Finding Hidden Assets During Divorce
Part 4 of The High Net Worth Guide To Divorce
This is part 4 of a 7-part guide for affluent and high net worth individuals considering divorce. In this section, we cover how to find hidden assets during divorce
Jurnex is an independent registered investment advisor that specializes in supporting women going through divorce. If you’re ready to take the next step with your separation, contact us for a consultation today.
Most couples are honest with each other, even when it comes to divorce. Unfortunately, there are a number of cases where one spouse may hide assets from another during divorce. One study by the National Endowment for Financial Education (NEFE) found that 41% of American adults admitted to deceiving their spouse about finances at some point. In this article, we explore how to search for hidden assets if you suspect your spouse is hiding money in a divorce.
There are essentially two key ways to discover hidden assets:
A. Follow the numbers
B. Follow your gut
We will go over these two methods in more detail below.
A. Follow the numbers
Following the numbers is a good place to start searching for hidden assets. Money tends to leave a paper trail, and mapping out their movement will often give you clues about where money may be hiding.
During divorce, there are two methods for examining numbers: 1) Legal Discovery and 2) Independent Investigation.
Legal Discovery, also known as Formal Discovery, is the legal procedure used to obtain financial statements and documents. Lawyers usually handle Discovery. Steps here include methods such as depositions, interrogatories and formal requests for bank statements. You are not being put on trial; the courts are simply asking for truthful information under oath.
These are documents that your spouse should be able to provide. The US legal system can generally subpoena financial institutions to release information. But Discovery is usually a congenial affair. Lawyers understand that there is no reason to hide financial information because the courts can eventually order all the documents anyway.
Much of Discovery is actually done through a process called “Informal Discovery.” To save time for the clients, lawyers will often simply call each other and ask “Can you send me everything you have on the Smith case?” The other lawyer might simply answer “Sure, we’ll have the documents ready for you by Monday”. And in general, Legal Discovery is a very good way to make sure assets are accounted for.
If you suspect your spouse is hiding assets from your lawyer, an independent investigation may be warranted. The courts themselves will have no way of knowing if you’re spouse is simply failing to report a large bank account. Your spouse might have even failed to disclose it to his own lawyer. In this case, an independent investigation can help you unearth hidden assets.
Here, you will have to either hire an independent investigator or do the search yourself. Here are the general steps to an independent investigation.
1. Analyze provided financial statements
Investigations should use your current financial statements as a starting point. They will look at income reported on W-2 forms (ordinary income) and Schedule C (business income). Other income includes
- Interest and Dividends (Schedule B)
- Capital Gains (Schedule D)
- Additional income (Schedule E)
They are looking to determine how much money your family should have. They may also look for gifts and inheritances received during the marriage that were transferred into joint names. These assets will be considered marital property.
2. Analyze expenses
Next, the investigator will look where income gets distributed. (What goes in must come out somewhere). They will analyze expense reports, credit card statements, tuition bills and mortgage accounts in this stage. They will consider lifestyle questions: after considering expenses, how much income should be left over? Does your amount of reported savings make sense?
In this stage, they are looking at major expenses. Minor items, such as individual day-to-day transactions, can certainly add up. But you’re searching for significant hidden assets. So stay focused on the big picture. A hundred dollars here and there can be added and rounded to the nearest $1-10K. These are small expenses relative to an affluent family’s net worth. You’re looking for shortfalls in the hundreds of thousands of dollars. Don’t get lost in the minutiae.
3. Search for missing accounts
If income, savings, and expenses don’t add up, it’s time to start searching for missing accounts. Here, the investigator will examine bank reports and financial statements with a fine-tooth comb. Usually, most large withdrawals are easy to explain. Down payment for a house, purchase of a car, annual payment for insurance. The list goes on; there are plenty of instances where large payments are necessary. But you’re looking for unexplained transactions. Either large one-time sums or frequent transactions that add up to significant amounts. Anything that is difficult to explain.
Money tends to leave a paper trail. And you can use these records to find missing assets.
B. Follow your gut
If you are not a numbers person, don’t worry. There’s another powerful tool for finding hidden assets: your gut feeling.
If something doesn’t feel right to you, you should take a second look. Studies have shown that people use instinct to successfully help them make better decisions. Cynthia Cooper, the whistle-blower who exposed the now-defunct Worldcom, first started her investigation because something just didn’t feel right to her. And she was correct. What started as a sense of unease ended up unearthing one of America’s largest corporate accounting scandals in history.
Listen to your instinct. If something doesn’t feel or seem quite right, it might not be. If people are acting out of character or appear to be working to head you in another direction, step back and ask yourself why. – Cynthia Cooper
Here are things you can look for when you’re following your gut.
1. Unexplained changes in behavior
Does your spouse seem distant when talking about money? Or have you noticed him/her making an unusual number of “work trips”? Sudden changes in people’s behavior may indicate they are hiding something. According to Divorce Magazine, 45-50% of married women and 50-60% of married men cheat on their spouses. And many of these cases will involve money. Whether spending money directly on the suitor, or indirectly through travel.
A sudden change in behavior may also signal some form of illegal or grey-market activity. With high net worth families, the desire to reduce taxes can often cause people to skirt the law. If your spouse seems nervous when talking about finances, it could be a sign that he or she is hiding assets abroad.
