Hiding marital assets during the process of a divorce is contrary to the fiduciary duty that each spouse owes to the other. Some spouses view the potential financial gain from hiding assets as being far more important than fair dealing. Hidden assets are often not easily found, especially those placed in the hands of third parties or behind trust or corporate documents.
Looking for hidden assets or unreported/under-reported income often involved the careful review of hundreds of pages of financial documents and the discovery process can test the resolve of even the most dedicated litigators. Proving the existence of an asset and proving it is part of the divisible marital estate is indeed a challenge. The individual hiding assets has a distinct advantage over the attorney who tries to discover them. This attorney seeking to find hidden assets must use a variety of discovery methods to increase the odds of locating the missing asset or income.
The following list reflects areas that have the potential for the hiding of assets or income:
• Bank or investment accounts. The existence of hidden bank or investment accounts is probably the most prevalent form of hidden assets.
• Hidden income unreported on tax returns and financial statements.
• Collusion with an employer to delay bonuses, stock options, or raises until a time when the asset or income would be considered separate property. While always possible, this is even more prevalent where the employer is a closely held business.
• Debt repayment to a friend for a phony debt.
• Expenses paid for a girlfriend or boyfriend, such as gifts, travel, rent, or tuition for college or classes.
• Stocks, mutual funds or other securities
• Stock Options – Stock options, not yet exercised but given as part of a compensation package to an employee, are often undisclosed unless the right questions are asked.
• Farming assets – “Watch the hay disappear.” Farm assets are a good candidate for aerial scouting.
• Commissions not yet paid/contingency fees not yet paid. This often occurs hand in hand with collusion between the spouse and their employer.
• Tax credits, carryovers and refunds – The parties may be entitled to credit previous tax losses against income and to carry this credit forward annually in increments. Similarly, tax refunds require a determination of whose name is the check coming to or what account it will be directly deposited into.
• A custodial account set up in the name of a child, using the child’s Social Security number. Deposits and withdrawals can easily be made without an unsuspecting spouse knowing.
• Hobby collections (particularly baseball cards, coins and stamps) as well as gold and silver – These should be itemized before dissolution if possible and appraised as soon as possible. This is one of the quickest assets to disappear and unless immediately accounted for, will never be fully discovered.
• Antiques and artwork – Antiques, paintings, sculptures, and carpets are often located at the spouse’s place of business.
• Frequent Flyer miles- A potentially valuable asset which is frequently overlooked but readily discoverable.
• Vehicles, boats, ATV’s, tools, firearms and other household goods. Like hobby collections, these assets can quickly disappear after separation and should be quickly documented and/or appraised.
By no means is this list of potential problem areas exhaustive. A properly motivated spouse can hide a myriad of assets. Instead, this list represents hidden assets commonly seen in dissolution actions where a spouse is inclined to deception. Having identified common areas of abuse, the inquiry then turns to how these hidden assets can be discovered. This is a multi-faceted approach involving the analysis of tax returns, use of interrogatories (written questions under oath) or other discovery methods, and the analysis of other documents and records.
In almost every case, my first point of inquiry involves the inspection and analysis of income tax returns, both personal and corporate. These returns provide clues to the discovery of income, income earning assets, or asset sales. Typically, the attached schedules are far more important than the summary entries on the first two pages of the 1040 return. It is my practice to get copies of tax returns for at least the prior three to five years, and in some cases I have gone back much farther. Spouses inclined to deception may provide altered or incomplete tax returns when requested through discovery. Where deception is suspected, it is wise to order a copy of the returns directly from the IRS or the state.
I am not a CPA and few practicing family law attorneys are so qualified. Accordingly, first and foremost, I view my job as a family law attorney to identify the potential for abuse. When red flags arise, it is my practice to bring in an accountant to analyze the respective financial documents. While my discovery may reveal hidden assets, trained financial professionals are far more likely to recognize areas of deception and assist in the process of asset recovery and valuation for the divorce court.