Advising Through Uncertainty

Navigating tax burdens, business value, and forensic issues in modern divorce cases.

By Asif Charania, CPA/ABV/CFF, ASA; Ginny Graef, CPA; John Murray, CPA; and Greg Saunders, CPA/ABV/CFF, ASA

Divorce creates a web of financial and legal challenges that demand careful coordination between CPAs, financial planners and attorneys. The following sections bring together tax planning issues with valuation and forensic considerations to provide a cohesive view for practitioners.

Part I: Key considerations for navigating income tax issues in divorce

Divorce is a challenging life event that significantly impacts your finances, and in particular, income taxes. Income tax planning during a divorce is important to avoid costly mistakes and ensure both spouses can navigate the process with fair tax burdens. Below is a summary of important aspects to consider when addressing income tax issues as part of divorce planning.

The tax implications of filing status

Filing status should be one of the first tax considerations during divorce. Your status on December 31 of the tax year determines your options. If you are still legally married on that date, you may file jointly or separately. Filing jointly can result in a lower combined tax liability, but both spouses are jointly responsible for the tax due. Once divorced, individuals must file as single or, if applicable, head of household, which can offer more favorable tax rates if certain requirements are met. It is possible that both spouses can claim head of household as their filing status if each spouse claims one or more dependents and they are providing more than half of their dependent’s respective support and live with the parent more than half the year.

The right to claim children as dependents (and therefore claim related tax benefits such as the Child Tax Credit or Earned Income Tax Credit) can be negotiated in the divorce agreement. Generally, the custodial parent has the right to claim the child, but this can be released to the non-custodial parent using IRS Form 8332. Only one parent can claim the child for any given tax year.

Alimony and child support

Two other common areas discussed in divorce tax planning involve alimony, known as spousal support, and child support. For divorces finalized on or after Jan. 1, 2019, the Tax Cuts and Jobs Act (TCJA) changed the treatment of alimony: payers can no longer deduct alimony payments and recipients do not have to report them as taxable income. This is a change from prior tax law that allowed for the deduction of spousal support by the payer and income inclusion for the recipient. Under both current and prior law, child support is non-deductible for the payer and not taxable for the recipient.

Division of assets and capital gains

Dividing marital property can trigger tax consequences, especially with assets like real estate, retirement accounts and investments. Most property transfers in a divorce are non-taxable at the time of transfer, but you should consider the potential capital gains taxes when these assets are eventually sold. For example, selling the marital home may qualify for exclusion of up to $250,000 in capital gains ($500,000 if married and filing jointly), but divorced individuals must meet specific requirements to claim this benefit.

Investment accounts should also be analyzed. When dividing these types of assets, you will want to understand the tax basis of the assets within the account to discern the built-in gain. When you divide the investment account, it is possible one spouse will have assets with a lower tax basis and potentially a higher gain on the eventual sale of the securities. Careful consideration should be given to all the marital assets to make sure each asset’s potential capital gain is fairly divided among spouses. While you may end up with an even distribution of asset values, one spouse could end up with less than intended because of the transferred tax burden of each asset.

Retirement accounts and Qualified Domestic Relations Orders (QDRO)

Retirement assets can be a significant part of marital property. One spouse’s retirement plan benefit can be used to fund marital property settlements to a spouse, former spouse, child or other dependents. When under a QDRO, the former spouse steps into the shoes of the transferring spouse. Transferring funds from qualified plans like 401(k)s under a QDRO allows penalty-free division of retirement accounts. Both parties should consider the tax impact of dividing IRAs, pensions and other deferred accounts, as different accounts have different tax treatments.

In addition, a QDRO distribution can be rolled over (partially or wholly) tax free to the spouse's eligible retirement plan if: 1) it is done within 60 days of receipt, 2) it is distributed to the recipient spouse under a QDRO, and 3) it would have been an eligible rollover distribution if it had been made to the transferring spouse. One point to note: Any amount distributed that is not rolled over is included in income for the recipient spouse. If the recipient spouse chooses to not roll over the QDRO, then the distribution will be taxable, but will not be subject to the 10% early distribution tax.

