Finding Hidden Assets in Divorce Discovery and Litigation

If you have questions about divorce, legal separation, alimony entitlement, or alimony in Connecticut, please feel free to call the experienced divorce attorneys at Maya Murphy, P.C. in Westport today at 203-221-3100 or email Joseph C. Maya, Esq. at JMaya@Mayalaw.com.

The Divorce Discovery Process

If you don’t think your spouse will voluntarily disclose all financial information in your divorce, you or your attorney will need to use a formal, legal process to get information and documents. Attorneys and judges refer to this as the “discovery process.” The discovery process provides several methods of getting information, which vary slightly from state to state, but for the most part include all of the following:

Document demands. Your attorney can ask your spouse to produce specific documents, such as tax returns, financial statements, loan applications, and account records.

Written questions called “interrogatories” or “requests for admission.” Using these discovery tools, your spouse must answer questions in writing, or admit specific statements that you believe are true.

Inspection demands. You can ask to inspect property like a safe deposit box or wine collection.

Testimony given under oath. In what’s called an oral deposition, you, your spouse, and your lawyers appear before a court reporter; your spouse is sworn to tell the truth and must answer questions asked by your attorney.

The discovery process is a good way to get financial information from an uncooperative spouse because the court has the power to compel compliance. For example, if your spouse fails to produce documents, you can ask a judge to order your spouse to do so. If your spouse disobeys the order, a court may punish your spouse by imposing a “sanction,” which can include monetary fines or even a judgment against your spouse on a particular issue.

A deposition is a particularly good way to get information from a dishonest spouse. Anyone who lies under oath during a deposition can be charged with perjury. This may be just the right kind of pressure your spouse needs to tell the truth about hidden assets. Typically, you should wait to depose your spouse until you’ve obtained some financial records. This way you can ask your spouse questions about records and information you’ve already examined.

What to Ask For During Discovery

You should ask for documents and information relating to assets, income, debts and liabilities. Don’t forget that assets come in different forms. Tangible assets include cash and other hard assets that can be sold or liquidated like the family residence, cars, jewelry, fine art, a wine collection, and other personal property. Intangible assets include assets such as savings accounts, checking accounts, brokerage accounts, retirement accounts, stocks and stock options, investment income, royalties, copyrights, and patents. So be sure to request a wide variety of records including receipts, loan documents, deeds, title records, account statements, stock certificates, subscription agreements, royalty agreements, tax documents, and W-2 forms.

Start with the tax return

If you’re the “out-spouse,” you probably weren’t preparing or reviewing tax returns during the marriage. It’s essential you examine these during a divorce. Some important areas of a return are covered below. But don’t stop here—tax laws and accounting issues are complex. It’s important to consult a tax advisor if there are complicated tax issues in your divorce.

