Scott David Stewart 0000-00-00 00:00:00
In every Arizona divorce or legal separation, the couple’s community assets and debts will be divided equally between them absent an agreement to the contrary. With the increasing frequency of 50-plus divorces, many of which will involve marriages of long duration, assets are often substantial and the division thereof more complex (not to mention contentious). When there is waste of marital property, the injured spouse has a right to one-half the value of the wasted asset. Closely tied to marital waste is the concealed marital asset, one that must be brought before the court for division – that is, if it can be discovered, identified, and located. THE DELIBERATE CONCEALMENT OF ASSETS Although it is unwise and can significantly undermine a party’s case when discovered, many a divorcing spouse will attempt to hide assets. This secreting of property typically occurs before the divorce action is initiated, in a period when that spouse anticipates divorce. When one spouse deliberately conceals assets, it undermines the fair division of property in the divorce; action must be taken to protect the other spouse’s property rights. The mandatory full financial disclosures required during discovery and the Arizona Rules of Family Law Procedure, particularly Rule 49 with its continuing duty to disclose, usually result in clues to the search for hidden assets. IN SEARCH OF CLUES TO HIDDEN ASSETS • On Identifying the Decoy. The decoy is intended to divert your attention from something more significant. When hidden assets are found too easily, they may merely be the decoy for the valuable asset concealed more carefully. Many divorce attorneys have observed parties, sometimes their own clients, using decoys to divert attention from the more valuable property that is hidden away more deeply. If you find the decoy, strengthen your resolve and look for the real hidden treasure. • On Analyzing Tax Returns. Carefully examine the spouses’ income tax returns for the past five years; compare their tax reporting with their Rule 49 disclosures. (Note: Rule 49 requires production of tax returns only for the prior two reporting years. Before dissolution, tax returns continue to be obtainable from the IRS.) Examine the interest income schedules and compare and contrast the itemized Family Law accounts listed on the tax return with the accounts listed in the Rule 49 disclosures. Compare the mortgage interest and real estate taxes from the tax returns with the real estate details provided during discovery. Determine whether there was a tax overpayment to be refunded to the taxpayer, possibly after the divorce is finalized. • On Locating Bank and Investment Accounts. Obtain copies of all bank, credit card, and investment account statements, again going back five years (which is more than what Rule 49 mandates). When examining each statement, look for any large transfers, withdrawals, advances, or credit purchases. When reviewing credit card statements, look for travel and accommodations expenses, extraordinary charges, and unexpected housing expenses in another location. Carefully examine ATM withdrawals for atypical or excessive spending, but don’t disregard regular transfers of small amounts as those may establish a pattern of concealment. A party may use the pretense of a debt payment when no legal obligation exists. Money may be transferred to a friend, family member, or insider with the intent of collecting it post-divorce. Examine any custodial account statements in the names of the party’s children or stepchildren, as these may be mere repositories for deposits so the money can be easily retrieved post-divorce. Always track any extraordinary transactions to determine where the money eventually ended up. • On Examining Paychecks. A payment deferred until after the divorce would appear to be that spouse’s separate property, unless it is traced back to the community as earned during the marriage. When reviewing payment records from the party’s employer(s), look for any deferred bonuses, options, or wages. Income earned during the marriage, to be paid out after the divorce, could evidence collusion between employer and employee. When a spouse is paid in cash, tracking earnings is often much more difficult, but not impossible. Look for any deviation of hours or wages from what was the historical earnings pattern during the marriage. One method of determining whether a cash income earner has hidden assets is to perform an in depth lifestyle audit. The lifestyle audit compares the spouse’s stated income with the amount of money he or she actually spends – a significant disparity between low stated earnings and high actual expenditures may evidence hidden income (not to mention unreported income tax concerns). • On Valuating Business Interests. Owning a business may make it easier for a divorcing spouse to hide assets and, for this reason, involving a forensic accountant or professional business valuator may be essential to getting hidden assets before the court for division. An investment could be reported under color of an ordinary business expense. Other business expenses may be inflated to reduce the appearance of profitability and to minimize the party’s reportable income. Salary payments could be made to fictitious employees with a plan to simply void the payments after the marital dissolution. Be cognizant of any wages paid to significant others, friends, family members, or insiders for services not provided; this may indicate an attempt to hold the money until it is returned to the former-spouse after the divorce is finalized. Deliberately diminishing the “paper” value of the business – perhaps by intentionally delaying execution of the most profitable contractual agreements until after the divorce – is another way to conceal business assets from division. • On Identifying Virtual Assets. An emerging group of intangible assets have entered the divorce scene as well, offering unique investigative challenges – they are virtual goods, services, and real estate. If you find evidence of virtual currency purchases for Facebook Credits, Playfish Cash, Linden Dollars, Microsoft Points, and the like when reviewing a party’s transaction records, such may be evidence of concealed virtual assets. Virtual currency has a real dollar value and virtual asset trading can result in real profits. Virtual goods are bought and sold within online communities like Second Life and among gamers. These virtual assets can take any digital form including, for example, designer clothing for avatars, tokens for special game privileges, and subdivision plots of virtual real estate. When real community dollars buy digital goods and virtual real estate, then the online asset may be divided in the divorce as another type of marital property. And when virtual profits are accumulated, those may also be divisible in a divorce, too. A party’s attempts to hide assets can occur in any divorce, regardless of the couple’s ages, duration of their marriage, or their wealth and acquisitions. Once a party decides to conceal assets from the other spouse, the only restriction seems be the intellectual capacity for deceitfulness of the secreting party. Experience has shown, too, that the more time a party has before the petition for dissolution is filed, the more likely they are to attempt to hide assets from the other spouse. Because of this, attorneys should red flag any excessive or abnormal expenditures, and scrutinize any indicia of a fraudulent transfer or disposition of community property and assets.
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