Net Operating Losses (NOL), estimated payments, and overpayments

NOLs

When married taxpayers generate NOLs on a joint return and later divorce, the NOL is only available to the spouse who created it. If both contributed to the NOL, the carryover should be split according to each spouse’s share of the loss.

Estimated payments & Overpayments

Taxpayers filing separately can divide joint estimated payments as they agree. If there's no agreement or claims exceed 100% of the payments, allocation is based on each spouse's share of tax liability.

When an overpayment from a prior-year joint tax return is applied to the current year's estimated tax, it is necessary to allocate the credit between former spouses for their respective separately filed returns. The IRS has determined that, unless an agreement exists between the spouses, the prior-year joint overpayment should be apportioned based on the individual’s separate tax liability for the current year. Consequently, such credits are treated as jointly made estimated tax payments and must be allocated accordingly by taxpayers filing separately.

Tax rules set the baseline for how property and obligations are split, but the story does not end there. Beyond income tax matters, estate and gift tax and estate planning considerations also play a major role in divorce outcomes. Once those broader transfer tax and planning issues are addressed, practitioners must then turn to valuation and forensic accounting concerns, which affect not only what assets are “worth” but also how courts interpret fairness under equitable distribution standards.

Part II: Estate and gift tax & estate planning issues in divorce

In the event of a divorce, it is very important to examine the impact to the client’s estate planning situation. Estate and gift tax issues need to be considered when marital agreements and financial settlements are executed.

Both parties to the divorce will likely need to execute new wills as soon as the divorce is finalized. For example, wills that provide for all assets to be left to the surviving spouse are likely no longer appropriate.

Spouses are often the sole named beneficiary under life insurance policies and Individual Retirement Accounts (IRAs). These designations should be reviewed and updated after the divorce is final.

Trustee provisions also need to be updated based on the post-divorce financial situation and relationship of the parties. For example, couples who create Irrevocable Life Insurance Trusts (ILITs) often have one spouse named as a trustee and/or beneficiary. If there is a divorce, these trust agreements need to be re-examined and updated, possibly to remove the ex-spouse as trustee and/or beneficiary as part of the marital settlement agreement.

Similarly, many couples have created Spousal Access Lifetime Trusts (SLATs) to take advantage of the larger estate tax exemption created under the TCJA. While this is a powerful tool during marriage, it can create complications if divorce occurs. Absent clear language in the trust, an ex-spouse could remain as a beneficiary or trustee, which may no longer be desirable.

The above are only two examples of trusts that must be reviewed. In practice, all trust agreements created during marriage should be examined by an attorney in connection with divorce-related property agreements.

Finally, new financial and medical powers of attorney may need to be executed if the ex-spouse was previously named as an agent.

From a transfer tax perspective, in many divorces property settlements result in transfers of assets between spouses. Under IRC § 2516, qualified transfers between spouses are not subject to gift tax. However, strict timing rules apply, so care must be taken to ensure transfers are made within the permitted window.

While estate and gift tax and estate planning issues affect the structure of marital settlements and future financial security, they do not answer the equally important question of asset value. Addressing structure must be followed by determining worth. Valuing businesses, tracing hybrid property, and assessing whether assets have been wasted or dissipated requires careful valuation and forensic accounting analysis.

Part III: Valuation and forensic accounting issues in divorce — Key considerations for equitable distribution in Virginia

Understanding equitable distribution

Dividing property in divorce is complex, especially when spouses own premarital assets or interests in closely held businesses. Virginia follows equitable distribution under Va. Code § 20-107.3, which means marital property is divided fairly, not necessarily equally.

Property falls into three categories:

• Separate: Acquired before the marriage or by gift/inheritance from a third party.
• Marital: Acquired during the marriage or enhanced by joint/spousal effort.
• Hybrid: A mix of separate and marital components.

The key issue is often why and how asset value changed during the marriage. The source of funds rule is a guiding doctrine in hybrid property cases [see David v. David, 287 Va. 231, 754 S.E.2d 285 (2014)]. This rule provides the nature of the funds used to acquire, maintain, or improve an asset determines the classification of that portion of the asset.

