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Uncovering Hidden Assets: Detective Work in Divorce

March 09, 2017

In the course of unwinding a marriage, one step that can feel overwhelming for some clients is accounting for and making an inventory of financial and other assets.[1] This can be especially challenging if you were not the spouse primarily responsible for family finances. In the early stages of divorce, it is easy for assets to be overlooked — or in some cases hidden. A little detective work can give you and your attorney the tools to start asking the right questions.

Start With Paystubs

Because changes can be made to deferrals, account contributions, and direct deposit instructions at almost any time, it is a good idea to request pay stubs that cover the six months preceding a divorce filing. In cases where there is credible suspicion that assets are being hidden, it may be wise to ask for paystubs covering up to five years. A year-end payroll statement can be extremely helpful in formulating a clear picture of an employee's earnings throughout the year. Once paystubs are in hand, here's what to look for:

Hours and Earnings

  • This section may show items like incentives or bonuses earned. Can those amounts be accounted for? Into which accounts were those funds deposited? Were the funds spent or invested?
  • It is important to note that bonuses are sometimes paid out separately from an employee's regular paycheck. If a known or suspected bonus amount can't be tracked with the pay stubs in hand, you should speak with your attorney about requesting additional information. If your soon-to-be-ex-spouse is less than forthcoming, your attorney can advise on methods of securing information about bonuses paid directly from the employer.

Before-Tax Deductions

  • This section will show any amounts being contributed by the employee to employer benefit accounts like a 401(k), Health Savings Accounts, or Deferred Compensation Plans. These types of assets are typically considered Community Property subject to division. Contributions to Employee Expense Reimbursement accounts will be shown in this section as well, which may point to reimbursements for expenses that need to be accounted for.

Employer Paid Benefits

  • This section may show that the employer has made contributions on the employee's behalf to a Health Savings Account, 401(k), SEP IRA, 401(a) or similar retirement benefit account. Retirement accounts are subject to division as Community Property.

Leave Balances

  • This section will show accrued benefits like paid vacation. Paid leave can be considered a Career Asset. If a large balance of paid leave has been accrued, the parties may wish to account for these amounts in calculating the value of Community Property subject to division.

Net Pay Distributions

  • An individual may be sending funds to a savings account or employer credit union account via direct deposit each pay period. In that case, those distributions will show up under this section and may reveal a previously undisclosed asset.

Benefits Handbooks

Additional information might be found in the Benefits Handbook (or in a Summary Plan Description) issued by each party's employer. These documents will describe in some detail the various types of accounts and benefits available to each employee, and they'll give you a good idea of what information to ask for. It is also wise to inquire about employment contracts or partnership agreements (where applicable), which may reveal previously undisclosed assets.

Looking at Tax Returns

The Institute for Divorce Financial Analysts[2] recommends examining no fewer than five years of tax returns in the search of assets. This step is especially important if either party owns a business, or if someone suspects potentially undisclosed investing accounts. Each schedule attached to Form 1040 will reveal certain items:

Schedule A – Itemized Deductions

  • This schedule, which shows itemized deductions, can point to the existence of assets like real estate or activities like gambling. For example, a deduction of property taxes that does not look familiar may point to an undisclosed real estate asset.
  • Note that with changes to the tax law for 2018, this schedule may become less useful. Many more taxpayers will choose the Standard Deduction instead of itemizing, and thus will not complete Schedule A.

Schedule B – Interest and Ordinary Dividends

  • The presence of a Schedule B will signal that there are income-generating assets. Those assets may be bank deposits, mutual funds, stocks, bonds, or any other financial asset paying interest or a dividend.

Schedule C – Profit or Loss From Business

  • If either party owns a business, this is one place where information about the business assets can be found. For example, a depreciation schedule may reveal assets owned by the business that were not previously disclosed.

Schedule D – Capital Gains and Losses

  • This form would indicate that there were transactions involving stocks, bonds, or real estate that generated gains or losses, and it may reveal the existence of an investing account or real estate assets.

The Role of the Financial Professional

This detective work may appear difficult, time-consuming, or intimidating to you. An expert such as a Certified Divorce Financial Analyst™ (CDFA®) can examine pay stubs, tax returns, and benefits handbooks, arming you and your attorney with the right questions to ask. Because CDFA® Professionals are specially trained, we can often do this work in less time and with less trouble than your attorney or another less qualified financial professional. Whether you use a CDFA® Professional or not, doing a little detective work in the early stages of a divorce can help you feel more confident in your final settlement agreement.

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[1] I address the topic of building an inventory in detail in my article Yours & Mine: Dividing the Community Pie (May, 2019)

This article was updated August 2019