This is a question often asked in divorce cases. This article is a reminder as to why it is vitally important to be involved in the family finances. Ask for accounts to be in joint names, request that log in names and passwords be shared, and take an active role in the family finances whether it be by paying the bills, reviewing accounts and/or maintaining records. Purchase financial software that can quickly and easily give you an information overview.
Below are questions to consider and remedies to assist in gathering a complete financial picture when your spouse has hidden financial data and information.
What Assets are Usually Hidden?
Money is often the common answer. But, there are other assets that can be hidden:
- stock shares;
- stock options;
- bonuses;
- investments accounts;
- real estate;
- trust accounts;
- off shore accounts;
- inherited monies;
- fine art; and the list could continue.
How are Assets Hidden?
In today’s world, it is easy to hide assets. Banks encourage online banking, and investment companies do the same. Statements are not always mailed to the marital home.
A spouse who wants to hide assets, may transfer cash or valuable items to close friends and family members. A spouse may create a trust and fund it with marital monies. A spouse may buy a car, a boat or artwork for a family member or good friend with the understanding that it will be transferred back to the spouse once the divorce proceedings are over. A spouse may put cash into an individual bank lock box, never telling the spouse about the lock box. A spouse may enter into a business arrangement with others via a corporation or partnership, attempting to hide assets through that business entity.
One case we handled involved Gloria and Glenn. It was the second marriage for both parties. Gloria had an adult daughter from her first marriage, and Glenn had three adult sons from his first marriage. Gloria was a nurse, and Glenn was in sales. They both deposited their paychecks into a joint checking account. Periodically they would make deposits to a joint money market savings account and make joint investments into their stock account.
Unbeknownst to Glenn, Gloria started writing large checks to her daughter. Glenn was totally unaware, but Gloria wanted to see that her daughter was taken care of and that her step sons’ inheritance would be smaller.
Glenn had allowed Gloria to take care of their finances, and he only discovered the scheme when he and Gloria had discussions about their finances while retirement planning. Glenn’s disappointment over account balances, led him to review several years of records. Then, he discovered the large checks written to his step daughter.
Glenn, angered by his wife’s misuse of martial monies, sought legal advice about the activity and a divorce. After reviewing their bank records, it was discovered that Gloria had bought her daughter a $35,000 car and had given her over $50,000 over the past several years, calling those transactions “gifts” for birthdays and Christmas.
If Glenn had been more involved in the management of his joint funds, he would have discovered his wife’s large gifts sooner.
Another scheme may involve a spouse entering into an agreement with his employer to delay a bonus or commission until post-divorce. Some employers will allow commissions to accrue and accumulate until after the divorce. Some employees may even refuse or delay a promotion just to suppress income.
The opposing party, Larry, in one divorce case, worked in rental real estate management. For years, he had earned over six figures. Larry’s wife, Cindy, was a teacher. They had 2 children, ages 3 and 5. Larry had an affair with a coworker, and Larry left his wife for this girlfriend. He moved into a large, three bedroom apartment (so each child could have a bedroom there) that was owned by his employer, who was also his best friend. Larry did not pay rent. Rather he had the rental amount deducted from his income, so on paper it looked as if he had a big pay cut.
Larry also convinced his employer to delay his bonuses until after the divorce because he knew his income would be used to calculate child support and spousal support. Larry was suppressing his post-separation income, a common ploy of those who will be paying child support and alimony.
Additional tricks may include:
- Overpaying the IRS;
- Getting cash back with purchases made with an ATM card;
- Buying items and then returning them for a cash refund;
- Adding to coin, art, gun or other collections;
- Creating phony debts and loans;
- Creating dummy companies and businesses;
- Hiding money in foreign accounts; and
- Transferring stocks.
Spouses who are business owners may hire unneeded staff to show a decrease in profits. They may create fake expenses and bills. They may buy expensive things for the business-like a car or new equipment, knowing that they will sell the car or equipment after the divorce. They may delay sending invoices to show a cash flow crisis.
Examples of some hidden schemes might look like these:
Husband has a cash based business. He might be a barber, landscaper, or restaurateur. He could easily hide cash payments in a lock box at bank. It is unlikely that he would hide all funds, but he could take “some off the top” every week.
Another scenario might involve a business person who suppresses business income by actually taking business profits and buying another asset, like commercial real estate, i.e., a strip mall or another office building and renting those properties, and the other spouse is completely unaware of this activity. Or perhaps the business is a separate asset, Husband is working at his family owned business and is being paid a salary. But, Husband starts bringing home less money because he is skimming off the top and investing in the real estate venture.
Or the often traveling spouse could be taking profits and monies to foreign countries and making investments in real estate in that other country or making deposits or investments in foreign accounts.
A case we have seen had these facts:
Joe and Jennifer were high school sweethearts. They married two years after their high school graduation and one month after Jennifer received her two year degree in accounting. Jennifer was the bookkeeper for her husband’s garage business, Joe’s Auto Repairs.
Joe was a natural born mechanic. He was gifted with fixing things, and he had learned the auto repair business from his father. Joe had a successful business in the rural part of the county, and he had a loyal customer base and was constantly busy, employing five others to help him with his business. Everyone trusted Joe and his work.
Jennifer was eager to assist her husband with his business at the beginning of their marriage, 20 years ago. Joe always told Jennifer she could pay herself a minimum wage salary, along with the promise that she could have flexible hours as long as she got the bookkeeping done. Given the location of their business and the age of many of his customers, Joe has always had customers who pay cash. The business flourished.
About 10 years ago, Jennifer had tried to convince Joe that she should receive a larger salary. Joe refused her request.
