Asset protection is something that you should be increasingly concerned about. However, attorneys and financial planners will exploit your concerns in order to justify the elaborate structures they create to “protect you.” There isn’t anything wrong with elaborate structures, but they are often an overkill. There are many things you can do to protect yourself without an elaborate structure, and in many cases, the little things add up to create a fairly good asset protection plan.
Asset protection can be analogized to protecting your money from a pickpocket. If all your money is in your wallet, then you will lose everything if you get your wallet lifted. If you take a majority of your money out of your wallet and put some of it in your front pocket, some of it in your money belt, and give some of it to your spouse, then when your wallet gets stolen, you don’t lose everything.
When you get sued or attacked financially, if all of your assets are held in the same “pot” then they are all subject to loss. If you have put some of the assets in your spouse’s name and others in a family limited partnership or limited liability company, then everything may not be exposed when the attack comes.
A major part of asset protection is dividing assets between spouses. Your love for your spouse has nothing to do with “sharing assets.” I know couples that haven’t “owned” anything together for decades. The doctor across the street doesn’t own the house he lives in. His wife owns the house. He just gets to live in the house, and if he is in trouble, he sleeps in the dog house. The wife owns the land, big savings accounts, stocks, bonds, and all of the assets that aren’t likely to get them in trouble. His medical practice may get him in trouble. He owns the practice. She isn’t his vice president, secretary or any other type of corporate officer. She has nothing to do with his practice. As a result, he can’t be sued in his practice and lose the house. When he is sued because he messes up doctoring, he could lose everything he owns, but the house isn’t his, so it is probably safe. The wife has made the house payments over the years, and it is hers. But, he is the wage earner. She doesn’t make enough money to pay the full house payment, so when there is a lawsuit against the husband, the attorneys are going to argue that the house is really his. He paid for it will be the issue.
If the spouse doesn’t work, the breadwinner should give the spouse a monthly allowance. Obviously, the allowance isn’t reported for tax purposes, because they file a joint tax return. However, the allowance is deposited into the spouse’s checking account, which only the spouse signs on, and it is hers to pay the house payments, buy clothes, or use in any way she wants. The courts have said that if this pattern is followed, then the house is clearly the spouse’s, and the argument can’t be made that the “breadwinner” paid for the house, so it is the breadwinner’s house.
The doctor and his wife recently borrowed money to buy a property, and they used her house as collateral. Because the wife didn’t have a big income and might not have qualified for the loan, the doctor offered to guarantee the loan for his wife. The bank said they had to put both names on the deed, and then they could get the loan. The bank told them that they could easily take the doctor’s name off the deed and transfer full ownership back to the wife after the mortgage was secured. Acting as their attorney, I told the bank to drop dead. It is her house. The doctor doesn’t have to own the house to guarantee the loan. Just because they are married doesn’t mean their business transactions are not arms length between them.
Just pretend that the banker was a great friend and had offered to personally guarantee the loan. It would be unthinkable that the wife would have to deed the house to him in order to have him guarantee the loan. When the bank wanted the wife to deed the house to the husband, so his name would be on the deed, I couldn’t let them put his name on the deed and then take it off again, because the courts in an asset protection situation would look at the history. Once they see the ownership transferring back and forth at will, the courts would hold that the house really was his and he could control the form of ownership. The house probably would be at risk when he was sued. After all the argument with the bank, the funny thing was, the bank finally gave her the loan without the husband’s guarantee.
The doctor owns the practice, rental units, extra cars, and other assets that could easily result in a legal suit. The wife owns the car she drives and he owns the car he drives, because in a suit the owner is usually sued in addition to the driver. The bottom line is, the husband and wife own nothing in common, and they stack the passive assets behind the less “exposed” spouse and the risky assets behind the more “exposed” spouse. They are very careful not to move assets back and forth between each other. They have two clearly defined “pockets,” and if the contents of one pocket gets “lifted,” the other pocket will probably be untouched.
The division of assets can be done by simply using each spouse’s name. However, assets held in a single spouse’s name will have to be probated should that spouse die. You should use a living revocable trust for each spouse. The trusts may be created by one or two documents; it doesn’t matter. The trusts won’t give you any more protection, but the trusts solve lots of problems if one of the spouses were to become disabled or die.
Other pockets you can use are irrevocable life insurance trusts, family limited partnerships, and limited liability companies.
Understanding the concept of “pockets” and how most asset protection techniques rely on using the spouses to create or control the pockets makes asset protection clearer. Know that if you create one clear pocket for each spouse, you have done more asset protection than most people ever do. The elaborate structures are nice, but you can get a good start on an asset protection plan without them.
Learn more in my book Protecting Your Financial Future.