Techniques for Discovering Hidden Assets and Unreported Income During the Divorce Process

Financial issues involved in a divorce - especially high net worth cases - can often become rather complicated.   Unreported income and hidden assets are often alleged in divorce proceedings, usually by the spouse who is either not running a business or has not been in charge of the family finances.

It is not uncommon for a spouse to hide assets, especially if the divorce has been planned for quite a while.  People hide assets for a variety of reasons, but essentially, they have property or money that they do not want to have discovered.

There are numerous ways to find hidden assets, but typically assets are either placed in the hands of third parties or behind false documents. The process of finding assets or proving unreported income is often one of the most difficult assignments during the divorce process. Being familiar with ways individuals move assets into the hands of third parties or behind false documents and techniques to find those hidden assets can result in the discovery of this property.

The cost of such discovery work must be weighed carefully against the potential benefits.  It is important for a budget to be planned for two levels of investigation. At the first level, formal discovery procedures such as interrogatories, depositions, subpoenas, requests to produce and motions to compel can provide information to review and analyze the marital and non-marital estates.

If an individual does not have a detailed list of assets and debts along with documents to prove the whereabouts of these assets, the discovery in identifying the “easy to find” estate can become costly.  At this point, a decision has to be made as to whether further money should be spent on the second level of discovery, which investigates and traces transfer of ownership of assets into  other individuals’ or entities’ names.

Is the cost of the investigation worth the potential value of the assets which are assumed, at this point, to be hidden? Through diligent and effective preparation, it is possible to discover assets not disclosed or acknowledged by the other party. It is important to create realistic expectations with the client as to the ability to discover assets which have been actively concealed, and the reality that - despite best efforts - it is sometimes impossible to locate willfully hidden assets.

In divorce situations, careful consideration must be given to answer any questions about about potential hidden assets.  What types of assets may be hidden? How are assets hidden? What techniques can be used to locate hidden assets?

WHAT ASSETS MAY BE HIDDEN?

The most common types of assets hidden are cash, bonds, mutual funds, cash value in insurance policies and variable annuities, stocks, travelers’ checks, Series EE savings bonds, and bearer municipal bonds.

Conversion of cash into personal property such as art, jewelry, collectibles, antiques, vehicles, boats and planes are also possibilities.  Hobby equipment, gun collections, original paintings, collector quality carpets and tools are examples of asset conversion that often are overlooked or undervalued.

HOW ARE ASSETS HIDDEN?

Methods of concealing assets are as varied as the personalities of the individuals involved. In their attempts to veil assets, spouses may often involve relatives or acquaintances who may or may not be aware of their complicity in the diversion of personal assets. It is not unusual to discover the placing of personal possessions or investment certificates into safety deposit boxes in the name of a family member or friend.

Paying down mortgages and credit card balances is yet another method of hiding funds in plain sight. Repayments of phony debts to friends or relatives can appear to be legitimate use of resources. Expenses for paramours such as gifts, travel, rent or tuition for college or classes may be disguised as valid outlays of funds.  Assets may be transferred into the name of another family member, friend or corporate entity.

Custodial accounts established under a child’s social security number as well as transfer of assets into pension, profit-sharing, 401(k), and Keogh plans are all strategies for cloaking liquid assets from the opposing party’s view. Employees can work in collusion with their employers to delay business contracts, raises or bonuses until after the divorce.

The transfer of large sums of money to trusts is one way individuals may attempt to disguise assets. Another is to gift money to individuals with the anticipation of having the money returned at a later date. These patently deceptive strategies may be fraudulent as well.

Spouses who own businesses may use the corporate entity to conceal assets. Skimming cash from the business, paying salary to nonexistent employees and then voiding the checks after the divorce, and paying salaries or fees to relatives or close friends for services that may never have actually been rendered then receiving the money back after the divorce is final are all strategies used by business owners to veil cash.

The value of a business prior to a divorce can be lowered artificially by delaying the signing of lucrative long-term business contracts until after a divorce settlement is reached. Unreported income on tax returns and financial statements can reduce the perceived value of a business to the detriment of the other party in the divorce.

WHAT TECHNIQUES CAN BE USED TO LOCATE HIDDEN ASSETS?

