JOINT TENANCIES
Many people believe that their property
is protected if they and their spouse own everything as joint tenants
in common with right of survivorship. Unfortunately, this is not the
case.
The premise behind Joint Tenancy is that a creditor of one
of the joint tenants can only reach that person's interest in the
property. The only real "protection" gained by this form of ownership
is that a creditor can't attach the other person's interest in the
property. For example, if a husband has an issue with a creditor only
his wife's half of the assets are protected. Surely losing half of your
assets is not an acceptable risk.
Furthermore, if the wife dies,
the protection is terminated, and the entire property suddenly belongs
to the indebted husband and is available to satisfy his creditors.
Joint tenancy is certainly not a solid asset protection option.
TRANSFERS TO SPOUSES
Another
variation of the Joint Tenancy scheme often used in do-it-yourself
asset protection planning is for the high risk spouse to transfer
assets outright to the low risk spouse. The reasoning behind this
strategy is in the event the high risk spouse is sued, he or she will
have no assets which can be reached by the creditor (assuming the
transfers were made before a creditor problem arose).
The
challenges with such a plan are as follows: First, if the low risk
spouse dies the property may come back to the high risk spouse and be
available to satisfy creditor claims. Another problem with this
"technique" is divorce. It can be very difficult to convince a court
that it should return assets to the high risk spouse when the transfers
to the low risk spouse were undertaken to avoid paying creditors.
ASSET RETURN ARRANGEMENTS
You've
just been sued, you panic, you don't know where to turn; if the
creditor succeeds, you'll be wiped out... So what do you do? As
variation on the spousal transfer "technique" discussed above, some
people will transfer assets to relatives and friends with a secret
understanding that the property will be returned when the creditor
problem goes away.
There are major potential challenges in using
such a tactic. For example, when the transfer is disclosed, it can
easily be classified a fraudulent transfer to avoid paying creditors
and the court will "undo" the transfer and return the property to you
to satisfy the creditor's claim.
Another often overlooked
challenge is the transferred property has now become exposed to the
transferee's creditors and now your assets are not only out of your
control but at risk!
Finally, what if the relationship between
you and your friend or relative goes sour? The ownership and control of
your assets is in their hands. You get the idea.
The bottom line... don't rely on joint tenancy and transfers to family and friends to provide adequate asset protection.
Carlos Lee, MBA, is the senior consultant for Asset Protection Consulting Group.
Visit Asset Protection Consulting Group to learn more about how to bulletproof your assets from future lawsuits.
