Is a Full Disclosure of Assets Required During a Divorce Proceeding?

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Is a Full Disclosure of Assets Required During a Divorce Proceeding?

For high net worth divorcing couples, the most important aspect of the divorce is a careful and strategic handling of the distribution of marital property. Handling this property transfer tactically can make the difference between a favorable settlement and one where the party faces unexpected taxes and other expenses. However, the first step in any distribution of marital property occurs with a disclosure of the marital property that is necessary for the parties to negotiate regarding and divide. Since this transfer of property is taxable under either gift or income tax regulations unless it qualifies for an exceptions under IRC Sec. 1041 or Sec. 2516, careful tax planning as part of a divorce is essential.

Must One Reveal all Property During Divorce Proceedings?

While the exact disposition of property under equitable distribution and community property regimes may differ, both types of jurisdictions require the disclosure of all material information that is necessary to facilitate either: the parties to negotiate and mutually agree upon a disposition of property or for the courts to adjudicate an informed division of marital property. In California specifically, divorce proceedings should be guided by California Fam. Code §721 that mandates California married couples are subject to the fiduciary rules imposed on persons in a confidential relationship. Additionally, California Fam. Code §1100(e) requires spouses to make a full disclosure of all material facts and information regarding the existence, characterization, and valuation of all assets in which the community has or may have an interest.  Thus, parties to a divorce are required to disclose assets as part of the proceedings. Individuals who attempt to evade this requirement can face serious consequences.

Have Divorcees Been Arrested for Concealing Assets or Otherwise Failing to Make Full Disclosures?

Many people mistakenly think that even if they are required to disclose a secret foreign account they don’t face significant risk in concealing it. They may justify their actions by stating that there is no paper trail that ties them to the account or believe that the U.S. government doesn’t have access to foreign financial records. However, the U.S. government detects and prosecutes criminal behavior of this type.

For instance, consider the case of Dr. Bradner, an Alaskan plastic surgeon. Bradner was a highly successful surgeon who had recently been informed by his wife that she was seeking a divorce. Shortly after his wife filed for divorce, Bradner set out on a road trip where he secretly drove roughly $300,000 in cash and 1,000 ounces in gold to Costa Rica. Once in Costa Rica, Bradner deposited the assets in a foreign bank. He then traveled to Panama where he opened another account under the name of a sham corporation. Later, in 2008, Bradner would transfer an additional $4.6 million to the Panamanian account. Bradner never disclosed these foreign assets or accounts in tax filings of divorce disclosures.

In 2011 after the divorce had settled Bradner attempted to repatriate the funds. Unfortunately for Bradner, he was stopped by agents from the Department of Homeland Security and the funds were seized by customs agents. In November 2015, Bradner was convicted by a federal jury of three counts of tax evasion and four counts of wire fraud. He was sentenced to serve four years in federal prison due to his scheme to conceal assets during divorce proceedings. He also likely faces additional civil liability due to the fraud committed. Furthermore, as a professional, Bradner may also face professional discipline due to the “moral turpitude” associated with fraud-based crimes which is likely to result in his disbarment.

Planning for Divorce’s Tax and Financial Consequences

Facing a divorce means that you will need to plan strategically regarding the steps you take. If you hold secret offshore accounts or have failed to pay taxes on certain assets or income the need for planning / corrective action is even more important. The failure to work with a tax lawyer who can assess your situation and make required disclosures can result in a less than favorable settlement or facing a situation with criminal consequences — like the one faced by Dr. Bradner.