Saturday, August 29, 2009

How to Find Hidden Assets -- Part 3

This is part 3 of an excellent article written by Warren R. Shiell in the Los Angeles Divorce and Family Law Blog with tips about how to find hidden assets. Tax returns were listed with some supporting schedules in the 2nd part of this post. The list below includes a variety of other items that may contain the "smoking gun" proving assets have been hidden.

"10. Safe Deposit Box Activity - Banks maintains safe deposit box records indicating when and who accessed the safe deposit box. These records will not indicate contents of a box or what, if anything, has been removed. If the first spouse was aware of the contents at the point when the records indicate the second spouse opened the box and something is now missing, he or she has a pretty good idea of who took it. This information can be subpoenaed.

"11. Cash Transactions and In Kind Compensation - One spouse may be a physician or a shopkeeper, or in some other work where cash is paid, or he or she may receive in-kind compensation, where something of value – other than cash – is given in exchange for services. Such cash payments or non-cash items are rarely reported on the income-tax return, but if you know of such income in the past and can subpoena current information, it will help in proving available income in excess of that shown on the income-tax returns. If one spouse buys things of substantial value with cash, there is probably a source of cash income somewhere. Most people do not retain cash in a non-interest bearing form unless they are hiding the source of the cash.

"12. Children’s Bank Accounts - Frequently, a spouse who wishes to hide money will open a custodial account in the name of a child. Deposits and withdrawals are made without any intent that the child has use of the account except in case of the spouse’s death. The interest from these accounts is not shown on income-tax returns, nor are returns filed for the children.

"13. Personal Knowledge of Spouse’s Habits - One of the most useful discovery tools is personal knowledge of the spouse’s habits with money. People who are attempting to hide money very seldom do so without making some form of written note so they can have a personal account of what they have done. When things are going well in a marriage, the spouse may tell the other spouse about such records, but you can be sure they will disappear in a case of divorce. The more secretive a person is, the more detailed such notes are likely to be. If a spouse has neglected to declare income to the IRS, the knowledge of hidden income or assets may prove to be a powerful leverage factor in reaching a satisfactory settlement. Be careful you cannot threaten to turn someone in or threaten any legal process to negotiate a better financial settlement that would be a criminal act – extortion.

"14. Phone Income Tax Returns - When the divorce has been filed, some spouses are inclined to alter the copies of their previously filed income tax returns to hide or adjust pertinent financial information. It is always a good idea to ask for copies of jointly filed returns directly from the Internal Revenue Service on Form 4506-T.

"15. Phony Loans or Debts - To keep cash from being divided, a spouse may sometimes attempt to bury the money with a phony loan to a cooperative friend or relative. The loan may be tied up with a long-term note or with a claimed likelihood of not being collectible so as to remove this money from consideration at settlement time. The other spouse, who was never aware of the debt, of course did not sign the note, because it probably came into existence after the divorce proceedings commenced. Sudden payment of debts to out-of-state creditors who are not available for deposition is usually a sign that the debt is a phony.

"16. 'Friends' or Other Phonies on the Payroll - If one spouse is in a position to control the payroll of a sole proprietorship, partnership, or closely held corporation, he or she may be paying salaries to a friend or relative who is not actually providing services commensurate with the compensation. The friend on the payroll may be stashing the money away or they may both be enjoying it. In either case, the profit of the enterprise will be reduced accordingly and your spouse may be drawing a lesser salary. The same ploy can be used for payment to phony independent contractors.

"17. Retirement Plan Abuse - If one spouse has established a pension or profit-sharing plan in connection with a closely held corporation, the plan should be carefully reviewed to determine whether monies that have been contributed to the account are being invested in accordance with the plan requirements. Very often, deductions will be taken for contributions to such plans, and then the money is used for personal living expenses or taken out as loans, which are never repaid.

"18. Defined Benefit Pension Plans - Defined-benefit pension plans are distinguished from defined-contribution plans by the fact that the benefits payable at retirement age are specified within the plan itself rather than by some contribution formula. The amount of the benefits then must be actuarially calculated, based on the age of the intended beneficiary and the point at which benefits are to be paid. A great deal of income can be buried by substantial payments into such a plan during the years preceding or during divorce litigation. The required payments could be a substantial part of the employee-spouse’s income, if that is what is required to achieve the defined goal at retirement. This, of course, leaves little money available for support or division as marital property. Once the divorce is completed, the defined-benefit plan can be discarded, even though a substantial tax loss may result.