Joe has not as involved in the business when it came to the demanding physical labor services. He wanted to help Jennifer with bookkeeping. He offered to help her by making runs to the bank for deposits. She absolutely refused his help and told him to stay away from the books and that she would handle them. Jennifer had a revenge plan in mind.
Jennifer responded by taking ½ of all cash payments and putting those monies in another bank account at another bank in her name only. It was created as a total online account, with no paper statements. Jennifer kept depositing all credit card payments and ½ of all cash deposits into the business general operating account.
Since Joe had completely trusted her with the bookkeeping and banking, he was unaware of her taking those funds. Joe never gave a close look to the book, but he did wonder why since he was busier than ever that deposits did not seem to grow.
Jennifer’s unhappiness with Joe became a much larger issue for their marriage when their only child went away to college. Jennifer asked Joe to move out of their marital home.
Joe was shocked to learn what Jennifer had done with the cash deposits during the past 10 years of their business and marriage. The secret cash deposits were discovered by a forensic accountant through his careful review of the business records and Jennifer’s spending habits. On average, the business had received about $800 every business day for services like oil changes and minor car repairs. Jennifer had taken about $400 a day for approximately 250 business days, a year, for 10 years, totaling $1,000,000 that was held in her “secret account”. That $1 million dollars explained her expensive watch and jewelry purchases, designer hand bag collection, recent plastic surgery and trips with her girlfriends to exotic locations. Jennifer had also given large amounts of cash to her mother and sister, who in turn, spent the extra money on similar items.
If you suspect that you might be a victim like Joe, what can you do? What warning signs should you consider?
What are Possible Signals that “Money Games” are being played or have been played?
- Has a spouse become very defensive and secretive about money?
- Has the breadwinner taken a pay cut or decrease in salary?
- Has a spouse complained about business being slow, but new employees are still being hired and no expenses are being lowered?
- Has the breadwinner increased his or her international travel?
- Has the breadwinner asked for a quick and hasty “sign off” on some accounts or paperwork because the CPA or banker needs it today or right away?
- Have new bank accounts and charge accounts been opened without an explanation?
- Have formerly mailed statements from banks and investment firms ceased coming to the martial home?
- Has the spouse opened a new post office box and is now having all financial items mailed to the post office box?
- Has there been a change in behavior and how documents are filed and stored? (Spouse always kept files in an open file cabinet, and now everything is in a locked drawer?)
- Has there been an unusual or surprise purchase like an antique car, a new boat or a flashy new watch?
- Does the spouse demand and maintain complete control over accounts?
- Has Quicken or Quickbooks been removed from the family computer? Has the computer been removed from the home or has the computer recently “crashed” and cannot be repaired?
- Is there drug abuse? Is there a gambling addiction?
These types of behavior can signal a pattern of activity that indicates some financial games are being played.
Back to the story of Joe and Jennifer. Perhaps Joe should have been more inquisitive about Jennifer’s spending habits and her lifestyle. Her complete control over the bookkeeping should have been a sign. She also had kept all their records under lock and key and when she put their records on Quickbooks, she would never show Joe how Quickbooks worked. She refused to share login information with him when he suggested that they have a “back-up” plan if she ever got sick or was away from the office too long. There were clues there, but for whatever reason, Joe did not see them.
Even though many questions are raised in this article, it is important to note that some spouses may just have always taken on the role of breadwinner, bill payer, and family financial supervisor. There is nothing to hide
Not every divorce involves inappropriate financial behavior or activity.
How are Hidden Assets Discovered?
A forensic accountant, who will have experience looking into possible suspicious fraudulent activity, should be hired. Don’t just ask your CPA; he or she just files your taxes. And, don’t just ask your financial advisor, he or she just helps you make investments.
An experienced, trained forensic accountant can establish the true income of the spouses, often by completing a lifestyle analysis. The lifestyle analysis can establish accurate income and expenses, along with careful review of years of tax returns and W-2’s.
The work results of the forensic accountant can be classified as work product, thus protecting it from being shared with the opposing counsel and the courts unless your attorney decides sharing the information would be beneficial to your case.
Be prepared to spend several hundreds of dollars on a consultation for you and your attorney and to compensate the forensic specialist at an hourly rate from $200-$400 or at a flat fee, ranging from $2,500-$10,000.
Discovery will be used in the litigation process, and documents will be required to be produced. Your attorney should ask all financial records like: bank records; loan applications; credit cards statements; location and contents of lock boxes; records for all investments; IRA’s; Annuities; and 401 K’s. Written questions or interrogatories need to be sent.
Ask to review the spouse’s passport for foreign travel. Review airline accounts and frequent flyer accounts. Ask for phone records and emails. Co-workers, supervisors, financial advisors, friends, and family members may need to be questioned or deposed. Bank records may need to be subpoenaed. Review loan applications since most people want to appear as wealthy as possible on a loan application.
There are IRS Service Forms that be requested, if involvement in foreign activity is suspected, i.e., IRS Service Form 3520, Annual Return to Report transactions with foreign trusts and receipt of certain foreign gifts; IRS Service Form 3520A, Annual Return of Foreign Trust with a US owner.
Estate files of deceased family members will be public record in the county where the deceased resided. The estate file will show distributions, and even though inherited monies are separate property, the spouse may have co-mingled those funds, making them a marital asset.
Additional Protections
Most divorce cases do settle through a separation agreement. A standard clause to include in your agreement is that all assets have been disclosed, along with a clause stating that there will be a penalty if there has not been complete disclosure. Another assurance is to include a clause that if post agreement signing, there is hidden asset discovery, the innocent party receive 75%-100% of the hidden asset or assets and attorney’s fees to recover that asset or assets.
