Divorce, or legal separation, can be a messy affair, and made messier if you believe your spouse or domestic partner has hidden assets. This becomes extremely important especially if you are in a community property state, such as California.
Why Is Uncovering Hidden Assets Important in Divorce?
In California, and other community property states, money earned by either spouse during the marriage, along with all property purchased with those earnings, are considered community property owned equally by both spouses. Additionally, any money considered separate property, such as one spouse’s inheritance, that is commingled with the martial property and cannot be identified, along with separate property transmuted or transferred to the community is considered part of the martial estate. Thus, any asset your spouse successfully hides actually devalues your marital estate. By exposing the hidden asset, those assets are then added to the marital pot when considering how the marital estate should be divided.
For more information regarding California’s community property law, click here.
How Do You Know There Are Hidden Assets?
Before you can determine whether there are hidden assets, you must first determine if an asset exists. If so, then the issue becomes whether that asset was “spent.” For example, was the asset invested in stock, deposited in a bank account, or used to purchase something? The asset is considered “hidden” if you cannot account for the asset.
The formula used to determine the existence of hidden assets is:
Assets – Expenditures = Hidden Assets
You are essentially subtracting the money earned by the money spent. Expenditures, in this formula, include deposits to banks, investments, stocks, household expenses, purchases, and loans. If there are no hidden assets then, in a perfect world, your marital assets minus your marital expenditures should equal zero. However, if an amount is determined by the difference, then there is a possibility that there are hidden assets.
What Are The Types Of Hidden Assets?
The most common types of hidden assets include:
- Mutual funds
- Cash value in insurance policies and variable annuities
- Traveler’s checks
- Series EE bonds
- Savings bonds
- Bearer municipal bonds
- Real estate
- Personal property such as art, jewelry, collectibles, antiques, vehicles, hobby equipment, gun collections, collector quality cards, tools, carpets or rugs, and original paintings
How Are Assets Hidden?
Methods of hiding assets vary from person to person. Sometimes, a person may elicit the help from relatives or acquaintances who may or may not be aware of the purpose of their involvement. For example, your spouse may have his friend or relative hold onto some personal possessions or investment certificates in their safety deposit box, under the guise of safekeeping.
Another method is repaying fake debts to family or friends, which may appear to be a legitimate use of money. Assets may also be transferred to family members, friends, living trusts, or even corporate entities. Other seemingly valid outlays of funds may be expensive gifts to a paramour. Business acquaintances or employees may collude with employers to delay raises, promotions, bonuses, stock options, or lucrative business deals until the resolution of the spouse’s divorce.
Owners of businesses may use the corporate entity to conceal assets by, for example, skimming cash from the business, paying nonexistent employees salaries and then voiding the checks after the divorce resolves, or paying salaries to family and friends for services never rendered.
Unreported income on financial statements and tax returns can also decrease the perceived value of available assets or of a business.
How Do You Uncover the Hidden Assets?
The process of searching for hidden assets is often a difficult assignment and should be weighed against the potential benefits. Once you decide you would like to move forward with the investigation, it is imperative that the investigator receives accurate and timely information about your spouse and his or her family and friends. The more information the investigator has, the more likely the hidden assets will be uncovered.
During divorce proceeding, the parties will go through a period called discovery, where both parties may request and must answer to questions and demands for documents. The questions and document demands should center around the following:
- Spouse’s lifestyle
- Spouse’s cash flow procedures in business
- Income tax returns
- Saving accounts and money market funds
- Checking account statements and cancelled checks, money transfers or money wires
- Credit card statements
- Credit reports
- Insurance statements
- Bank statements
- Offshore accounts, which are legally required to be reported
- Loan applications and personal net worth statements at banks
- Public records
- Social media, such as Facebook, LinkedIn, Twitter, Tumblr, Pinterest, Instagram and Google Plus
An investigator will first determine how you and your spouse’s finances work because there has to be an opportunity to hide assets before a hidden asset can exist. After discovering that opportunity, the investigator will then look at the paper trail: trailing the asset through being purchased, appraised, insured, taxed, repaired, maintained, sold, traded, or scrapped. Each stage of the paper trail proves the evidence of an asset.
Spouses often recognize when their marriage will no longer continue and begin to hide assets at this point. This “date of indication” is important because investigation prior to this time rarely yields results. More evidence of hidden assets is usually found after the date of indication. Much of the information needed to trail the assets can be obtained through discovery requests. However, if the request is broad, say given over an extended length of time, then your spouse could seek court protection, arguing that the investigator’s request is too broad, unreasonable, unduly burdensome and harassing. By shortening to the time to start at the date of indication until the time of divorce, you have a likely successful argument against your spouse’s request for court protection.
The divorce attorneys at Cottle Keen Lopiccolo & Heyde have experience in uncovering hidden assets for divorcing spouses in Orange, and, by calling 714-676-3764, can discuss your options if you believe your spouse is hiding his or her assets.