Volume III, Number 2 – April/May 1994
© Donlevy-Rosen & Rosen, P.A.
ASSET PROTECTION IN REAL LIFE
PROTECTING THE NESTEGG. Ms. X, a single mother, recently sought our help in protecting the lump sum nestegg she received from her former husband in their divorce settlement. While married, she and her husband had purchased an office building, and provided their joint and several personal guarantees to the mortgage lender. After the divorce, the husband “blipped off the radar screen”, leaving his former wife and their children to rely on the lump sum settlement for their future support.
It began to look as if the mortgage on the office building would go into default. Ms. X was concerned that the lender would immediately proceed against her on her guarantee, and grab her remaining nestegg. An appraisal of the property showed that its value was still in excess of the mortgage balance. We were able to implement a structure to protect Ms. X’s nestegg, effectively requiring the mortgage lender to foreclose on its primary collateral (the office building) instead of, as lenders these days prefer to do, going after the personal guarantee. Implementing a protective structure under the above facts requires thoughtful analysis and careful planning in order not to run afoul of the fraudulent transfer rules (See AP NEWS, Vol. I, No.5).
RISKY BUSINESS. Dr. Y, a physician client, was contemplating performing an experimental surgical procedure outside of the United States. He was unable to obtain malpractice insurance in respect of the contemplated procedure, and, although he intended to take every precaution in performing the procedure, he did not wish to expose his personal wealth to a claim in the event complications resulted from the procedure. He was concerned that should a problem arise, the damages claimed might be many times greater than the damages claimed in a case arising from the performance of a non-experimental procedure, and sought our help in protecting his wealth. We were able to implement a protective structure which permitted Dr. Y to concentrate on advancing medical science, without the specter of a financial catastrophe looming overhead.
A RARE CASE – PROTECTION AFTER SUIT. We had represented Dr. Z for some time in his corporate and tax matters, and, although we had periodically suggested that he see us regarding asset protection, he, like most people, waited until he had been sued to consult with us on that subject.
Dr. and Mrs. Z had a combined net worth of approximately $2.5 million, and the plaintiff was claiming damages in a malpractice suit against Dr. Z in the amount of $5 million. Ordinarily, under such circumstances, the fraudulent transfer rules severely limit, if not eliminate, the asset protection options available. However, many years earlier Dr. and Mrs. Z had learned that (in their state) titling their assets as tenants by the entireties (“TBE”) would protect the property from a creditor of one (but not both) of the parties. In fact, in those states which have adopted the Uniform Fraudulent Transfer Act (and which otherwise exempt TBE property as above), TBE assets (where only one spouse is liable on a claim) do not even count as assets for purposes of the fraudulent transfer rules, and can thus be transferred with impunity, even in the face of a creditor attack on one of the spouses. You might ask: If Dr. and Mrs. Z’s assets were already protected, why do anything further? For several good reasons: First, if Mrs. Z died, the TBE protection would be lost – immediately! The property would become Dr. Z’s sole — and unprotected — property, available to satisfy his creditors claims. Since life (and death) are unpredictable, a better solution was sought. Second, as in the situation where the non-debtor spouse dies and the TBE assets become unprotected, the protection is also lost in the case of a divorce. Finally, maintaining assets in the TBE form of ownership can have disastrous estate tax consequences. Depending upon a couple’s net worth, holding a significant amount of assets in this form of ownership can result in additional estate tax costs upwards of $235,000. A very significant price for the family to pay – particularly when a better solution is available. We were able to implement a structure for Dr. and Mrs. Z which protected their assets from the claimant in the current and any future litigation,regardless of survivorship, and which saved approximately $235,000 in estate taxes.
CAVEAT: The lesson to be learned from DR. Z’s case was simply that he was lucky. DON’T RELY ON LUCK TO PROTECT YOUR ASSETS! PLACING ASSETS IN THE TBE FORM OF OWNERSHIP, OR IN YOUR SPOUSE’S NAME AFTER YOU HAVE BEEN SUED WILL VERY LIKELY BE A FRAUDULENT TRANSFER WHICH CAN BE SET ASIDE (undone) BY THE COURT, AND CAN POTENTIALLY RESULT IN INCREASED FEDERAL ESTATE TAXES. THE SOLUTION: PROPER ADVANCE PLANNING AND EXPERT LEGAL COUNSEL. DON’T WAIT ‘TILL IT’S TOO LATE!
NEWS FLASH FOR FLORIDA RESIDENTS:
We opined that it couldn’t happen here, but we may have been wrong. Florida’s asset protection sacred cow – the unlimited value HOMESTEAD EXEMPTION – has come under serious attack in the State House of Representatives.
Florida has received a lot of bad press in recent years as a result of notorious types like Bowie Kuhn moving here from up north at the “eleventh hour” to establish an exempt Florida homestead. Our legislature has had enough, and is now considering a proposed constitutional amendment which could force a homeowner with more than $350,000 of equity to sell the home to pay creditors. It would work like this: the owner would be forced to sell the home and could keep the first $350,000; the creditors would get the rest. If approved by Florida’s esteemed legislators, State voters would have the final say on the matter in November. Fortunately, we have solutions to the problem currently in use for our clients in states which do not have Florida’s generous homestead exemption.