"19. Estate, Gift and Inheritance Tax Returns - Much useful information is available from inheritance, estate, or gift-tax returns of relatives you believe have been generous to the spouse. If these returns show that there were substantial gifts or bequests that have not been accounted for in the settlement negotiations, you are alerted that other assets could also be hidden. A tracing will have to be made from the estate’s distribution to see what has happened to the assets."

Obviously, there may be clues to misconduct in a wide variety of contexts. Using the list here, and the prior lists and sources, you can have a good chance of proving that assets are hidden or missing. That should improve your chances of receiving an appropriate share of the assets and you may have the opportunity to shine the spotlight on your spouse's bad behavior. Most judges will get really upset if/when they become convinced someone has been dishonest to them and to the court system.

Saturday, August 22, 2009

How to Find Hidden Assets -- Part 2

This is part 2 of an excellent article written by Warren R. Shiell in the Los Angeles Divorce and Family Law Blog with tips about how to find hidden assets. As mentioned before, it is not unusual to suspect (often correctly) that some assets are not being disclosed. Sometimes, there are clues that an attorney or other layman can find, but other times, it is necessary to bring in an expert forensic accountant to uncover various assets. The following section of the original post by Warren R. Shiell has suggestions about some of the types of financial records that can produce evidence or clues about undisclosed assets.

"The following checklist of research items may assist in determining the whereabouts of hidden assets or if, in fact, they exist at all:

"1. Financial Statements – Any loans from lending institutions require sworn financial statements to be filled out. In most cases, the borrower is trying to impress the lending institution with the extent of assets and may exaggerate these. Looking back five years or so at these statements may put you on the trail of assets which are now unaccounted for, or which show valuations substantially greater than what is now claimed.

"2. Personal Income Tax Returns – A review of personal Federal and State income tax returns and attached schedules filed during the past five years may indicate sources of interest or dividends. The returns may also reveal unknown sources of income or loss from trusts, partnerships, or real estate holdings. You should also review W2’s, 1099’s, 1098’s and K1’s.

"3. Corporate Income Tax Returns – If one spouse is the principal owner of a closely held corporation the corporate tax returns should be reviewed for the following: a. He or she may be manipulating his or her salary by taking less pay and then taking loans from the corporation to make up the shortage. He or she may be charging personal expenses to corporate accounts, which will later be reimbursed or charged to the officer’s loan account.c. Corporate returns should also be reviewed for excessive or unnecessary retained earnings (undistributed profits). These may be disguise available profit distributions or an artificially low salary level.d. Reimbursement of prior capital contributions or repayments of loans to the corporation may also provide hidden cash flow to your spouse.

"4. Partnership Income Tax Returns - Reviewing several years of partnership income tax returns (IRS Form 1065) may reveal sudden changes in the partnership interest or distributions. Such changes often occur at the time of a divorce and then compensating adjustments are made after the divorce is completed.

"5. Canceled Checks and Check Registers from Personal, Partnership, and Corporate Accounts - While time-consuming, it is always revealing to go over all the canceled checks and bank statements from personal accounts for the past few years, and post the expenditures to different columns under utilities, entertainment, loan payments, and so on. You will learn the amount of total expenditures per year, which sometimes exceeds income, and you will have a better feeling for cost of living and where budget cuts should be made. In terms of hidden assets, you may come across canceled checks for the purchase of property, which you never knew, existed. It is important to check off the canceled checks against the appropriate bank statement to make sure that you have all of the canceled checks. It is possible that certain checks were removed before they were delivered to you. For larger amounts deposits and withdrawals you should review the back and the front of the checks.

"6. Savings Account Passbooks
- Acquire the passbooks for any savings accounts open during the past five years or more. Look for any deposits or withdrawals that are unusual in amount, or in pattern. A monthly withdrawal or deposit of money in the same odd amount may reflect mortgage payments or income receipts from sources that you are not aware of.

"7. Security or Commodity Account Statements - If one spouse has been buying and selling stocks or bonds or dealing in commodities, the broker with whom he or she trades furnishes monthly or quarterly statements indicating all transactions. A review of these statements going back a few years could reveal the existence of securities of which there was no knowledge or could raise questions as to the disposition of the sale proceeds. Cross checking securities transactions and bank accounts by date and amount will usually verify the source or disposition of the monies involved. If the securities are sold and the proceeds are unaccounted for, you can be sure the money is out there somewhere.