2. Cash flow that doesn’t make sense
Think of how your lifestyle compares to your peers. Do you live in similar houses? Do you drive similar cars? But why then aren’t you seeing good cash flow? This can be a sign of money leakage. Your spouse’s earnings may be getting diverted into accounts you don’t know about.
Often, we find spouses making excuses when confronted. Bonuses are coming in late. Clients aren’t paying on time. Commissions are getting delayed. But these are all signs that your spouse may be diverting income. If you have a suspicion, trust your gut. Dig deeper and see what you find.
3. Use of business finances in personal accounting
Often, business owners will combine family finances with their business. This is a common practice for small and medium firms. This practice, however, is also an easy way to hide marital assets.
If your spouse seems nervous whenever they talk about company finances, this should immediately raise a red flag. They could make excuses, saying “the accounting is too complicated to really understand.” Don’t be fooled. Every business must have balanced books in order to file their taxes. Professional accountants and auditors created those books with accuracy and truthfulness. Any falsification and they risk of losing their license (or even go to jail).
If something doesn’t seem quite right, you should probably have a forensic accountant analyze the company’s books.
How are assets hidden?
To truly catch a criminal, you often have to think like one. There are three usual ways a spouse can hide assets during a divorce.
1. They fail to report the asset
Most commonly, your spouse may simply never mention the existence of a particular account. This could be a US account, or one located overseas. Regardless, there is no way for a court to know the existence of a bank account if it is not reported. There is no magic Oracle sitting in a courtroom to let them know.
These kinds of assets can be the most difficult to uncover. The existence of safety deposit boxes, for example, can be difficult to track. You will have to dig through your family’s financial record to unearth these assets. Look for unexplained bank statements and invoices that you don’t recognize.
2. Hide it with someone else
Your spouse may also hide assets with friends and family. It can be difficult to subpoena these records without due cause, however. Here, the best way to keep track is to analyze bank statements, especially after you have spoken to your spouse about divorce. Make sure you keep track of where the money is going. You want to make sure there are no unexplained withdrawals from any of your accounts.
3. Hide it with a business
This is similar to hiding money with somebody else. If your spouse runs his own business, they may move assets from family accounts into their business accounts.
Again, the best way to detect this is to keep track of monthly bank statements. You are looking for unusual withdrawals to bank accounts you don’t recognize.
What to do if you discover hidden assets?
In the off chance that you discover your spouse has been hiding assets, there are a number of steps you should take to address this.
1. Understand their intent
Did your spouse accidentally hide the asset? Often, a spouse will simply forget to report a particular asset. This is actually the most common reason for assets getting lost. Savings accounts for special occasions, long term deposits, rainy-day funds and college funds for your children. These are all accounts that are easy to forget about. You simply don’t see them on a day-to-day basis.
In this case, you should simply add the asset your Financial Affidavit and move on. Financial Affidavits often undergo a dozen revisions over the course of a divorce. Assets simply go unreported and need to be added in later.
However, if your spouse was purposely hiding assets, you should proceed with caution. Because you may find more. When people want to deceive their spouse or the IRS, they usually utilize multiple accounts. So finding a hidden account often signals the existence of many more.
2. Notify your legal team
If you determine that your spouse was purposely hiding assets, you should notify your legal team. The US court system has significant penalties for hiding assets. This can include
- Civil: courts can order spouses to pay the legal or investigative bills of the opposing party. Also, judges will not take lightly to a spouse who hides assets during a divorce. Failure to produce current financial statements can be grounds for a judge to rule against the asset-hiding spouse.
- Criminal: depending on your state, lying to the courts about your assets may be grounds for criminal charges. Perjury (falsely testifying under oath), is a criminal offense that can involve significant fines or even jail time
3. Hire a financial investigator
If you do find hidden assets, your lawyer may advise you to hire a financial investigator or forensic accountant. These professionals specialize in seeking out financial fraud. Prepare yourself for a full financial audit. This is a necessary step; you need a clear picture of your family’s total assets to find out what’s missing.
Be aware that financial audits are time-consuming and expensive for both sides. Before you take this step, make sure you have warranted suspicion of deception. Spending tens of thousands of dollars to investigate an honest mistake by your spouse isn’t worth it. But if you suspect your spouse has purposely hidden significant assets from you, an auditor should be able to trace back where the money went.
How can a financial advisor help?
If you suspect your spouse is hiding assets but still want to come to a peaceful resolution, consider contacting Jurnex. As a professional divorce mediator, we will gladly speak with you and your spouse about hidden assets. We recognize that court-ordered investigations are both time-consuming and expensive. Lawyers need to be paid. Court fees pile up.
Mediation can be a far better option. Allowing your spouse to come forward about hidden assets can be far better for both parties. If you and your spouse agree to mediation, take the next step and see how Jurnex can help you come to a peaceful solution.
Continue to Part 5: Consdering Alternatives to Divorce
Sections of the High Net Worth Guide to Divorce
Part 1. Overview.
Part 2. Protecting Yourself During Divorce.
Part 3. Identifying Marital Assets.
Part 4. Finding Hidden Assets. (current page)
Part 5. Considering Alternatives To Divorce.
Part 6. Choosing A Type of Divorce.
Part 7: How To Divorce.