Asset tracing and hybrid property

When separate assets receive marital contributions, they become commingled and require tracing to determine separate versus marital portions. Tracing analyzes records to follow the source and path of funds.

Common occurrences when asset tracing becomes relevant include:

• Contributions to a premarital investment account.
• Paying down or refinancing a premarital home with marital funds.
• Using an inheritance to acquire or improve marital property.

Under Virginia law, the spouse claiming a separate interest bears the initial burden of tracing it by a preponderance of the evidence (Va. Code § 20-107.3(A)(3)(a); David v. David). If tracing fails, the asset or its increase is presumed marital. If marital contributions increased value, the owning spouse must show the gain was due to passive factors or third-party efforts (Rowe; Congdon). Accurate records are critical.

The same principle applies to businesses: appreciation of a separate interest may be classified as marital if driven by either spouse’s significant efforts.

Businesses: How courts decide value

In Virginia, courts apply the concept of “intrinsic value” to a business during divorce [Bosserman v. Bosserman, 9 Va. App. 1, 384 S.E.2d 104 (1989); Howell v. Howell, 31 Va. App. 332, 523 S.E.2d 514 (2000)].  Intrinsic value is defined as the property’s worth to the parties themselves, not what it might sell for in an open market transaction. This differs from “fair market value” and focuses on the unique circumstances of the divorcing spouses.

Choosing a valuation date

Typically, businesses are valued as of the evidentiary hearing (Va. Code § 20-107.3(A); Bosserman). The court may, on timely motion, choose another date for good cause — for example, to prevent a spouse from benefiting from waste or dissipation after separation.

Common valuation approaches

There are three widely accepted ways to value a business in divorce:

• Income approach: Projects future earnings or cash flow and converts that into a present value.
• Market approach: Compares the business to similar companies that have been sold or are publicly traded. Given the intrinsic value standard, the market approach is often used as a corroborating method, rather than assuming an actual market transaction.
• Asset approach: Analyzes the business’ assets less its liabilities. In divorce, the asset approach is often treated as net tangible asset value, serving as a “floor” against which other approaches are measured.

In many cases, prior to applying the approaches above, the appraiser must make normalization adjustments to ensure financial statements reflect the business’s true economic performance.

Forensic accounting and asset dissipation

When one spouse controls the business, forensic accounting may be needed to investigate potential waste of marital assets near separation. Experts may:

• Identify personal spending disguised as business expenses.
• Quantify how personal use of business assets (e.g., vehicles, travel, meals) impacts business value.
• Detect unrecorded cash income or off-the-books transactions.
• Evaluate compensation relative to market wages and identify changes post-separation.

If dissipation is found, courts may adjust equitable distribution or even move the valuation date back to separation to prevent a spouse from benefiting from waste.

Support analysis and double dipping

One challenge in divorce valuations is “double dipping.” This occurs when the expert adjusts a spouse’s compensation for valuing the business but then uses the actual (not normalized) compensation to calculate spousal support. As a result, the same income is counted in both the business value and support analysis.

Although some Virginia courts have permitted this practice [Hoebelheinrich v. Hoebelheinrich, 43 Va. App. 543, 600 S.E.2d 152 (2004)], the law remains unsettled and fact-specific. CPAs should not assume it will be accepted in any case and must coordinate with legal counsel on every engagement where double dipping may be at issue.

Minority interests and discounts

If a spouse owns a minority interest in a business (i.e., lacking control), the value of that interest may be lower than a pro-rata share of the entire company. As a result, depending on the nature of the valuation, appraisers often apply discounts for lack of control and marketability. Virginia courts have taken differing approaches. In some cases, courts declined to apply discounts if they believed the result would undervalue marital assets. In other cases, courts have considered expert testimony supporting adjustments. The application depends on case-specific facts and judicial discretion.

Goodwill: Personal versus business

Goodwill is defined by the International Glossary of Business Valuation Terms as “that intangible asset arising as a result of name, reputation, customer loyalty, location, products, and similar factors not separately identified.” Courts in Virginia recognize two types:

• Personal goodwill: Tied to the individual (e.g., their reputation, personal relationships, skills). This is considered separate property.
• Business (or entity) goodwill: Tied to the business itself and would remain if the individual left (e.g., brand recognition, trained staff, location, systems). This is considered marital property.