"8. Expense Accounts - Very often, a corporate employer will allow employees a great deal of leeway in their expense account reporting. A spouse may take advantage of this by exaggerating or even falsifying business expenditures. The employer maintains records as to expense account disbursements to the employee over the year with monthly detail. A check of these records will indicate the extent to which the employee is able to “live off” the expense account.

"9. Deferred Salary Increase, Uncollected Bonus, or Commissions - You should always determine whether a salary increase is overdue, when it will be forthcoming, and how much it is. Employers are sometimes sympathetic to their divorcing employees and willing to bend the rules slightly to defer salary increases, bonuses, or commissions in order to suppress apparent income. Ultimately, these increases, bonuses, or commissions must be paid to keep the corporate books straight, and the employer will rarely lie when put under oath or forced to make a written statement on the subject. Sympathy goes just so far."

By carefully looking at the above sources, you may be able to uncover substantial assets that the other party may be trying to hide. Sometimes, things are just accidentally overlooked, such as a bank account that is inactive. Most of the time, however, during a divorce, it is very unlikely that an unrevealed asset was accidentally overlooked. Follow your intuition and you may find your pot of gold.

Saturday, August 15, 2009

How to Find Hidden Assets -- Part 1

This is the first part of an excellent, extended post in the Los Angeles Divorce and Family Law Blog by Warren T. Shiell, from July 5, 2009. He wrote a thorough review of how assets are hidden and how they may be found. His post gives very practical tips for effectively searching for hidden assets. I have broken his long post into three parts for the reader's convenience. Here's the first section of his post.

"The divorce process is a time of distrust for each spouse, and right or wrong, each may accuse the other of hiding assets.

"Assets are traditionally hidden in one of four ways:

  • The person denies the existence of an asset.

  • Assets are transferred to a third party.

  • The person claims the asset was lost or dissipated.

  • Creation of false debt.

"Tax returns are the first place to look to discover hidden assets. It is a good idea to look at tax returns for the past five years. By reviewing the tax returns you may discover assets that you had no knowledge of or that were not disclosed by your spouse. The first two pages of a tax return can serve as a 'table of contents,' because they list the forms and schedules that are attached to the return.Important forms to review include:

"Schedule A – Itemized Deductions. May help identify unlisted assets or sources of income. For example property taxes may reveal real property or a boat that one spouse does not know exists; and gambling losses would reveal that there are gambling winnings.

"Schedule B – Interest and Ordinary Dividends. This identifies the assets and investments generating interest and dividends. However some interest generating accounts may be non-taxable and may not be listed.

"Schedule C – Profit of Loss From Business. This form may be a place to hide assets or income. For example, depreciation for real estate is generally not a cash outflow and it is added back to net income to determine the actual income. The depreciation schedule may also reveal additional assets in the business.

"Schedule D – Capital Gains and Losses. This form is used to reports gains and losses from stocks, bonds, and real estate.

"Schedule E – Supplemental Income and Loss. This form is used to report income from rental properties, royalties and partnership and s-corporation income. Depreciation should be examined to determine whether this is an expense that should be added back to income.

"Form 1065 is used to report partnership income

"Form 1120 and 1120S are used to report corporate income

"Form 2441 claims child-care expenses. Both federal and state income tax returns, 1099s and W2s, as well as amended returns need to be reviewed.In the course of discovery (sharing documents and financial information with the opposing side), most spouses believe that their counterpart has somehow hidden or failed to disclose the existence of certain assets."

It's an unfortunate fact of life that people are sometimes dishonest as they go through a divorce. (How's that for an understatement?) The list above gives you some paperwork to gather to examine so you or your expert can try to find any missing assets. Fortunately, there is often a paper trail, if you can recognize it. Using an expert to examine the records is usually an excellent investment. If you are able to establish that your spouse is cheating and hiding money, you will be in a much stronger position to get a better settlement or a better decision after a trial.

The next two sections of the post to help you find hidden assets will follow shortly.