• Form 1040: Income from wages. As discussed in more detail below, this is where you’ll find income from all reported sources, including wages, salaries, tips, interest income, dividends, business income, capital gains, IRA distributions, pensions and annuities, unemployment compensation, and social security.
• Form 1040: Interest and dividend income. Income-earning investments like bonds, bank CDs, savings accounts, money market accounts or loans made as a lender will show up here. It’ll also show dividend income like income paid to stock shareholders. If either the interest or dividend income exceeds $400, a Schedule B should be attached that will identify the source of the income.
• Form 1040: Retirement plan distributions. Distributions (money received) from a deferred-compensation plan or IRA account are listed on the 1040. If there were distributions, ask where the funds went.
• Carry-forwards. A “carry-forward” is an IRS or state income tax rule that allows taxpayers to save an unused deduction, credit, or loss and use it in a later tax year. For example, you may “carry-forward” charitable donations that exceed 50% of your income and apply these in another tax year. Similarly, if you exceed the yearly limit for contributions to your child’s 529 college savings plan by say $2000, you may be able to carry-forward the $2000 and use it as a deduction in a later year. These types of credits should be accounted for in the property division.
• Refunds. Review old returns to find previous tax refunds. Sometimes a spouse who anticipates a divorce will intentionally overpay taxes for a previous year, expecting to get the entire reimbursement after the divorce is final.
• Schedule A: Itemized deductions. This is where itemized deductions are entered including any state and local taxes paid on income, real estate and personal property. These payments may be related to hidden assets located (or income generated) in another state. For example, if your spouse paid property taxes for a property you weren’t aware of, you’ll need to learn the name on title, the purchase date, and the source of any payments on the property.
• Schedule A: Miscellaneous deductions. Deductions here may include expenses for tax and, possibly, estate planning advice. If you didn’t know your spouse consulted a tax professional or estate planner, you may want to follow up directly with these individuals. Your search could uncover additional assets, such as a hidden trust.
• Schedule B – Part III: Foreign accounts. In addition to the sources of dividend and interest income, Part III of Schedule B may contain a list of your spouse’s foreign accounts and trusts.
• Schedule C: Profit or loss from business. Schedule C is used to report profit or loss from a business operated or a profession practiced as a sole proprietorship (a businesses owned by a single owner). Be sure to review the reported sales, expenses of the business, costs of goods sold and net income to get an idea of how your spouse’s business is doing.
• Schedule E: Supplemental income and loss. Here you can find income-generating assets including: rental real estate ; royalties from literary and artistic works such as music and books ; royalties from copyrights, patents, and software ; investments in partnerships and S-corporations ; and estates and trusts.

Loan applications and financial statements

Before approving a loan, a lending institution will ask for a completed application, copies of recent pay stubs, account records, and a signed declaration regarding all assets and debts. If your spouse applied for a loan, get a copy of the application as it might reveal hidden income or assets.

In addition, your spouse may have submitted a personal financial statement to a lender. A personal financial statement should include all assets, debts, income, and expenses. It’s basically a report from your spouse to the bank regarding all of his or her own finances and the marital estate. You should definitely ask your spouse (or the lender) for copies of all personal financial statements your spouse prepared.

Trace accounts and cash flow

Tracing (analyzing) accounts and cash flow during the marriage (tracing all money in and money out) may lead to the discovery of hidden assets. In order to perform a complete tracing, your attorney or accountant will need records for all accounts under one or both spouses’ names (whether held alone, jointly, or with a third person). This includes savings, checking, brokerage, trust accounts, and any other accounts used by either spouse during the marriage.

Get copies of cancelled checks and ask for copies of wire transfer documents, including authorization forms and wire instructions, to see if your spouse authorized any major transactions you weren’t aware of. Find out where the funds went. Did your spouse set up another personal account that holds a stash of cash? Did your spouse “gift” money to a relative or friend that your spouse will undoubtedly get back once the divorce is over? Did your spouse move money into a joint account with a third party? Tracing is a great way to uncover hidden assets.

Search for hidden bank accounts

You or your attorney can send a subpoena (a written request issued by the clerk of the court) to any bank where you suspect your spouse has an account. When subpoenaed properly, a bank is obligated to produce all records associated with your spouse’s name. If the bank fails to do so, it can be held in contempt of court.

Review account records carefully. Search for transactions into and out of known accounts. Look for unfamiliar account numbers. For example, if you find a large transfer into or out of your spouse’s account, check to see where the money came from or went. Banks typically list the name of the sending and receiving institutions and the last four digits of all accounts. If you find an unfamiliar account, you may have discovered a hidden asset. Follow up with a subpoena for records to that bank as well.

If you have questions about finding assets in your divorce case, you should contact an experienced family law attorney in your area for advice.

For a free consultation, please do not hesitate to call the experienced family law and divorce attorneys at Maya Murphy, P.C. in Westport, CT at 203-221-3100. We may also be reached for inquiries by email at JMaya@mayalaw.com.

Source: Nolo