What is the Penalty for Hiding Assets in Divorce?
You are here to learn about the penalty for hiding assets in divorce. Let's get to it.
There are two major penalties for hiding assets in divorce
1. Losing more than 50% of the hidden asset.
2. Getting hit with the attorney's fees, costs, and expenses your spouse incurred.
Can there be more than that? Yes. If hiding the asset rises to the level of the breach of fiduciary duty, the California Family Code can even order damages against the spouse.
Family Code 1101(g) and (h)'s penalty for hiding assets in divorce
To give you a taste of how serious these penalties are, here are two paragraphs from Family Code 1101(g) and (h).
"(g) Remedies for breach of the fiduciary duty by one spouse, including those set out in Sections 721 and 1100, shall include, but not be limited to, an award to the other spouse of 50 percent, or an amount equal to 50 percent, of any asset undisclosed or transferred in breach of the fiduciary duty plus attorney's fees and court costs. The value of the asset shall be determined to be its highest value at the date of the breach of the fiduciary duty, the date of the sale or disposition of the asset, or the date of the award by the court.
(h) Remedies for the breach of the fiduciary duty by one spouse, as set forth in Sections 721 and 1100, when the breach falls within the ambit of Section 3294 of the Civil Code shall include, but not be limited to, an award to the other spouse of 100 percent, or an amount equal to 100 percent, of any asset undisclosed or transferred in breach of the fiduciary duty."
Visit our page on breach of fiduciary duty in divorce cases to learn more about that topic.
Here is a table of contents of what we will cover in this article if you want to jump ahead. Each of the following is a link that takes you to that section.
Table of Contents
- Sanctions in the form of attorney's fees as a penalty for hiding assets in divorce
- Losing up to 100% of the asset is a penalty for hiding assets in divorce
- Types of assets spouses hide
- Why does a husband or wife hide assets before or during divorce
- What can a spouse do to prevent the other spouse from hiding assets?
- How to find assets your spouse has hidden
- How hidden assets affect child support and alimony
Sanctions in the form of attorney's fees as a penalty for hiding assets in divorce
Sanctions are a form of attorney's fees against a spouse who should be punished for misconduct. These "sanctions" are a penalty for hiding assets in divorce.
How much can the court award in attorney's fees as a penalty?
Technically, the sanctions penalty can be all of the other spouse's attorney's fees, costs, and expenses.
Costs and expenses go beyond fees. Costs and expenses may include filing fees, court reporter costs, expert witness costs, and much more.
Does financial hardship matter?
What if the spouse who hid assets would suffer financial hardship by being ordered to pay the other spouse's fees?
Notice Family Code 1101(g) uses the word, "shall." That means the court does not have the choice to order fees and costs. If the court finds a breach of fiduciary duty for hiding assets, the court must order fees and costs.
But if it does not get that far, the court may take into consideration what we write below in Family Code 271.
Family Code 271's sanctions as a penalty for hiding assets in divorce
Family Code 271 reads differently from Family Code 1101.
A victimized spouse can use both of the code sections to seek fees as a penalty for hiding assets in divorce. Family Code 271's sanction as a penalty is not limited to hiding assets. It applies in many situations.
Section 271 intends to punish: "Notwithstanding any other provision of this code, the court may base an award of attorney's fees and costs on the extent to which the conduct of each party or attorney furthers or frustrates the policy of the law to promote settlement of litigation and, where possible, to reduce the cost of litigation by encouraging cooperation between the parties and attorneys. An award of attorney's fees and costs pursuant to this section is in the nature of a sanction…"
The limitation it has is: "The court shall not impose a sanction pursuant to this section that imposes an unreasonable financial burden on the party against whom the sanction is imposed."
Unreasonable financial hardship is not easy to show. It requires evidence.
Do we really expect the spouse who was caught hiding assets is going to be truthful about his or her financial situation? Of course not. That is why it is important to not assume that spouse is telling the truth about any alleged hardship.
Losing up to 100% of the asset is a penalty for hiding assets in divorce
The Family Court is supposed to divide community property (sometimes called marital property) equally. It is supposed to give separate property to the spouse who owns the separate property. And some assets are both community and separate property.
If these are the property division rules, how can a Family Court give one spouse more than 50% of community property?
Simple - if the Family Court finds a spouse engaged in willful nondisclosure of an asset (hid the asset), then the Court has the ability to order as part of the "penalty" loss of some or all of that asset.
