Divorce: The 'dark side' of financial planning

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NASHVILLE, Tenn. -- Breaking up is hard to do.

But it can be even trickier for a client going through a divorce if either spouse has been hiding assets from the other.

“Many people undergoing divorce struggle with financial disclosure,” said Peggy Tracy, a forensic accounting and fraud examiner with Priority Planning during a panel at the FPA's annual conference. “A lot of your clients aren’t being honest with you … if you have not encountered clients who are committing fraud, someday you will.”

Tracy says she worked as a financial planner for about 20 years before shifting her focus towards helping clients with divorce settlements — “the dark side of financial planning,” she said.

Conveniently for advisors, discovery proceedings can provide a unique opportunity to review clients’ finances with added scrutiny. While the idea is to disclose everything, many divorcees-to-be try to game the system, Tracy says. Any financial abnormalities could lead to uncovering big secrets: overspending, marital infidelity, gambling, health issues or drug problems.

“People who are getting divorced often don’t even like each other,” Tracy said. "If you don't know what's on the table, how can you make an equitable settlement?

Advisors can follow financial patterns to uncover secrets that one spouse doesn’t know about. But doing so requires a deep dive, Tracy says.

“It’s important to see the statements you might not look at normally,” she said pointing to credit card statements and life insurance policies, which reflect money movement not shown on a tax return.

Having an extra set of eyes can be a boon. If your firm uses an outside professional for tax preparation, ask them to look for strange patterns and disparities in tax returns, Tracy says.

One of the most prevalent types of divorce fraud is dissipation, or “using marital assets for non-marital purposes,” Tracy says.

Uncovering it can be as simple as comparing net worth year-over-year, she says. For example, “if your clients’ net worth is growing 4 or 5% and suddenly it’s down 12%, there’s something wrong,” Tracy said. “If it doesn’t fit like a puzzle, there’s something wrong.”

She referenced several different instances of dissipation she has encountered, including the story of one spouse who had been siphoning marital money away slowly by (otherwise completely legally) transferring small amounts into an IRS account. By the time the couple sat down to divorce proceedings, the account had amassed around $500,000 in separate savings.

Tracy also urges watching out for spouses who have attempted to hoard their own money by purchasing prepaid credit cards and gift cards -- $25 and $50 increments can add up over time.

That said, sometimes a spouse’s secret can be as simple as accidental overspending.
Some clients may also discover their spouses were cheating on them while uncovering evidence of gifts purchased for mistresses or other unusual activity.

Bottom-line: Advisors shouldn’t shy away from difficult questions.

“Sometimes, the best thing you can do is have uncomfortable conversations with your clients,” Tracy said.

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