Editor’s Note: This is the second half of a two-part series discussing what constitutes marital property, and the legal / illegal methods of protecting your assets in a divorce.
Due to the difficulty of holding on to assets once they are a part of the marital estate, many people going through divorce will try less-than-lawful methods of keeping marital property to themselves.
It is not uncommon for spouses to attempt transferring assets to a family member or under some “shell” mechanism to a third party in order to keep assets for themselves. If the intent is to fully maintain the benefits of the asset and continue to have full control over the shared property by excluding the asset from the marital estate, most states will consider these attempts fraudulent.
Spouses may also simply “hide” assets by failing to disclose them, selling them for a much lower value or even destroying them. The reason doesn’t have to be rational and can purely be meant to deprive the other spouse of the asset’s use, value or enjoyment.
It is important to consider that any attempt to retain sole possession may not only be unsuccessful, but can also have very negative consequences on the outcome of your divorce.
Even in states that don’t have rigid disclosure formats, parties are generally required to disclose, in some form or other, all marital assets of which they are aware. Some states will have a very specific fraud provision, which may allow the court to re-open the divorce once the hidden asset is discovered and re-allocate assets. This not only prevents a spouse from feeling secure in their final divorce decree, but the reallocation can often be punitive (disproportionate in the “innocent” spouse’s favor) in nature due to the fraud upon the court.
Additionally, even in states that don’t divide property based on fault (giving more to the “good spouse” and less to the “bad spouse”), those states can often do so based on a specific finding of “economic” fault. This concept allows the court to address a spouses intentional destruction or dissipation of assets when done intentionally to deprive the innocent spouse of the asset.
For example, Spouse A has a beloved Porsche, worth $50,000. Spouse B, with the intention of depriving Spouse A of the beloved Porsche, sells it to an unrelated third party for $5,000. Upon learning of the sale, the court can essentially pretend the Porsche still exists and “give” the Porsche to Spouse A while attributing the receipt of an asset worth $50,000 to Spouse B.
So, while Spouse B does not have the asset, the court presumes he or she does and finds $50,000 out of the estate to give Spouse A. While Spouse A may not have the Porsche, he or she does have the value of the Porsche, and Spouse B is left with the damageof the short sale.
This does not mean that during a divorce, a spouse cannot use or sell assets. Many states even allow use of marital assets during the divorce process to meet the needs of the spouse or in the normal course of business. Typically, taking a very transparent approach to these transactions will be the most protective course of action.
In general, attempting to deprive a spouse of an asset, other than through a pre- or postnuptial agreement, will not be successful, will not be supported by a lawyer and can lead to more problems than good.
The most significant impact of being caught is the harm to your credibility. You may no longer be considered reliable if the court learns you essentially lied throughout the course of your divorce, which can prevent you from successfully testifying about anything else. Basically, this allows the “innocent” spouse to rule the day in terms of giving information to the court; theirs will be believed, yours may not.
It can also lead to a disproportionate division of the marital estate in the “innocent” spouse’s favor. And again, if the deceit is discovered after the divorce, the entire allocation of assets can be revisited in a subsequent proceeding.
It is sensible to be wary of your spouse trying hide assets during your divorce; however, determining if a spouse is hiding something can be very difficult. Obvious signs may include items simply disappearing, savings being cleaned out, assets being liquidated or “gifts” and sales to family members.
More discreet actions may consist of regular cash withdrawals from a bank account, deposits that are “short” of the anticipated amount (for example, pay check is for $2,000 but deposit was only for $1,500), shared bank accounts or assets with family members, frequent dealings in cash, unrecorded sales, casual transactions or suspicious transactions allegedly in a business name.
Although the signs can be hard or impossible to see, most states allow for very liberal discovery in the process of divorce. Discovery is essentially the formal word for investigation, and both parties in a divorce can often ask for several years of bank statements, business records, retirement statements or other documents. They can also ask the other spouse formal questions, under oath in a deposition, to try and determine what assets exist or if things may have been liquidated in anticipation of a divorce.
Of course, parties are free to use their estate in many ways while married, so this is not a means to “undo” all transactions or spending during the marriage. Rather, it is a means of discovering what is out there or to identify problematic transactions undertaken with the intention of depriving the other spouse of use, value or enjoyment of the shared marital asset.
Protecting your assets can be difficult without a pre- or postnuptial agreement, so transparency and full disclosure are the safest methods to save yourself from extra trouble (and likely expenses). You may think you’re sneaky enough, but the chances are you’ll be caught and the consequences far outweigh the potential reward.