This type of financial punishment is for serious cases. If the spouse did not intend to hide the asset but rather forgot about it (believe it or not, it can happen), the Court will likely not go that far.
However, if the spouse willfully hid the asset (willful nondisclosure), the court can take out the gavel and financially hammer the spouse who engaged in misconduct.
Types of assets spouses hide
Hiding money (cash), cryptocurrency, and bank accounts
Cash is easy to hide. A person may hide cash with family, friends, at work (especially if self-employed), or in a safe deposit box.
If the cash is large enough, the spouse may hide it outside the United States. As an "asset," cash is also the hardest to find. We will discuss that more below.
Bank accounts are harder to hide because every bank account has an account number. Find the account and you find the money in it. Husbands and wives hide bank accounts in the following ways:
1. Placing the account name with a family member, friend, or business partner
2. Opening a bank account under a business name, whether actual (corporation or LLC are the most common) or fictitious.
3. Opening a bank account outside California or outside the country
Some spouses hide bank accounts using all three.
Cryptocurrency, for all intent and purposes a form of a Ponzi scheme, is the latest tool spouses use to hide assets. Cryptocurrency offers many advantages over cash or bank accounts.
Hiding jewelry, art, and collectibles
Jewelry is similar to cash. Small, portable, and easy to hide. People often hide jewelry the same way, and in the same place, they hide cash.
Art is a little more tricky. If the art is worth hiding, it must have value.
And if the value is significant enough, hiding it requires care in handling. Some spouses who hide art before or during divorce give the art piece to a third party who is experienced in storing and preserving it.
Collectibles vary in size. For example, coins or baseball cards are much easier to hide than "Incan matrimonial head masks." At the risk of stating the obvious, where a spouse may hide a collectible depends in large part on the collectible.
The one thing each of the above has in common most of the time is the spouse who is hiding these assets (marital property) does so before the divorce.
Hiding 401(k) and other retirements
401(k), IRA (individual retirement account, pensions, or other retirements are not easy to hide.
Most of the time, these assets are connected to a spouse's employment. And a subpoena to the employer uncovers such assets most of the time.
An IRA may be the exception. It is similar to a bank account, except it is often market-dependent (may go up or down depending on how the market is doing). Therefore, a spouse may hide an IRA in a similar way as hiding a bank account.
But as we discuss in more detail below, an IRA is harder to hide than a simple checking account.
Hiding real estate
"How does a spouse hide real estate?" I can hear you asking.
It is not uncommon (that is a lawyer's way of saying it is kind of common and kind of not).
Think about what real estate is. Land and often a structure on top of it. As you walk by a piece of land or home, do you know by looking at it who owns it? No. Can you find out that information? Yes. How? By doing a search for the "record" owner.
And that is the key. Let's say the husband bought a house under his sister's name with marital money his wife did not know they had. How would the wife know about it? We discuss that later too.
Businesses are difficult to hide because most of the time, the husband or wife is operating the business and the business is a major source of revenue.
However, a spouse may hide an asset like a business by being an investor in the business, and not its operator. This "silent partner" scenario opens the door for a hidden income stream from a business the other spouse may not know exists.
We also encourage you to read our guide on a divorce that involves a business.
Why does a husband or wife hide assets before or during divorce
Some spouses hide assets before divorce. Others may hide the asset during the divorce process. Which is more common and when does the spouse hiding the asset choose one approach versus the other?
Hiding assets before divorce
Planning for divorce
A spouse who hides assets before divorce is usually planning for the divorce. That husband or wife may be unsophisticated and take rudimentary approaches to hiding assets - hiding cash with family or friends, or having those same people "hold" personal property.
That spouse may also take sophisticated measures like hiring an asset protection attorney or accountant, some of whom engage in misconduct by helping the spouse unlawfully hide assets.
The "control freak" spouse
But not every spouse who hides assets before divorce does it for planning purposes.
Some spouses are just controlling freaks who cannot let their spouses know anything about the family's financial affairs. Most of the time, this is the husband who has a toxic personality, is probably a narcissist, and emotionally abusive toward their spouse.
That "fear" element is important to such a spouse's success during the marriage and they count on that fear and intimidation to keep their spouse from learning too much.
Protecting assets from other parties
Sometimes, a spouse hides assets before divorce because he or she wants to protect it from other parties. The spouse may be facing or in the middle of one or more lawsuits.
