In the course of discovery (sharing documents and financial information with the opposing side), occasionally there is reason to believe information is purposely being hidden or withheld. The following (partial) list of items to research may assist in determining the whereabouts of hidden assets or if, in fact, they exist at all.
- Financial statements to acquire a loan: Any loans from lending institutions require sworn financial statements to be completed. In most cases, the borrower is trying to impress the lending institution with the extent of assets and may exaggerate them. Looking back five years 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.
- Deferred salary increase, uncollected bonus, or commissions: It is always a good idea to check directly by subpoena or otherwise with the spouse’s employer to 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.
- Income tax refunds: It is possible to over-withhold taxes from earned income so that there will be a refund coming that no one knows about or has thought about! This is especially effective if the divorce is final before the refund arrives. Details of how to “split” a potential tax refund/bill should be outlined in the separation agreement.
- Cash transaction 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 don’t retain cash in a non-interest-bearing form unless they’re hiding its source.
- “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 be both enjoying it currently. In either case, the profit of the enterprise will be reduced accordingly and the spouse may be drawing a lesser salary. The same ploy can be used for payment to phony independent contractors.
- Securities or commodities 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 stock sales 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’s out there somewhere.
- 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 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.
- 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 contributions then must be actuarially determined, 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 can be a substantial portion of the beneficiary’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 define-benefit plan can be discarded, even though a substantial tax loss my result.