Divorce can be a complicated and emotional process. One of the biggest issues in divorce is equitable distribution. Which assets are marital? Which are considered separate property?
Particularly where a spouse owns a business and there may be an opportunity to hide assets, the process of discovering assets can be quite a quagmire/very tricky. Here are the top 5 things to keep in mind when you are looking for access to financial information.
1. Tax returns.
Tax returns can provide a treasure trove of information. On the basic form 1040, pay careful attention to line items such as "tax-exempt interest," "business income (or loss)," "IRA distributions," and "pensions and annuities." In addition, for those who own their own business, look closely at "self-employed SEP, SIMPLE and qualified plans," as this may reveal contributions of a self-employed individual to a retirement plan.
On Schedule A, pay attention to the line item for "real estate taxes;" you may uncover a real property you never knew about. Similarly, the line item for "investment interest" suggests that there may be assets such as margin accounts.
Schedule B requires the taxpayer to list interest income and ordinary dividends, which also suggest assets for purposes of equitable distribution.
If your spouse owns a business, carefully review Schedule C. In particular, pay attention to "gross receipts or sale," as this will identify total revenues. Check the line item for "wages" for employees, as it may reveal whether some employees are getting paid on or off the books. Look at the "tentative profit/loss" line, as it will reveal true profits, before deductions for home office expenses.
Schedule D will help you identify what a short or long term asset sold for, which may help discern a spouse's cash flow. Schedule E can also provide a wealth of information. Look at line items for rents and royalties received. This is also where investment income from partnerships and S corporations is reported.
Form 1120 applies to "c" corps. Don't just look at the "gross receipts or sales" line for revenue, but also look at the line items for "compensation of officers." You may be able to discover whether your spouse received additional compensation as an officer of the company. Perhaps he or she received a hefty compensation sum in order to take assets out of the company.
Form 1125-E will provide detail on officer compensation. Form 1120S deals with similar issues, except applies to "s" corps. A review of Schedule K is important to both "c" corps and "s" corps, as you may identify foreign ownership, or other issues worth investigation.
2. Bank statements and cancelled checks.
Scour checking and savings accounts statements Bank statements can reveal secret purchases or investments. They can also reveal transfers of cash to family members or friends, in an effort to deplete accounts that may be subject to equitable distribution. You may also discover off shore accounts that you never knew about. In addition, it is typically a good idea to get copies of cancelled checks.
Your spouse should willingly identify all accounts used by either of you during the course of the marriage, whether those accounts were held individually, joint with you or joint with a third person. If your spouse refuses to cooperate, you can subpoena the banks for the account information. Also, a subpoena to multiple banks may reveal information about a bank account that your spouse "forgot" to identify.
3. Account for all debts.
Perhaps your spouse recently paid a debt back to a friend or family number that seems suspicious to you. Investigate it. Ask for the details of the alleged debt. Ask for documents confirming the debt. Your spouse may be attempting to divert assets in the form of paying back loans to friends and family who are in on the scheme.
4. Look at financial statements and loan applications.
Typically, an individual completing a financial statement of net worth or similar loan application for business purposes will detail every last penny in assets in order to secure a loan at attractive rates. Financial statements will identify all sources of assets and income, as well as debts and other expenses. Also, banks these days require that all sources of income be documented – this means your spouse would have to provide supporting documentation for the assets identified in the loan application.
Thus, ask for copies of complete financial statements, mortgage applications or similar loan applications for the past 5 years – with all supporting documents.
5. Confirm the dates that assets were purchased.
Often times, a spouse will try and argue that an asset is "separate property," not subject to equitable distribution because it was purchased prior to the marriage. You won't know for sure until you ask for the supporting documents evidencing the purchase. As an aside, look for asset appreciation for those assets your spouse is claiming are exempt from equitable distribution as a premarital asset. In some cases, to the extent a premarital asset appreciated during the marriage, the appreciation amount may be subject to equitable distribution.
Unfortunately, some spouses will look to hide assets in anticipation of a divorce. Discovery can be a powerful legal tool in helping unearth otherwise undisclosed assets. Angela will be speaking on the subject of discovery devices for equitable distribution issues at the New Jersey Association for Justice Boardwalk Seminar on Thursday, April 30, 2014 and Friday, May 1, 2014 at Bally's, Atlantic City.
Written by: Angela M. Scafuri of law firm Bressler, Amery & Ross P.C.
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