It has been said that, in relationships, financial secrets are emotional ticking time bombs — they never stay buried for long…..
Anecdotally, the uptick of financial infidelity that we, as family law practitioners, have increasingly seen in our law practice is borne out in recent polls that bear witness to the disquieting trend of financial infidelity as one of the leading causes of divorce. Not only is financial infidelity devastating emotionally and fiscally in the short-term, its seismic ripple effect can be felt long after the ink is dry on the divorce agreement. One survey found that – despite no wrongdoing on the part of the innocent spouse, 37% of divorcees found themselves solely responsible for debts that were previously shared, thereby worsening their financial state post-divorce at a time when it is essential they establish their own independent financial footing and they enjoy unblemished credit as they seek to rebuild their lives.
What is Financial Infidelity?
To begin, let’s unravel what we mean by financial infidelity. Generally speaking, this fiscal phenomenon occurs when a spouse intentionally withholds information or outright lies about financial circumstances in the hopes of secretive spending; hiding debt (perhaps gambling debt or payday loans); amassing and hiding assets; short-circuiting the other spouse’s access to information or to accounts; and/or obfuscating true net worth. When the deceptive spouse is accumulating secret debt by opening credit cards, taking out loans, tapping into the home equity line of credit or “merely borrowing” from 529 college savings, we are on high-alert on behalf of the innocent spouse because this spiral may have lasting impact on that spouse’s future (not to mention the children’s future) for years to come.
Financial Infidelity & The High Net-Worth Client
For high net-worth clients – such as executive, entrepreneurs, and clients who have the financial wherewithal to engage lawyers to establish closely held businesses or simply independently have the influence to structure their own compensation packages, untangling the deceptive financial infidelity web takes on new complexities because the “too clever by half” spouse has not atypically concealed their wealth through financial restructuring. Think of this like a sort of shell game of hiding behind a panoply of business entities, dummy corporations, phantom firms, or highly elusive compensation schemes.
Games High Net-Worth Clients May Play
When forensic accountants do a deep dive to plumb the depths of the tried-and-true tactics high net-worth clients typically resort to , they are looking to see whether the deceptive spouse has overpaid vendors; underreported revenues; made so-called “loans” to friends or shell entitles with no expectation of being repaid; made out-of-the ordinary international wire transfers; overstated business expenses; or even created straw employees or contractors. Another favorite tactic high net-worth clients favor is disclaiming an officer, board, or ownership role in a company so as to appear not to have any claims or be the one pulling the strings – when the reality is that they are indeed the puppet masters.
Another tip-off is to pull back the curtain on executive compensation changes. Divorce attorneys are well-versed in dealing with sophisticated executive compensation structures that include golden handcuffs, phantom equity, performance-based bonuses, RSUs (restricted stock options); and non-cash perks. Divorce attorneys also know to seek discovery in the form of employment contracts/compensation agreements; loan applications and credit reports (as these can unearth undisclosed assets and debts); and just good old deferred compensation options.
This structuring is ripe with opportunities for veiling accurate wealth assessment because the executive or entrepreneur can seek to ensure that RSUs or bonuses will only vest post-divorce; can fail to disclose equity interests by channeling assets to offshore trusts or to private, hard to trace entities; can defer income so as to appear to have a drop in income during the pre-divorce period; or can fail to disclose equity interests on tax forms (which may be buried like a needle in a haystack in internal company books).
While the aforementioned were the old-fashioned, tried-and-true methods of obfuscating, the newer opportunities gaining favor for hiding In plain sight mechanisms to siphon off wealth include cryptocurrency wallets; NFTs (non-fungible tokens); investing in collectibles such as gold, art, watches, fine wine, real estate ventures, expensive cars, electronics, extended frequent vacations (without the other spouse); and expending funds for luxury goods (for the deceitful spouse or his/her significant other).
Red flags for the Innocent Spouse
If you think something is amiss, start by trusting your gut and intuition. However, it is imperative to understand that courts rely on facts and this is where you need to become watchful and informed.
Do a reality check with a trusted independent professional – CPA, certified divorce financial analyst, forensic accountant, business valuation expert; private investigator with a specialization in asset/debt tracing, – – and, most especially, with the counsel of an excellent family law attorney.
These professionals will seek to track underreporting of income; the selling or giving away of assets to friends or relatives as part of an overall divorce planning scheme; running up credit card debt in secret; and/or not disclosing bank or investment accounts.
It is important to know that once a Complaint for Divorce is filed in Massachusetts and once the other spouse is served, a Rule 411 Automatic Restraining Order is in place as protection. This means that both parties are constrained from dissipating assets except for reasonable living expenses, spending in the ordinary course of business or investment, or paying reasonable attorney’s fees. Moreover, neither party can incur debt, change life insurance or pension/retirement plan beneficiaries, or remove children or the other spouse from insurance policies (including health/dental/life/automobile/disability insurance policies).
Do Courts Care About Financial Infidelity?
Yes! Absolutely!
Massachusetts is an equitable division state, meaning, the court will seek to divide assets and liabilities fairly and equitably, although not necessarily equally. Financial infidelity can skew a court’s equitable award in favor of the innocent spouse.
In all divorce matters, be they contested or uncontested proceedings, arguably the single most important and most highly scrutinized document is each party’s Rule 401 Financial Statement. So highly-valued is this sensitive document, it must be signed under the penalties of perjury. By signing this declaration, you are certifying that the information you have provided is true, complete, and accurate to the best of your knowledge and belief. If a spouse lies or misrepresents financial information by commission, or conveniently omits such information by omission, it can upend the entire divorce proceedings and subject the deceitful spouse to sanctions and penalties (of both a civil and criminal nature).
Importantly, each spouse’s credibility is the sine qua non that intangibly figures into the calculus of a court’s judgment as to how assets and liabilities should be equitably divided: although assessing this intangible as to a party’s character is elusive, it absolutely has real world tangible consequences. For example, the value of the hidden or dissipated asset can be put on the innocent spouse’s side of the ledger and/or the judge might order a disproportionate share of the marital estate in favor of the wronged spouse.
Advice: What Your Divorce Attorney Wants You to Know
Be vigilant; gather as much factual information as possible by collecting documentation; and preserve and maintain evidence but keep all of this data password-protected on all of your electronic devices (change your passwords frequently to difficult to guess passcodes). (I cannot tell you the number of times families share iPads or similar devices and private information pops up randomly on a child’s screen!)
Remember: digital evidence can quickly disappear so take screenshots and export the data as soon as you can; consider getting a separate email address for communications with professionals whom you might hire; keep a journal of changes in the “before and after” spending history; consider hiring a forensic attorney or like professional; try not to play your hand by confronting your spouse with your evidence; and make all best efforts to preserve and maintain your own financial best interests and good credit (e.g., remove your name from joint credit cards and/or remove your spouse as an authorized user and/or put a very modest cap on credit card spending – – such as $300, to keep debt liability in check).
If your spouse wants to renegotiate your prenup or have you sign a postnuptial agreement or a home equity line of credit document, you should be on high alert.
And, most importantly, retain an excellent family law attorney early on to guide and protect you and to champion your best interests in the short- and long-term.