Spouses who anticipate accumulating even modest amounts of wealth need to be aware of the possible consequences awaiting them if they decline to take advantage of asset protection opportunities, and instead allow the marital property laws of their state to determine what property will be available to satisfy the claims of an unforeseen creditor. Assume the following for purposes of illustration. A man and a woman marry. Shortly thereafter, the wife quits her job because the husband, a physician, earns more than enough for the two to live comfortably and raise a family. After 30 years of marriage, with an ample accumulation of wealth, they begin to plan their retirement. The couple has never engaged the advice of an estate planner, nor have they ever taken any action on their own to protect any of their assets. Unfortunately, shortly before he retires from his practice of medicine, the husband is sued for malpractice. The resulting judgment far exceeds his liability coverage, and he becomes a judgment debtor; the creditor comes after everything he owns.
This example raises the following questions: after 30 years of marriage what does he own, what does his wife own, and how much property will the creditor be able to reach? In order to find out, the couple files a suit for declaratory judgment to determine how much of their house, ranch, savings account, life insurance and annuities contracts are subject to the claims of the husband's creditor. In an actual case with substantially similar facts as this example, the court decided that under state law, the husband and wife owned the land as tenants in common and therefore the judgment could be satisfied out of the husband's one-half interest in the real property; a partition by sale was required. As to the savings account, life insurance and annuities contracts, everything was earned by the husband, and because the spouses lived in a common-law jurisdiction, everything was his separate property, and all was available to the creditor. The couple's life savings were virtually eliminated.
The above result could easily have been avoided by implementing simple asset protection strategies by an experienced attorney for marital property. The first step in planning a strategy to protect the assets of a married couple is to find a lawyer that can identify what would happen to the couple if they do no asset protection planning, and a few years in the future they face the claim of a creditor. Will the result be like that of the spouses in the above example?
This analysis requires identifying and understanding what property the couple currently owns, and how vulnerable that property is to the claims of a creditor of either spouse or of both spouses. If the married couple lives in a community property state, what property is held as community property and what property is held as either spouse's separate property will need to be determined. If the couple lives in a common law state, it will be necessary to determine in whose name property is held. Also, the planner needs to decide if property acquired in the future will take on similar characteristics as the property currently held. If the current scheme of property ownership exposes the property to unnecessary risk, a more appropriate scheme must be devised. For example, if one spouse is the primary wage earner and is also in a high-risk occupation, such as medicine or law, which may expose him or her to large unforeseen judgments in the future, that spouse should not own and control a large proportion of the spouses' assets; however, that may be exactly what happens under the law if no planning is done.
Once a more appropriate distribution of property is decided upon, the estate planner must determine a means for reaching the desired goals. The spouses may want to make outright gifts, enter into marital property agreements, or establish trusts whereby asset protection may be afforded the donee-spouse as well as the donor. Laws of the spouses' particular jurisdiction need to be carefully consulted to determine if the proposed action will be upheld if challenged by creditors. For example, some states liberally accept pre- and post marital agreements, while others have strict rules which must be complied with in order for such agreements to be enforceable, while still others may not recognize post marital agreements at all.
Estate planning varies by state and immigration status. Please speak to an attorney in order to plan carefully depending on the state and country you live in.
For more information of Estate Planning and how to protect your assets, please call (+1) 305-372-0222 to schedule a consultation with Attorney Genilde E. Guerra.
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