What Financial Information Do You Need to Disclose During Divorce and Why?
Disclosure of information and documents relative to assets as well as liabilities is a typical issue that arises in every divorce case. In many states, like California, spouses have fiduciary duties to one another.
A Fiduciary relationship is one that mandates the highest duty of “good faith” and “fair dealing”. This relationship begins when you get married, and ends when a divorce is finalized. It is similar to the duties that one business partner owes to another partner.
A required action in the process of divorce is the preparation and exchange of preliminary financial disclosures.
Willingly and negligently omitting information in the preparation of financial disclosures can result in devastating consequences for both parties.
That's why you need to know, understand, and analyze the importance of full transparency and disclosure in the preparation of your preliminary financial disclosures.
Financial Disclosure During Divorce - What Does California Law Say
Let's first have a concise understanding of California divorce law. California is considered a community property state, meaning everything that was acquired during the marriage is considered community property, with a few exceptions. Assets acquired before marriage or after the date of separation, that were kept separate and not commingled with other assets, are considered a person’s separate property and not subject to division.
Assets, liabilities, retirement accounts, and pensions are all examples of community property. California courts require that any portion of these assets or accounts that were acquired during the marriage be equitably divided between the spouses.
That is why thorough preparation of preliminary financial disclosures is a mandatory requirement for the completion of a divorce in California courts.
The Income & Expense Declaration and the Schedule of Assets and Debts Declaration encompass the preliminary financial disclosures. The sum of these two documents identifies all separate property and community property subject to division in the divorce.
The objective of these mandatory disclosures is to give both parties a clear and better understanding of the marital assets and debts and pave the way for equitable discussions, negotiations, and ultimately a fair and reasonable marriage settlement agreement.
So not only are the disclosure documents important, It is crucial for both parties to fill out the documents correctly. Incorrectly filled-out documents may be punishable by law.
Further, the court can set aside any judgments if both parties fail to exchange their mandatory disclosures. Many people who fill out these documents on their own don't really understand the rationale behind community property although it may, at first glance, appear easy to understand.
Financial Disclosure During Divorce - Failure To Disclose Everything
You might ask, "What are the consequences of not disclosing my financial information?" Since it's mandated by law, there can be grave repercussions for not complying with fiduciary duties of disclosure.
Many states authorize the Family Law Court to charge a party who failed to comply with the disclosure requirements a monetary penalty as compensation for the other party, or as reimbursement for attorney’s fees and costs that he or she incurred.
There are occasions where the Family Law Court has the power to grant the other party half the value of the undisclosed asset. The Court can even award the full amount of assets to the other party if the failure to disclose escalates to a level of fraudulent activity.
Don't ever think that noncompliance or non-disclosure of information is worth the risk, hoping that you won't get caught and that the issue can be finalized without any information being disclosed and without the asset given to any parties during the judgment.
Remember, California issues full authority and jurisdiction to the Family Law Court to arbitrate non-disclosed assets and liabilities by either party, even after the divorce is finalized.
You might think of not disclosing your separate property assets because they are not a part of the division of the community property.
Financial Disclosure During Divorce - It Can Be Confusing
Although this is true, the problem arises if any of the parties misunderstand the legal representation of a separate-property asset. You may assume that an asset in your name, regardless of how or when it was acquired, is a separate property asset. This is not necessarily true!
Examples of confusing issues might be when you opened a bank account, bought a house, or when you created a 401k before marriage, but made deposits during the period of marriage. This becomes an issue because the money deposited prior to marriage is separate property, but the deposits made during marriage are community property. The asset then has both separate property and community property. It becomes your responsibility to prove which is which. This is why all assets, whether they are community property or separate property must be disclosed.
As mentioned above, both parties are mandated by law to exchange preliminary financial disclosures. Without these preliminary financial disclosures, the judge will not grant any judgments. The court needs the preliminary financial disclosures to identify the entire community estate.
After the Respondent is served with the Summons of Petition at the start of the case, the exchange of the preliminary declaration of disclosure must occur.
Preliminary financial disclosures consist of the following forms:
FL-140 - Declaration of Disclosure
FL-142 - Schedule of Assets and Debts
FL-150 - Income and Expense Declaration
FL-141 - Declaration Regarding Service of Declaration of Disclosure
Under punishment of perjury by the California courts, preliminary disclosure mandates each party to identify their assets and debts. Both parties confirm the correctness of what they disclosed as their assets and debts by signing a declaration document.
Each party can also establish and confirm if they know of any financial opportunities being presented to the marital community estate at the time they sign the declaration.
Is it possible to waive the Preliminary and Final Disclosures? For both disclosures, they can only be waived if the case is a true default case.
A true default case is when a Respondent does not appear in court, makes no official and written response to the petition, and does not sign a marital settlement agreement.
Take Control of Your Future
Just as you would want to hire a wedding coordinator to help you prepare for your wedding day, it makes sense to hire a Certified Divorce Financial Analyst to assist or provide counseling or coaching for the preparation of your financial disclosures.
Both Kimberly and Leslie provide step-by-step guidance on matters related to divorce. With a wide range of experience and expertise related to divorce issues, our team will simplify the process and provide much-needed clarity in areas such as long-term tax consequences, asset, and debt analysis, dividing pension plans, continued health care coverage, stock option elections, protecting support with life insurance, and much more.
This information is not intended to be a substitute for seeking legal advice from an attorney. For legal or tax advice please seek the services of a qualified attorney and/or qualified tax professional.