported as a debt on a one’s financial statement. Joint credit card debt is generally identified as “joint” on the financial statement and reported on each party’s financial statement.

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    Signature Page

    Page 9 is the signature page. Somewhat puzzlingly, parties who execute a long form financial statement must have their signatures notarized, while those signing short forms do not require notarization. The notary requirement is peculiar, since both long and short form applicants are under the same obligation to present true, accurate and complete information on their respective financial statements. Moreover, the purpose of a notary is to ensure that a signature is not forged; the notary adds nothing to the truthfulness or accuracy of a document’s contents.

    Extra Pages and Footnotes

    Extra pages and schedules can be created for assets, expense and liabilities that do not fit within the standard 9-page financial statement. Explanatory notes (i.e. footnotes) are often helpful for addressing ambiguous areas on the financial statement, and for making any detailed disclosure of income, expenses, asset or liabilities. For complex financial statement, it is not uncommon for attorneys to include ten or more explanatory notes that provide background and details surrounding multiple parts of the financial statement.

    Mistakes and Pitfalls

    In his blog on Divorce.Net, Attorney Howard Goldstein offers several potential mistakes individuals should watch out for when preparing a financial statement:

    Estimates: If you are estimating any item, you should note that it is an estimate somewhere on the form. Otherwise, a judge will assume your expenses and income are based on actual figures obtained from careful review of past history.

    Valuation: You are asked to provide values of your personal and real property. If you are not certain of the value, make sure you obtain an appraisal or otherwise indicate on the financial statement how you arrived at the value. If you are not sure, then you should indicate that on the form or in a footnote. If you are valuing a stock account or mutual fund, make sure you indicate the date that you’re using for the valuation.

    Leaving things out: Every account, no matter how small, must be disclosed. If you leave something out, your spouse may claim you were intentionally trying to hide an asset, which could be quite embarrassing, or even legally problematic in front of a judge.

    Pension plans: Often people will leave out pensions they have earned, or not properly calculate the value of the pension. If you need help valuing a pension, you may have to speak with an actuary.

    Collectibles and tangible property: Used furniture has little value, but collectibles like coins, stamps, and memorabilia should be appraised by an appropriate professional.

    Attorney Goldstein’s common sense tips are worth observing by any individual preparing a Massachusetts financial statement for a Probate and Family Court case.

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    About the Author: Nicole K. Levy is a Massachusetts divorce lawyer and Massachusetts family law attorney for Lynch & Owens, located in located in Hingham, Massachusetts and East Sandwich, Massachusetts. She is also a mediator for South Shore Divorce Mediation.

    Schedule a consultation with Nicole K. Levy today at (781) 253-2049 or send her an email.

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