Prior to searching for hidden assets, the investigator must have accurate and timely personal identification information for the other spouse. This includes full legal name and variations (nicknames, abbreviations, common misspellings) as well as known aliases. Current and recent address information is essential. While some searches only need the name and not the address, it is always good to have both pieces of information.

Because assets may have been transferred to family members, the names and addresses of close relatives, their social security numbers and dates of birth will be valuable information in tracing movement of property or cash between the spouse and family.

Specific questions may reveal the likelihood of hidden assets evident through lifestyle.  Does the spouse travel?  If so, where?  In what type of hotels do they stay, and what are their activities as they travel?  Who makes up their group of friends and what type of people are they? Does the spouse get an automatic transfer of funds or an allowance? Does the spouse deposit a paycheck into a separate account?

1. Other telling information can be gleaned from answers to questions such as these. Is a credit card statement being mailed to the spouse’s work address?  Are large amounts of cash floating around?  Is cash used to pay for purchases?  Who are the spouse’s accountant and lawyer? Has the other party provided honest reports on prior tax returns? Is there ownership of a business?  If so, is it a cash business?  Is there a Subchapter S Corporation?

With this basic information in hand, the investigator can pursue specific information from many sources.  Here’s a quick list of information sources which should be reviewed.

1.  Income Tax returns: This should be the first place to look for possible clues as to the existence of hidden assets.  The return provides the roadmap to the discovery of income earning assets and asset sales.  The return should also describe the source of income, whether it be interest, dividends, rental income and gain or loss from the sale of a stock.  Each page of the tax return should be carefully examined for information.

2.  Public Records:  Public records are available in county courthouses, city halls and at state repositories.  These records contain valuable information that is public and available to anyone who inquires.  However, to be efficient with time and resources, one needs to be familiar with how to obtain the types of documents that will reveal asset holdings

Whether termed as obscuring, hiding, obfuscating, veiling or concealing assets, the many methods used by one spouse to prevent access by the other to cash, real, personal or business property can present a seemingly insurmountable wall for attorneys seeking parity or equitable division of marital assets for their client.  Due diligence demands exhaustive measures when unethical and/or fraudulent arrangements exist or are suspected. While it may be difficult to bring to light unreported income and hidden assets, clues can be found which are very meaningful to a trained eye, and can open the facts for fair final property settlements.

References:

Abrams Yu and Associates, P.C. "Problems of Hidden Assets in Divorce Litigation." June 07, 2006. http://www.divorcenet.com/states/michigan/problems_of_hidden-assets (accessed April 30, 2009).

Elizabeth L. Bennett, Attorney at Law. "Hidden Assets in Divorce: Are They Discoverable?" Undated. http://www.divorcesource.com/PA/ARTICLES/bennett1.html (accessed April 29, 2009).

Hoover, Joe, and Anni Adkins and Dr. Lew Deitch. "How to Conduct an Assets Search - Part One." HowToInvestigate.com. Undated. http://howtoinvestigate.com/articles/assets_search1.html (accessed April 29, 2009).

Hoover, Joe, Anni Adkins, and Dr. Lew Deitch. "How to Conduct an Assets Search - Part Two - Locating Hidden Assets." HowToInvestigate.com. Undated.                                                                                 http://how to investigate.com/articles/assets_search2.html (accessed April 30, 2009).

Kohn, Mark: CPA, CVA. "Money Matters: Assets & Liabilities: Unreported Income and Hidden Assets." California Divorce.Info. May 1, 2009. http://californiadivorce.info/money.assetsliabilities.unreportedincome-... (accessed May 1, 2009).

Meyer, Cathy. "How to Identify Hidden Assets." About.Com Divorce Support. Undated. http://divorcesupport.about.com/od/propertydistribution/ht/hiddenassets.html (accessed May 30, 2009).

Pearlman, Alan. Chicago Family Law Blog: Divorce and Hidden Assets. December 13, 2005. http://www.chicagofamilylawblog_com/-news-and-updates-divorce-and... (accessed April 30, 2009).

Zerman & Mogerman, LLC. "Discovery and Treatment of Hidden Assets in Divorce Cases." July 17, 2004. http://www.divorcenet.com/states/missouri/mo_art09 (accessed April 30, 2009).