Lessons from The Madoff Ponzi Scheme

There are a couple of lessons learned from the Bernie Madoff scam that business persons can make sure they are observing. Bernie and his wife made a couple of mistakes. (Well, maybe more than a couple.) They were just flat out illegal in most of what they did, but they made mistakes that you can avoid when you are trying to protect your assets. Every businessperson needs to pay attention to these basic rules. The rules are easily violated, because they “don’t apply to me.” Yah sure!!!

When structuring the business, don’t have the husband be the president of the corporation and the wife be the secretary, or visa versa. One spouse ONLY is the officer and director of the family business. The other spouse can work as an employee in the business, but they never fill an official role. They aren’t even the office manager. They are just an employee. Yes, they can counsel and direct, all night long in bed, but they are not the head honcho in the office.

Both Bernie Madoff and Ruth Madoff were in on the business. It doesn’t matter how they were “structured” or how much power Ruth had, because in this situation they were both doing things that were illegal. However, assuming your company is running down the legal path, if for some reason the officers and directors get in trouble (somebody pierces the corporate veil), only one of the spouses is in trouble if only one of the spouses is the officer, director and chief honcho. The other spouse who is just a silent participant in the business can almost always stay out of the mess.

Assets held by the “silent” spouse are also going to be out of the mess. (Community property states are a different game. There won’t be as much asset protection afforded the silent spouse if you are living in a community property state. Welcome to the Republics of Texas, California, Washington, and others.) The silent spouse should hold his or her assets in a separate living trust, so that the other spouse won’t have legal hassles if the silent spouse should die. Read my story about Mr. Smart in my new book, Protecting Your Financial Future. After the family business collapsed, his wife kept millions that came directly from the family business.

Never have the silent spouse sign on any of the business papers, especially credit applications and loans. If at all possible, the silent spouse should be protected from the business transactions. His or her name should never appear on any business papers. Sometimes it is hard to keep their name off the loan documents, because the loan company wants everyone’s name on the bottom line. They would love to have your kids, mom, dad, good friends and everybody else sign the note.

Don’t ever have the silent spouse show his or her face at the loan company. When asked, the spouse has nothing to do with the company. (In fact, they don’t.) When asked, the silent spouse hates the company and won’t sign a thing. It is surprising how often the loan company will back down. Sometimes they don’t, and the spouse is stuck on the loan. But, you have control over the loan repayment. So in a sense, the loan is not an asset protection issue.

If the business encounters lawsuits and other things you don’t have control over, the silent spouse should be out of the line of fire, provided you have shielded them from the business. Madoff had his wife front and center in the business. She should not be protected, because she was too involved in the business, and she was participating in the illegal activities. In your family business, you can often protect a lot of the family assets, including profits from the business. The silent spouse has to hold the assets and stay out of the business as an “official.” Asset protection isn’t usually something associated with living revocable trusts, but Protecting Your Financial Future, my new book, shows you how to squeeze some asset protection out of a living trust.