Tuesday, August 11, 2009

Divorce and Social Networking - New Rules

A couple of months ago, Daniel Clement posted a nice article with suggestions about how to stay out of trouble during a divorce when you participate in social networking. Here's what he had to say:

"Remember the YouTube spectacle of Tricia Walsh Smith who publicly humiliated her husband and, ultimately, herself. In the age of social networking, new rules of apply to couples going through divorce. The rules, as compiled by Time, can succinctly be boiled to one- 'Discretion is the better of valor.'

[Here are the rules.]

"1. Don’t brag.
Your claims of poverty will ring hollow if you brag on
Facebook about your purchases of expensive items or post photographs of lavish vacations.

"2. Keep the party off-line
Sure you may want to let off some steam, but if you are engaged in a custody fight, the pictures of you holding a bong in one hand and a half empty bottle of “Jack” in the other are not going to win you points with the judge. They probably are not going to be too helpful when lecturing your kids about sobriety or on your next job interview.

"3. Guilt by association.You are who you hang out with. See Rule No 2.

"4. Keep the details of the divorce private.
Don’t fuel the fire with comments and criticisms on the internet. No one likes their spouse’s divorce attorney or the judge after an unfavorable ruling. But remember, the judge is going to make many rulings in the course of a case- some you will win, others you will lose. Do you really want the judge to rule on your case after you publicly criticized him or her?

"5. Don’t Defriend.
As Time points out, unless it is high conflict, 'Don't "defriend" in-laws or your ex's friends right away. People need time to adjust.'"

This should be a good reminder to everyone enjoying social networking while they go through a divorce. As I discussed in a previous post on July 2, 2009, social media are becoming more common-place and are also become a major source of information for interested people. Pictures, statements, profile details and other information that appear in media, such as Facebook, can show up in court and can be very embarrassing, or worse.

And, it's not just your site that you need to be concerned about. If you have friends who take your picture and then post it on a page, or who write about what you and s/he did or what s/he saw, you may have some "splainin" to do. And it may turn into testimony in court. Following the above rules should help everyone to be more careful about their involvement in social media.

Saturday, August 1, 2009

When is the Best Time to File?

Some people say, "It's all in the timing." (Others may say that it's all in the location -- but that's really a different topic!) Timing can make a huge difference in a lot of things in life. One of the most obvious is in financial matters. Investing or selling at the right time can put you in a solid financial position. For example, if I had bought American Airlines stock a few years ago when it was under a $1.00 a share because there was a very real possibility of filing for bankruptcy, and I kept it, even now there would be a nice profit. Likewise, getting out of the market at the right time can ensure a much better position compared to the person who held on to the stock just a day too long.

Apparently, some people have brought the timing issue into the divorce arena. According to the Miami Herald, some attorneys are advising their male clients to file for divorce now while their net worth is low. The idea is that they will have to give their wife less assets now than they would otherwise if the market were up. I understand the logic in that, but I still have some problems with that thinking.

1. The proportions are the same, even if the amounts are different. While it is true that the total amount paid to the spouse in settlement may be less than it would be if the economy were better, the property division should still be in a very similar proportion between the parties as it would be in better economic times. Is a $600,000 -- $400,000 split really a lot better than a $900,000 -- $600,000 since they are both 60-40 splits? Both parties would end up with less than they might in a better economy.

2. It is usually pretty easy to stall and delay in a divorce. The courts are often backed up, which means it will probably take a long time to get to court unless there's an agreement. Faced with a long wait to get to court, many of the wealthier spouses will sweeten the pot to get an earlier deal done. Or, the delay may be long enough for the economy to start to recover.

3. Other financial circumstances could also change that would affect the property division. If one or both parties lose their jobs, or if a company goes broke, that could completely change the situation. If one spouse has been a stay-at-home parent and now has to look for a job, but the economy is failing, that may create the need for lengthy spousal support (alimony).

4. Sometimes, it is the wife who has the more significant investments. She might make the same assumptions and conclusions, and then her husband could be the one losing out.

The bottom line: My suggestion is that if someone wants or needs to be divorced, they shouldn't wait around for the stock market to hit bottom or to reach the top, and they shouldn't rush into a divorce just to save on the pay out. The finances are always an issue, but other personal issues should be primary. Don't let the property division dominate your thinking to the point that you ignore or downplay the other personal issues in the marriage.

Thanks to Tim Evans of the Hattiesburg Divorce Lawyer blog who had a recent post about this topic which had the reference to the Miami Herald article (I don't normally keep up with Miami news). Tim's blog is well worth regular reading.