Virginia courts have consistently drawn this distinction (see Russell v. Russell, 11 Va. App. 411, 399 S.E.2d 166 (1990); Howell v. Howell). While personal goodwill is typically treated as separate property, practice or entity goodwill may be treated as marital, depending on the facts and circumstances of the case.

This distinction is especially important in service-based businesses such as law firms, medical practices, or accounting firms. Appraisers use various methods to calculate personal goodwill, including the With-and-Without Method, Excess Earnings Method, Residual Method, and Multi-Attribute Utility Model (MUM) Method. Depending on the facts and circumstances of the case, one of these methods may be more applicable than the others.

What about shareholder agreements?

Many businesses have shareholder or buy/sell agreements that set a formula for valuing an owner’s share. Virginia courts have held that these agreements should be considered but are not determinative in divorce valuations.  In Bosserman and Howell, the Court of Appeals acknowledged such agreements but determined the trial court was not bound to adopt the contractual formula if it did not reflect the intrinsic value standard. At the same time, in Kaufman v. Kaufman, 7 Va. App. 488, 375 S.E.2d 374 (1988), the court recognized that these agreements are legally binding contracts and may not be ignored entirely.

Accordingly, shareholder agreements are relevant but not conclusive. While Virginia courts are not bound to apply contractual formulas that conflict with the intrinsic value standard, these agreements remain legally binding contracts. CPAs should coordinate with legal counsel to assess enforceability and implications outside of equitable distribution since they may still govern the parties’ rights and obligations under contract or corporate law.

Additional considerations for CPAs in divorce engagements

Tax implications

The sale or transfer of a business interest in divorce may trigger tax recognition events beyond those addressed in equitable distribution. CPAs should analyze built-in gain exposure, basis adjustments, and the treatment of passive activity losses when valuing marital property.

Treatment of debts

Equitable distribution in Virginia applies to marital debts as well as assets. Under Va. Code § 20-107.3, courts classify and allocate responsibility for debts incurred during the marriage. CPAs should analyze whether debts are marital or separate, how they are secured, and whether payments impact disposable income available for support. Debt classification can significantly affect net marital estate calculations.

Professional standards and disclosure

CPAs serving as valuation or forensic experts must comply with AICPA standards, including VS Section 100, SSFS No. 1, and the Code of Professional Conduct. Independence, objectivity and avoidance of conflicts are critical, particularly when serving as a testifying or neutral expert. Reports should clearly state key assumptions, methodologies and limitations so that opinions are transparent, defensible and consistent with professional expectations.

Final thoughts

Divorce involves a complex interplay of income tax planning, estate and gift tax considerations, estate planning updates, and business valuation and forensic accounting analysis. Each of these areas can materially impact how assets are divided, how liabilities are assigned, and how future financial obligations are determined. By coordinating across disciplines, CPAs, working closely with attorneys and financial planners, are uniquely positioned to help clients avoid tax pitfalls, ensure proper estate planning updates, fairly value assets, and support court decisions with defensible evidence.

This integrated approach strengthens both the financial and legal foundations of divorce resolutions, ensuring that outcomes are equitable, sustainable and aligned with both tax law and family law principles.

Disclaimer: This article references commonly cited Virginia statutes and case law to illustrate valuation and forensic concepts. Because statutes, case law, and legal interpretations change frequently, CPAs should confirm the current status of the law and consult with qualified legal counsel before relying on this discussion in practice.

The authors are all experts and leaders at Keiter in Richmond. Asif Charania, CPA/ABV/CFF, ASA, is partner and leader of Keiter’s Valuation and Forensic Services Practice, where he works closely with Greg Saunders, CPA/ABV/CFF, ASA, in valuation and forensic accounting. Ginny Graef, CPA, a partner who leads the Estate Tax Practice and Family, Executive & Entrepreneur Advisory Services team, is an expert in income, trust, gift and estate tax planning. John Murray, CPA, partner and tax leader of the Financial Services team, specializes in income and business strategy, including alternative investments and private investment funds.