Accountants & Financial Planners: When a Client Is Hiding Assets in Divorce

If your client believes that their former partner or spouse is attempting to hide assets in a divorce it is helpful for you and your clients to know that this is not an uncommon concern. The Court is very familiar with how people attempt to hide property to avoid assets being included in the pool for division.

If a client ever asks you directly or indirectly about how they might be able to conceal any assets, then this article will also be helpful to navigate that ethical dilemma. Below I explore the most common ways in which people try to hide property, how they can be discovered, the consequences when caught and how you can be drawn into Family Law Court as their advisor.

Common Methods for Hiding Assets in Divorce

Even though there is an obligation for both parties in a de facto or marriage breakdown to make full disclosure of their assets, liabilities, superannuation and financial resources, some people will still attempt to hide them. Here are some common ways in which this occurs.

1. Giving assets to other parties to hold

When money or assets are given away to other parties in the lead up to a separation, depending on the circumstances, this can be construed as intentionally depleting the asset pool available for division. If parties are intentionally trying to reduce the property pool available for division, giving money to others in anticipation of a property settlement is a very risky approach as there is always the chance that the person they give the money to will not return those funds. It is not uncommon that a Court may decide to “add back” funds voluntarily given away by one party into the asset pool as if they were still held by that party. In circumstances where the asset “given away” depletes the pool for division to the extent the other party cannot satisfy their entitlement, a Court may order the recipient of the “gift” to transfer the asset back.

It is far more beneficial for both parties to disclose all their assets and be as transparent as possible at the very start.

2. Use of trusts

Setting up or changing the structure of trusts in an attempt to hide assets, is another common method. A trust may hold a range of assets, and the control of trusts can be amended in a way that attempts to exclude property from the matrimonial property. The case of Kennon & Spry (2009), is one example of how one party attempted to withhold assets from their former partner through a trust. In this case, the husband removed himself and his former wife as capital beneficiaries and then moved assets from the trust into a trust for his children. Ultimately, the High Court reversed these actions, stating that because the husband used the income and capital of the trust at his will, so it was to be included in the property pool for division.

While trusts are commonly used as an asset protection mechanism, the ultimate control of the trust will inform whether it is included as an asset of the parties or a financial resource in their property settlement. 

If it is seen as a financial resource but it can be proven that one party to the property settlement has influence or control over the trust, despite not being the appointee, then the trust could also be considered an asset. Explored in a previous article, in the case of Harris & Dewell and Anor (2018), was the concept of ‘puppeteering’. That is, where someone who is not the appointor or trustee of the trust is exercising control over a trust despite not being the appointor or trustee. Therefore, if there is a question about someone attempting to mask the true function of a trust, that can also be discovered.

Related: Trusts – Financial resource or asset for division?

Discovering Hidden Assets in a Divorce

Hidden assets are normally found in one of two ways:

1. During the financial disclosure process; and/or
2. By subpoena.

During the financial disclosure process, both parties are supposed to disclose all the assets and liabilities to one another. This includes exchanging “disclosure documents” which are common documents such as financial statements, tax returns, bank statements, trust deeds, company constitutions, pay slips, employment contracts etc. Sometimes, assets that one party forgot about or did not realise they had, will come up during this process. 

For your clients who believe assets have been hidden or money going out over time, there are a number of ways in which information can be sought. 

Hidden assets can be revealed through a subpoena. A subpoena is used when someone may not be forthright or comply with their disclosure obligations. In that case, a subpoena can help access bank account statements, trust documents, or other relevant documents that will provide a clearer picture of where certain assets lie. For example, a subpoena may be issued to a bank to produce copies of relevant bank statements if a party has not been forthright in providing these documents. Hidden assets can also be found by reviewing tax returns and financials, looking at loan applications or credit card statements, and pulling public records. In some cases, it is necessary to engage a forensic accountant to review financial statements and bank records to perform a tracing exercise. 

The Consequences for Failing to Disclose

Financial disclosure during a property settlement requires relevant documents to be disclosed to the other party. Both parties have to supply copies of all their disclosure information to the other, which helps minimise the risk of assets not being accounted for.

Documents are relevant if they:

• Verify the extent or nature of assets, financial resources and liability for one or both parties;
• Verify the extent or nature of current or future income for either party from employment or other sources like trusts or a company; and/or
• Related to an issue in dispute in the property settlement, such as the contribution of each party to the asset pool or the needs of either party to support themselves in the future.

It is also typical for parties to disclose evidence of any assets sold or disposed of within the 12 months prior to separation and anything following separation.

If it is discovered that a party has hidden assets in a property settlement, depending on the circumstances, the Court can potentially: 

• Set aside a Financial Agreement or Property Settlement Order, even if it is years later; 
• Refuse to allow a non-disclosing party to use a document if it was not disclosed to the other party;
• Order the non-disclosing party to pay the other party’s legal fees.

The consequences for anyone who fails to provide full and frank disclosure can be significant. If a client approaches you with the idea that they may want to hide assets or may already be doing so, speak with them about the consequences of failing to disclose those assets and the importance of transparency. 

Your Role As A Client’s Advisor

As accountants, financial advisors, or others assisting in family law matters, you should encourage your client’s to be forthright with their lawyer as to all of their assets, liabilities, superannuation and financial resources. 

It is possible for you in your role as an advisor to be drawn into property settlement matters in the Court. This can occur through two different types of subpoenas:

1. For the production of evidence; and
2. To give evidence in Court.

For your clients, the key message is that if money is going out, or assets moving, there will be questions about where it has gone. In the event money has been siphoned over a number of years, this still may be relevant in their property settlement. 

If your clients are reluctant to disclose all their assets, it is ultimately up to them. However, keeping records and discussing the importance of disclosure with them could help you protect yourself in these circumstances. 

There are many methods with which the Court can handle hiding assets in divorce. Informing your clients of the risks may well help them see the importance of disclosing all they should.