In a high-value divorce, the complexity of a couple’s financial holdings can naturally make the fair division of marital property challenging. When there are offshore assets involved—or it is suspected that undisclosed offshore accounts may exist—that challenge grows. In California, almost all assets acquired during a marriage are considered to belong equally to both spouses, including bank accounts or other assets held overseas. As a practical matter, though, uncovering, accurately valuing, and ensuring a fair division of offshore accounts can be quite difficult. Having legal representation from a family law firm experienced in complex asset division and cases involving international assets, as well as the assistance of qualified financial professionals, is essential to protect your share of assets and ensure a fair financial settlement.
- Legal Requirements for Offshore Accounts in Divorce
- Tracking Offshore Accounts
- Challenges Involved in Dealing with Offshore Assets in Divorce
Legal Requirements for Offshore Accounts in Divorce
While offshore accounts are often associated with shady or outright illegal activities such as tax evasion, hiding assets, or money laundering, it is not necessarily the case that the existence of offshore assets in a divorce case is a red flag for underhanded dealing. Owning an offshore account, even in notorious tax havens like the Cayman Islands or Switzerland, is not illegal. In fact, high-net-worth couples with a diversified investment portfolio or business interests may well have foreign bank accounts, international residential and commercial property, or corporate entities in other countries.
What is illegal is attempting to conceal ownership of offshore accounts from the Internal Revenue Service (and in some cases, the Financial Crimes Enforcement Network) or failing to disclose them during divorce. In the U.S., the Foreign Account Tax Compliance Act (FATCA) mandates that certain U.S. taxpayers holding aggregate financial assets outside the U.S. of more than $50,000 in most cases must report those assets on their annual tax return. Failure to do so can result in civil and criminal penalties. Additionally, under this regulation, foreign financial institutions and certain other entities are required to provide third-party reporting on foreign assets held by their U.S. account holders.
Do You Feel Your Ex-Spouse Is Hiding Offshore Accounts?
In California, Family Code § 2104 requires each party in a divorce to serve the other party a preliminary declaration of disclosure that includes “[t]he identity of all assets in which the declarant has or may have an interest and all liabilities for which the declarant is or may be liable, regardless of the characterization of the asset or liability as community, quasi-community, or separate.” This is done under penalty of perjury, and failure to comply can result in monetary sanctions and/or the court setting aside the judgment resulting from a fraudulent disclosure. The Court can also award 100% of the undisclosed/hidden asset to the other spouse.
Unfortunately, these legal requirements may not deter a spouse from attempting to conceal assets. A move to shift funds overseas after divorce proceedings have been initiated may also be a punitive attempt to prevent a soon-to-be ex from accessing needed funds, but that too is illegal. In California, Family Code § 2040 requires the courts to include an Automatic Temporary Restraining Order (ATRO) in the summons that, among other things, prevents both parties from selling, hiding, or transferring property without written consent from the other party or a court order. While it is okay to use funds from joint accounts during the divorce as long as that was the usual practice (for example, for the necessities of life), it is not permissible for one spouse to cut the other spouse off from accessing joint bank accounts or clean out shared funds.
Tracking Offshore Accounts
As noted above, any and all offshore assets should be fully disclosed to the other party in the divorce process. In theory, it is always a good idea for someone who is contemplating divorce to obtain copies of their complete financial records prior to filing to lower the likelihood that information could be successfully concealed. In practice, in high-net-worth divorces, there may be records that a spouse not actively involved in the couple’s business holdings or who did not have primary responsibility for the couple’s finances does not have easy access to.
Fortunately, parties in a divorce do not have to rely solely on the voluntary financial disclosure of their spouse. When it is suspected that one spouse’s financial disclosure is incomplete or otherwise suspect, a forensic accountant can be brought in to analyze the financial statements and documentation provided to hunt for clues that may point to accounts or assets that the other party is attempting to hide. For instance, tax form reporting may reveal the existence of offshore accounts, or scrutiny of transactions in a bank account may turn up a transfer to a foreign account no further information has been provided for.
Challenges in Dealing with Offshore Assets in Divorce
While having a full accounting of all offshore accounts and holdings is the critical first step to a fair division of assets, there are other challenges specific to overseas assets to be aware of. First, while changes in international banking and taxation regulations have led to greater cooperation between jurisdictions, a foreign financial institution may not necessarily cooperate with legal requests for information (unlike U.S. banks, which would be required to share information when served with a subpoena or court order). This can make it difficult, if not impossible, to achieve a full picture of all assets.
Further, there may be jurisdictional issues that limit how U.S. courts can divide assets between spouses. If the Court issues an order relating to community property in another country, it may be difficult to enforce as the other country has no obligations to comply with a U.S. Court order. However, it can balance the value of that asset against U.S.-based assets that it can control in determining the overall property division between spouses. In such instances, accurate valuation is of paramount importance, and it may be necessary to engage an appraiser to help resolve disputes over the asset’s value. Legal counsel should be fully versed in potential issues regarding properties of this type to be able to effectively advocate for a divorce settlement that is both fair and enforceable.
Finally, there may be unexpected tax implications associated with offshore assets. Consulting with knowledgeable tax professionals prior to finalizing any property division agreement can ensure that each party is fully informed of their tax obligations and remains in compliance with applicable tax laws.
Looking After Your Financial Interests in Silicon Valley
If your spouse has moved marital property into an offshore account, you may fear that it will be impossible to recover in your divorce. That is not the case. The family law attorneys at Hoover Krepelka have the expertise you need in complex property division and high-net-worth divorce to ensure that you receive your fair share of offshore accounts and other assets. We work with forensic accountants specifically selected for their experience in family law matters, as well as other financial professionals necessary to accurately assess and understand your financial holdings, to ensure the divorce strategy we craft on your behalf is focused on your long-term interests. To schedule a consultation with a member of our team, fill out the form below today.
