Couples who have a family-based business have often spent considerable time and money building the company. It may be a source of pride for them, but it may quickly become a source of contention if they decide to divorce.
When business owners divorce, they have to determine the best way to divide the business. In some cases, this can become problematic, particularly if only one of the parties has knowledge of the business’s finances. There’s a chance that they may suddenly claim that the income from the business mysteriously dropped right before or during the divorce. This is sometimes referred to as sudden income deficit syndrome.
How does sudden income deficit syndrome occur?
Sudden income deficit syndrome is a deliberate reduction in reported income. For business owners, this often comes from diverting income to other entities or fabricating expenses to lower net profits. Some individuals may opt to bypass reporting cash payments or may pay out money to fraudulent vendor accounts that funnel into their own accounts.
Why is sudden income deficit syndrome bad during a divorce?
Sudden income deficit syndrome is problematic during a divorce because it can skew the results of the property division process. The individual who is misleading about the business’s income would walk away with more of the property division assets than they should. It can also have an effect on alimony and child support obligations.
Spotting sudden income deficit syndrome isn’t always easy. In some cases, it takes the help of a forensic accountant who can scrutinize the books and look for signs that there are hidden sources of income.
It’s critical that anyone who’s going through a divorce that involves a family-based business takes the time to evaluate the possibility of this occurring so they can take actionable steps to protect their interests. Working with someone familiar with high-asset divorces may be beneficial.