The judicial doctrine of dissipation (breach of fiduciary duty in CA) of marital assets is an attempt to balance a spouse’s right to freely transfer his or her own property against the need to protect the legal entitlement of the non-transferring spouse to marital property. In most states, lifetime transfers made with either the intent to deprive the transferor’s spouse of his or her share of marital property, or where transfers are made in a manner that would not be equitable to permit them to stand, are prohibited or recoverable by state statute.
How Do Courts Determine if Dissipation Has Occurred?
To make a ruling on whether or not dissipation has occurred the courts look at all the relevant factors including for example:
Whether adequate arm’s length consideration is received in exchange for a transfer;
The ratio of the transferred property’s value to the transferring spouse’s total wealth;
The amount of time elapsing between the transfer of property and the divorce;
The status of the marital relations between the spouses at the time of transfer; (i.e. Transfers during periods of marital strife)
The source (SP, CP or Marital Property) of the property transferred; and
Whether the transfer is in essence revocable or merely illusory (i.e., the transferring spouse in reality retains rights in or powers over the transferred property regardless of how the transaction is structured or documented).
If a family relationship exists between the transferring spouse and party receiving the property.
There are various legal codifications of what constitutes dissipation, however, they all involve minimizing the marital assets capable of division by a divorce court via hiding, depleting, or diverting them. Some examples include:
Ruining or trashing personal items.
Gifting, loaning of selling at far below fair market value, property to others.
Funds spent on extramarital relationships.
Excessive Gambling losses.
Residence needlessly falling into foreclosure.
Needless spending down of business and personal cash accounts.
Destroying, losing or failing to properly maintain marital property.
How Can CPAs Work as Forensic Accountants to Detect Asset Dissipation?
During divorce forensic accountants can be engaged to follow the paper-trail of funds that may have absconded from marital accounts in support of a potential claim for dissipation of marital assets. The CPA will also work to determine the actual income of the family and if tax fraud has been occurring, (often better left to a Kovel Accountant). Any forensic accountant is also likely to verify and quantify any “co-mingling” of marital and separate assets.
Finally, the forensic accountant will also work to discover hidden assets. Business owners may have both motive and ample opportunity to hide both income and assets from their spouse’s eyes. Areas of inquiry for hidden assets may include:
W2 employees have earned deferred compensation plans, stock options, bonuses, expense accounts, or other fringe benefits that they occasionally fail to declare.
A Forensic accountant should ordinarily be hired to comb through the business’s records, determine the authenticity of the company books, and vet the positions taken of the company tax returns.
life insurance vehicles
Hidden safety deposit boxes
Hidden offshore or domestic brokerage or bank accounts.
Essentially, the higher the family net worth the more numerous or intentionally complicated the hiding places are likely to be. For more divorce task related issues, please read our “Divorce Tax Issues” page for more information. If you wish to speak to a Tax Attorney, you can Contact Us on these numbers 800-681-1295.