Hiding assets during divorce
With some exceptions, most spouses who hide assets during divorce are doing so to keep it from their spouses. And every approach we stated above applies to this situation.
Such spouses have a more difficult time getting away with it. That is because there is often a paper trail that shows the existence of the asset they foolishly try to hide.
For example, if there are bank accounts under the spouse's name and the spouse then places his or her parent or sibling on that account and removes their own name, there will be a paper trail that will trace the history - bank statements.
Discovering hidden assets after divorce
A spouse may not find the hidden asset until after the divorce.
In an infamous case in California, the husband learned after the divorce was final his wife had won the lottery. She bought the ticket during the marriage but hid this fact from her spouse.
What did the judge do? Give 100% of the lottery winnings to the husband for his willful and knowing nondisclosure and concealment. How is that for a severe penalty for hiding assets in divorce?
What can a spouse do to prevent the other spouse from hiding assets?
If your spouse keeps financial information from you, odds are good your spouse will attempt to hide assets.
There is no reason a spouse should refuse to give equal access to financial information, including accounts or assets that may be under that spouse's name or even that spouse's alleged separate property, as that term is defined by California family law.
You should be able to see all of the bank statements. You should have access to community property bank accounts.
You should know exactly what your spouse earns in income, no matter the source.
In short, you should have total transparency.
Easier said than done? Not really. This is information the law entitles you to have. Look at Family Code 721.
"(a) Subject to subdivision (b), either spouse may enter into any transaction with the other, or with any other person, respecting property, which either might if unmarried.
(b) Except as provided in Sections 143, 144, 146, 16040, 16047, and 21385 of the Probate Code, in transactions between themselves, spouses are subject to the general rules governing fiduciary relationships that control the actions of persons occupying confidential relations with each other. This confidential relationship imposes a duty of the highest good faith and fair dealing on each spouse, and neither shall take any unfair advantage of the other. This confidential relationship is a fiduciary relationship subject to the same rights and duties of nonmarital business partners, as provided in Sections 16403, 16404, and 16503 of the Corporations Code, including, but not limited to, the following:
(1) Providing each spouse access at all times to any books kept regarding a transaction for the purposes of inspection and copying.
(2) Rendering upon request, true and full information of all things affecting any transaction that concerns the community property. Nothing in this section is intended to impose a duty for either spouse to keep detailed books and records of community property transactions.
(3) Accounting to the spouse, and holding as a trustee, any benefit or profit derived from any transaction by one spouse without the consent of the other spouse that concerns the community property."
Total transparency is the law.
How to find assets your spouse has hidden
Uncovering hidden assets takes patience and diligence. And even then, there is no guarantee you will find the hidden asset. The easier it is to hide the asset (cash and jewelry as two examples), the harder it is to find it.
Here are some tips. Like everything else in this article, this is not legal advice. Consultation and representation by an experienced family law attorney is important.
Understand the disclosure process
During a divorce, spouses must disclose all income, expenses, assets, and debts to the other spouse. It does not matter whether the asset or debt is community property or separate property. The obligation to disclose this financial information is unconditional.
Think of these financial disclosures like a financial affidavit. Each spouse discloses under penalty of perjury everything he or she knows to the other spouse.
This is step one to finding hidden assets. Why? Because until you see your spouse's disclosures, you do not know what may be missing or hidden.
Embrace the discovery process
What happens if your spouse did not disclose an asset? You conduct discovery on that asset.
You request document production from your spouse.
You subpoena documents from third parties or entities like banks, as one example.
One effective method is to subpoena loan applications. Spouses who hide assets sometimes do not realize that they are disclosing hidden assets by listing them on loan applications because they want to appear solvent to a bank when they request a loan.
You take the deposition of people you believe may be hiding the asset. You ask your spouse to admit in discovery called request for admissions he or she did not disclose assets you suspect your spouse is hiding. This last part sets up your spouse for even more powerful sanctions against him or her.
Discovery is intended to flush out the hidden asset.
Should you hire a private investigator?
Yes, you should hire one because they can, through lawful means, potentially find hidden bank accounts or hidden assets.
Private investigators can get expensive but if the hidden assets are worth a lot of money, they are a good investment.
Be prepared to provide the private investigator with everything you know - spouse's full name, aliases, social security number, date of birth, all of the financial information you do have, and more.
