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You’re Getting Divorced – Are Your Assets Accounted For?

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Two unions are formed when becoming wed: 1. Personal 2. Financial Over my years in the forensic accounting field I have, unfortunately, witnessed many divorce proceedings primarily focus on the personal union with mere basic attention to the financial union (i.e. filing a financial affidavit, assets and liability schedules, and compute alimony and child support guidelines). This can cause insurmountable determents to the parties involved!

The financial union of individuals must be looked at as a business. Are all the transactions and assets accounted for? Would it be okay if an executive or partner was skimming or embezzling funds? What if a business cease operations – then partners turn around and purchase lavish jets and real estate? The business is making adequate money yet the accounts do not reflect this – where’s the money? And so on. The point is businesses should operate fairly and in accordance with governing law.

When one spouse primarily handles these matters, is simply not cooperating during the divorce process, or suspicions of marital fraud/dissipation are alleged – caution flags should be raised by you or your attorney.

If you are contemplating divorce a specialized financial team, including a forensic accountant, can be engaged to assist in analyzing such concerns. Being armed with a basic understanding of ways in which one can manipulate finances will greatly increase chances of detection. When brought early on the team’s effectiveness is much greater. The financial expert will also assist in the cost-benefit to tracking down your assets.

Unaccounted for Assets

Endless possibilities exist due to continued complexities in financial instruments and concepts. In my professional history, assets are typically hidden or influenced in one of the following ways:

  1. Cash or a cash-like instrument put into the ‘mattress’ (i.e. undisclosed safety deposit box)
  2. Paying into future benefits such as Health Savings/Flex Spending accounts,
  3. Prepayments of liabilities in one spouses name (e.g. credit card or tax liability)
  4. Transfer/’gifting’ funds to a related party with intent to receive back after divorce.
  5. For self employed individuals or those materially participating in small business activities; holding back cash distributions, postponing receivables until after divorce.
  6. Intentionally diminishing or influencing value of non-cash assets
  7. Simply not reporting assets during divorce proceedings.
  8. An employer holding back a bonus until after divorce has completed.
  9. Intangible Assets; Such as patents, copyrights, and book royalty contracts.

Of course, the answers to these points may be as simple as a misunderstanding. By preparing an initial list of assets and corresponding questions you can simply approach your spouse and ask for documents, records, or an explanation of your concerns. This may circumvent the need for additional analysis. In cases where you or your attorney is not satisfied – you should then consult a financial expert.

The forensic expert will work with you or your attorney in review and determine what information is most relevant to demonstrate your concerns.

Financial Review

The following tools and sources of information are an excellent starting place for evaluating asset concerns:

  • The discovery process; Depositions, Interrogatories, Mandatory Disclosure (where applicable), and other pleadings/responses
    • This information is invaluable as your spouse may face sanctions such as monetary fines, judgments, and or perjury charges. The court also has the power to compel information. These actions and documents are excellent for pressuring your spouse to provide information you seek.
  • Banking records
    • If available, every financial related statement should be obtained (bank, credit card, loan statements, etc) for the period in question. You can obtain these by directly contacting your bank, spouse, and or subpoena. When reviewing these documents, the following should be kept in mind;
      • Are all paychecks and incoming deposits accounted for? Are there missing regular deposits – such as a quarterly dividend check?
      • Can you account for all material expenses?
      • Do the times your spouse travelled match up with transactions? Were there any cash withdrawals immediately proceeding or during?
      • For transfers out – can you trace transfers into other accounts?
      • Are all cancelled checks accounted for? Were any checks written to cash?
      • Are assets purchased accounted for? (For example, a $10,000 purchase from Zales)
    • Tax Returns
      • Form 1040 (and some state filings) will reflect income from all wages. This includes items such as wages, dividends, interest, stock sales, business income, and IRA distribution/contributions.
      • Schedule A – reflects deductions against income such as charity, financial planning/fiduciary, mortgage interest and taxes, safety deposit boxes and more. Review of this schedule may show a prepayment of taxes, hidden trust, or hidden taxable accounts. Points deducted can reflect the occurrence of a refinancing – was cash taken at time of refinancing?
      • Schedule B – reflect interest/dividends and asset sales, respectively.
        • On Schedule B you can identify assets such as savings bonds, checking and savings accounts, brokerage assets, and more. (Note, some accounts may not be included if they do not meet filing thresholds).
      • Schedule C – reflects the operations of you or your spouse business. Noncash transactions should be ignored when reviewing the data (such as depreciation expense). Does the net cash from the business correspond to findings in your bank accounts? If not, there may be additional accounts your spouse has not disclosed.
      • Schedule E – reflects rental real estate, partnership interests, royalties and estates and trusts. This information may disclose interests you were not previously aware of. Typically form K-1 information is taken and input on Schedule E – and should be reviewed as well.
    • Loan Applications and Financial/Net Worth Statements
      • Banks and other financial institutions often ask for these statements to qualify for a loan or insurances. A personal financial statement will generally include a declaration of all assets, liabilities, income, and expenses.
    • Closely Held/Small Business Documents
      • When one holds significant influence/control of a business they have ability to manipulate transactions and finances. Historical balance sheets, profit and loss, general ledgers, and business tax returns can provide invaluable information such as assets the business holds, any personal expenses being paid, cash available, and possible related parties.
    • Offshore bank accounts
      • Review of Federal Tax Return Form 1040 Schedule B, Part 3 is also an excellent quick check for any foreign accounts that may exist – if so, Form TD 114 would provide further information on these assets. Form 8938 also reflects foreign financial assets
      • Your spouse’s passport may reflect travel to foreign countries, where offshore accounts may be located.
    • Expenditure/Lifestyle Analysis
      • While banking statements provide a good starting point and view into the financial picture – what happens if transactions happen and unaccounted money or unaccounted transactions are occurring? With the assistance of a financial expert, they will review spending patterns in relation to known sources of funds. After normalizing spending (for items such as onetime expenses, should the spending exceed known sources it may be possible debt has been utilized to fund variance or other sources/streams of income were unreported. Should the spending fall short of known sources of income, is the money accounted for?
    • Public record searches
      • These searches may provide information such as additional real estate owned, business entity associations, property ownerships, bankruptcy, judgments, and title records.

Recognizing hidden assets or missing income is only the first step. The actual burden of proof and due diligence required by the courts however, is largely more intricate. Adding further complexity is the sheer amount of concealment strategies and the fact most are multifaceted – combining various hiding concepts. This burden is both timely and costly. A forensic expert will assist you and or your attorney with recovery of assets while also creating pragmatic expectations for the possibility of actual recovery and associated cost; balancing the cost of proceedings and potential outcome. When engaged early in the divorce process, the forensic accountants work is invaluable.

Jordan Egert, CPA, CFE, CDFA is the Manager of Litigation Support at CBM – Councilor, Buchanan, & Mitchell P.C., where his time is devoted to financial consulting engagements (involving collaborative and litigated financial cases), forensic tracing engagements, and taxation as it relates to family law. Jordan Egert is a member of the Association of Certified Fraud Examiners, Maryland Association of Certified Public Accountants, and the Institute of Divorce Financial Analysts. For additional information or questions please contact jegert@cbmcpa.com

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