The Problem of Hidden Assets in Divorce

When you start hiding things, that’s when darkness creeps up.

Steve Kazee

At the time two parties are divorced, a court will divide your marital assets in some fashion.  In Montana, the court is charged with making a “fair and equitable” division of the marital estate, i.e., the assets and liabilities acquired during your marriage.  The issue of inherited, gifted or premarital property is a subject for an entirely different post, but suffice it to say there are some different considerations for the division of these types of assets.  While much has been made about the difference between “community property” states and non-community property states, the truth is that the end result is really very similar in most cases.

But how can you divide what you don’t know exists?  The simple answer is: you can’t and too often deceptive spouses get away with squirreling away assets that they don’t want divided.

Montana, like most states, requires that the parties to a divorce disclose all of their assets and liabilities regardless of whether or not they were acquired by inheritance, earned during the marriage or otherwise.  Failing to disclose assets is unethical, unfair and illegal.  Executing a disclosure statement that is  knowingly incomplete  or inaccurate is perjury.

Still, people do it all the time.  So how do you protect yourself from a spouse determined to hide assets?  First, it is wise to have a basic understanding of your finances before you are in a divorce setting.  I am frequently surprised to find that one spouse has been left completely in the dark regarding finances throughout the course of a marriage. Having at least a working knowledge of your financial situation is probably a good idea for a wide variety of reasons that have nothing to do with divorce.  As a collateral (and, hopefully, unneeded benefit) it will also help you know the nature and extent of your marital estate in the event that the worst happens.

If you know that a divorce is likely or imminent, begin gathering financial information as quickly as possible.  If you sense that a divorce is likely, your spouse probably does as well and it is during this time that  assets are most likely to be hidden. You should also know that, before a divorce filing is made,  there is nothing illegal about a spouse moving funds around, selling assets, incurring additional marital debt or closing accounts. The earlier you get a bead on your finances, the less likely it is that assets will be hidden in the first place and the more likely you will be to find them later on. Once you suspect that a divorce is on the horizon, start gathering  as much information as you can, including pay stubs, bank records, tax returns, credit card statements and investment/retirement account statements.

Bear in mind that some assets  are not necessarily hidden but  rather devalued in some way to avoid equalization in the division of the marital estate.  This is particularly true where an individual is self-employed and/or operates his or her own business.  For example, funds from a business may be “laundered” through a family member or close friend for phony services, then returned to the spouse after the divorce.  Cash may be skimmed from the business, bonuses delayed until after dissolution or simply not reported on tax documents or financial statements.  Mechanisms for hiding income and assets are limited only by the imagination and creativity of the party seeking to avoid disclosure.

There are many effective ways to uncover hidden assets and income. Often, basic discovery  procedures will reveal telltale clues to the existence of hidden assets. Having  financial records produced during discovery analyzed by a competent forensic accountant is typically the best way to locate missing assets. It may also be  necessary to hire a private investigator to locate these assets. Sadly, if you are unsure whether or not there are hidden assets, it may cost you a significant amount just to find out.  If hidden assets are located, however, the court will likely require the party hiding assets to pay those costs.

If you are considering hiding assets, my advice to you is simple: don’t. Not only is this kind of behavior illegal, wrong and unfair, but it can very likely end up backfiring on you. If your spouse discovers that you have hidden assets — even after a final decree has been entered — the court can reopen your case to divide those assets that were hidden. In addition, as a punitive measure, the Court can award the entirety of those assets to your spouse. Finally, the court will take a dim view of your behavior, a circumstance that can have disastrous results for the outcome of your case.

Why Prenuptial Agreements Are Like Bike Helmets

“One is not exposed to danger who, even when in safety is always on their guard.”

Publilius Syrus

I am occasionally asked by clients whether or not they should get a prenuptial agreement in the event that they remarry. Quite frankly, I’m surprised that more people don’t utilize them. I suppose it is because people who are about to get married don’t like talking about the possibility that they will not stay married. Some people are vehemently opposed to the very concept of a prenuptial agreement — usually, the people that express that opinion do not have a great deal to lose or have not been through a messy divorce.

The simple fact is that prenuptial agreements have a number of significant benefits and the mere fact that one or both of you desires to protect yourself in the event of a dissolution of your marriage, does not mean that you expect or plan to be divorced. Sort of like wearing a helmet does not mean that you plan to crash your bike.

Prenuptial agreements are most beneficial to parties who have significant assets to protect. They are also very attractive to parties who have previously been through an unpleasant, contentious and protracted divorce. However, premarital agreements may also be beneficial to parties who do not have significant wealth as the scope of possible subjects to be resolved by prenuptial agreement is broad and can include limitations on spousal support.

Properly crafted prenuptial agreements protect valuable or sentimental premarital and inherited property and clearly define the scope and nature of all premarital property of both parties. A prenuptial agreement can protect assets from the debts of a future spouse and protect your children’s inheritance. They can establish mechanisms for resolving future disputes, streamline and simplify divorce proceedings in the event that they do occur and reduce acrimony and cost.

Montana follows the Uniform Premarital Agreement Act. The UPAA requires that the Court actually enforce the terms of a validly executed a premarital agreement. Note that the same deference is not granted to similar agreements reached after the parties have already married. The UPAA allows parties to a premarital agreement to address a broad range of subjects including:

1. the rights and obligations of each of the parties in any of the property of either or both of them, whenever and wherever acquired or located;
2. the right to buy, sell, use, transfer, exchange, abandon, lease, consume, expend, assign, create a security interest in, mortgage, encumber, dispose of, or otherwise manage and control property;
3. the disposition of property upon separation, marital dissolution, death, or the occurrence or nonoccurrence of any other event;
4. the modification or elimination of spousal support;
5. the making of a will, trust, or other arrangement to carry out the provisions of the agreement;
6. the ownership rights in and disposition of the death benefit from a life insurance policy;
7. the choice of law governing the construction of the agreement; and
8. any other matter, including their personal rights and obligations, not in violation of public policy or a statute imposing a criminal penalty.

There are, of course, some limitations to what the parties can address in their agreement. For example, a premarital agreement cannot impact support of children. In addition, there are exceptions to the general rule that premarital agreements must be enforced by a Court and certain formalities in the preparation and execution of the agreement must be followed. For example, a prenuptial agreement will be set aside in the event that it was not voluntarily executed, if there was not a fair and reasonable disclosure of the assets at issue or the agreement is otherwise unconscionable.

In January 2012, the Montana Supreme Court decided In Re Marriage of Funk, a case that I believe makes the case for premarital agreements even more compelling. The primary issue in that case was a piece of real property that had been inherited by the husband. The wife was awarded a substantial interest in the property upon the parties’ divorce and the Montana Supreme Court affirmed, stating that the District Court was required to consider the “contributions of a homemaker” to the maintenance or preservation of what would otherwise be considered separate property. The Supreme Court went on to overrule about a bajillion (that’s a legal term) previous cases.

Most attorneys agree that Marriage of Funk did not really change the law. However, those same attorneys will cite to the Funk case when trying to argue in favor of granting a non-acquiring spouse an interest in the other party’s premarital or inherited property. A properly prepared and executed premarital agreement avoids any confusion or doubt.

True, premarital agreements are not exactly the most romantic thing to discuss before your wedding. However, marriage should not be about ownership of property and nothing in a prenuptial agreement prevents both parties from enjoying the benefits of property owned by either party. Opening the lines of communication about issues that are important to you is critical to a happy, honest and successful marriage.