You probably need a forensic accountant to help uncover hidden assets
A forensic accountant can review financial records (sometimes mountains of it) and find transactions that may lead to the hidden asset.
Many spouses do not perfectly cover their trail to hide the asset. They may have paid money to hide the asset through a check or credit card or withdraw cash from the bank to do so.
Every financial transaction is a bread crumb that can lead to another transaction and ultimately the hidden asset.
Sometimes, the tax return may show the hidden asset
Let's say your husband is hiding a bank account. Let's assume it is an account that pays interest and he transferred the account from his name into that of his sister's name in 2018.
That financial institution will send your husband a tax document that shows the amount of interest paid on that account. That shows up on a tax return.
So if you look at tax returns for the years prior to this transfer (and even if you had no idea that account existed), you should find the existence of this account by looking at the tax return.
And this is just one way to find hidden assets through tax returns. There are so much more.
Look at it this way. If an asset generates any taxable income, chances are high it is listed on a tax return if that income is reported. And if it is not reported, then you may find through the IRS or Franchise Tax Board letters that ask your spouse for an explanation about nonreporting.
Finding hidden money (cash), cryptocurrency and bank accounts
Cash is hard to find. We discussed that. But if your spouse opened a safe deposit box that you did not know about? Do you know what that should tell you? He or she is hiding something in that box.
Cryptocurrency is easier to hide but you can still find it.
It starts by gaining access and doing a complete electronic sweep of your spouse's computers.
Because this is "digital" currency, you may be able to find evidence of it on your spouse's computer. This "electronically stored information" leaves traces of the "digital wallet" and spending from it.
Private investigators can be effective in finding bank accounts. But so can other bank accounts. Spouses sometimes transfer money from one account to another and this leaves that trail we discussed earlier.
Finding hidden jewelry, art, and collectibles
This is similar to cash - difficult to find. And similar to cash, if you suspect it existed, you may have to flush out its existence through the discovery process.
For example, let's say there is $250,000 in art and collectibles you believe may be missing. When was it acquired? Let's say 5 years ago.
I doubt anyone paid cash for it. There should be a financial transaction that shows the purchase.
That transaction should also show from whom it was purchased. Now you have the source of purchase. Time to subpoena that person and confirm the purchase.
Once you do that, what is your spouse going to do? The dog did not eat the asset. Where did it go? Your spouse had possession of it.
See what happened? You traced the hidden asset from its source.
Finding hidden 401(k) and other retirements
The best way to avoid undisclosed retirement accounts is to subpoena the employer or company who issued it. This may be the present employer, one or more former employers or both.
Evidence of a retirement account may also exist in tax returns.
Finding hidden real estate
Records of real estate ownership are usually public record. That makes tracking them down easier.
There are software programs available that allow you to make a State-Wide (and even National) search.
A private investigator can help with such a search.
Finding hidden businesses
We discussed how hiding a business as an asset is difficult because business ownership often generates income to the spouse.
We also discussed the "silent partner" scenario and how a spouse may divert that income because there may not be obvious evidence of the investment.
However, this is another example of how tracing the financial investment can lead to the hidden asset.
To make an investment into a business requires a cash infusion or the promise of one.
Infusion of cash leaves a record often through a financial transaction. A promise does not immediately, but (like a financial investment), you will likely find a contract or evidence of the offer, counteroffer, and acceptance of the investment terms.
What does all of this mean regarding finding the hidden business asset?
If you suspect your spouse is an investor in a business (let's call it Acme for this hypothetical), you can subpoena the business owner of Acme for all communications between him/her and your spouse. You can also subpoena your spouse's financial records (statements with financial institutions) to see transactions with the other business owner for Acme or anyone else at Acme.
If your spouse who is hiding the business asset is diverting his or her money through others, it gets trickier.
Subpoenaing financial information from a third party when you lack the evidence to connect that third party to issues relevant to the divorce can run into privacy objections.
It may also lead to motions (requests filed with the court) by the third party to quash (cancel) the subpoena.
These types of discovery battles are beyond the scope of this article. However, experienced divorce attorneys can show you how to navigate them.
How hidden assets affect child support and alimony
If the asset is income-producing, it will affect support.
What should your next step be if your husband or wife is hiding assets?
That is easy. It is time to consult with a knowledgeable and experienced California divorce attorney.
Our family law firm is available for an affordable strategy session.