One of the biggest issues in divorce is the division of community property. Since each spouse typically receives a percentage of the total value of their community property, often a spouse may try to hide assets in an attempt to exclude them from the division. The discovery process can be further complicated when the divorce has been planned for a long period, as was the case of John Sculley, a former Apple CEO. His ex-wife sued Mr. Sculley in 2013 for allegedly filing false financial affidavits and for not honestly and fully disclosing his assets. According to the filing, Mr. Sculley began an affair nearly a decade prior to the divorce settlement in 2011, which coincides with the point Mr. Sculley began hiding assets.
WHAT TYPES OF ASSETS ARE COMMONLY HIDDEN THROUGH THE COURSE OF A DIVORCE?
In the case of Mr. Sculley, he allegedly failed to disclose private equity investments and investments in privately held companies and global ventures. Other common assets include cash, real estate, securities, and personal property – art, jewelry, collectibles, vehicles, boats, etc.
HOW ARE ASSETS TYPICALLY HIDDEN?
The Use of Third Parties. Family members and friends are used to hide assets by paying off phony debts, transferring stock, or holding physical assets in their possession until the divorce is settled, and at which point the assets will be returned to the individual. Mr. Sculley allegedly used the help of his brothers and the use of the investment firm they started, to transfer or hide assets. Other common uses of 3rd parties includes opening accounts in a child’s name, creating trusts to hold assets, and asking employers to delay compensation payments for “tax” purposes with the hope of receiving those payments after the divorce settlement.
The Use of A Business Venture is another way to hide a substantial amount of assets while giving the appearance of legitimate transactions. Incorporating the third party method, family members or relatives can be used to pay off phony debts, salaries or expenses, with the monies being returned post-divorce settlement. Skimming cash, delaying collection of receivables, tax overpayments, unreported income and artificially devaluing the company are all ways to hide assets or reduce the value of the assets to be included in the divorce settlement.
Hiding Assets in “Plain Sight” is another common and simplistic method used to hide cash and physical property by opening a separate account, safe deposit box, tax overpayments, and debt payments. Over-paying student loans and credit cards appear to be legitimate expenditures of cash, but student loans only benefit one party and overpayment of a credit card allows the individual to use that overpayment for future individual expenses.
WAYS TO DISCOVER THE EXISTENCE AND EXTENT OF HIDDEN ASSETS
It is important that the spouse provide an inventory of all known assets, as this creates a foundation of potential assets to compare during the divorce proceedings.
The first place to look for red flags regarding possible hidden assets is through a review of past tax returns. Tax returns provide a wealth of information and are a roadmap to the discovery of potential hidden assets. The source of income producing assets is described and can be used to compare against the assets in the inventory listing. In addition, deductions taken on the tax return can show the existence of hidden assets; for example, the existence of real estate can be discovered through a property tax deduction.
Bank, credit card, investment and other account statements are extremely important in tracing the activity of financial transactions of assets and may prove the existence of sources of income along with the related account details.
Performing a lifestyle analysis (does the lifestyle of an individual match the income reported) and a cash flow analysis of a business are additional tools that are used to uncover potential hidden assets. These discovery tools can assist an experienced individual in uncovering hidden assets and provide an equitable settlement.
Public records contain valuable information concerning property deeds and records and corporate records (UCC- uniform commercial code).
Hidden assets are sometimes difficult to locate, and a cost benefit analysis is necessary to determine the extent of work to be performed based on the potential value of assets in question. Being familiar with the ways individuals hide assets and some of the techniques to find those hidden assets can result in the discovery of those assets. Cesar Mejia