Every day, we speak to Doctors about how they can achieve the protection they desire in order to maintain their wealth. In these conversations, we hear many common myths. Perhaps you too hold some of these false beliefs. Five common myths are:
· “My assets are owned jointly with my spouse, so I’m okay.”
· “My assets are owned by my spouse, so I’m okay.”
· “I am insured, so I’m covered.”
· “I can just give assets away if I get into trouble.”
· “My Living Trust (or Family Trust) provides asset protection.”
These myths are dangerous because they lull the individual or family into a false sense of financial security. This, in turn, may prevent the Doctor from taking necessary steps to truly protect the assets. Let’s examine each of these common myths and dispel them.
Myth #1: “My Assets Are Owned Jointly With My Spouse, So I’m Okay.”
Most Doctors hold their homes and other property in joint ownership. Unfortunately, this ownership structure provides little asset protection in both community and non-community property states.
In community property states, like California, community assets will be exposed to community debts regardless of title. Community debts include any debt that arises during marriage as the result of an act that helped the community. Certainly, any claims resulting from a medical practice, income-producing asset (rental real estate) or auto accident would be included.
Even in non-community property states, joint property is typically at least 50% vulnerable to the claims against either spouse. Therefore, in most states, at least 50% of such property will be vulnerable—and all of the other problems associated with joint property still exist in non-community property states.
Myth #2: “My Assets Are Owned By My Spouse, So I’m Okay.”
One of the most common misconceptions about asset protection is that assets in your spouse’s name cannot be touched. We cannot tell you how many Doctors have come to us with their assets in the name of one spouse and assumed that those assets were protected from claims against the other. This often happens when one spouse has significant exposure as a Doctor and one does not.
Unfortunately, simply transferring title of an asset to the non-vulnerable spouse does not protect the asset. The creditor is often able to seize assets owned by the spouse of the debtor by proving that the income or funds of the debtor were used to purchase the asset. To determine if the asset is reversible, three questions can be asked:
· Whose income was used to purchase the asset?
· Has the vulnerable spouse used the asset at any time?
· Does this spouse have any control over the asset?
If the answer is “yes” to any of these questions, then the creditor can be paid from these assets.
California allows a debt incurred during the marriage to be recovered from any community property. According to California Family Code §910(a), “the community estate is liable for a debt incurred by either spouse before or during marriage, regardless of which spouse has the management and control of the property and regardless of whether one or both spouses are parties to the debt or to a judgment for the debt.”
Said another way, if assets constitute community property, it is irrelevant that community property assets are titled in the name of one spouse. The creditor can attach all of the community property, even if only one spouse is the debtor and even if the debt arose prior to marriage. Because each spouse has a coextensive ownership interest in community property, creditors of either spouse can reach all community property of the two spouses.
Myth #3: 1 Am Insured, So I’m Covered.”
While we strongly advocate insurance as a first line of defense, an insurance policy is 50 pages long for a reason. Within those numerous pages there are a variety of exclusions and limitations that most people never take the time to read, let alone understand. Even if you do have insurance and the policy does cover the risk in question, there are still risks of underinsurance, strict liability, and bankruptcy of the insurance company. In any of these cases, you could be left with the sole financial responsibility for the loss. Lastly, with losses that fall within the plan’s coverage limits, you still may see your future premiums go up significantly.
Myth #4: 1 Can Just Give Assets Away If I Get Into Trouble.”
Another common misconception of asset protection is that you can simply give away or transfer your assets if you ever get sued. If this were the case, you could just hide your assets when necessary. You wouldn’t need an asset protection specialist. You would only need a shovel and some good map-making skills so you could find your buried treasure later.
In recognizing the potential for people to attempt to give away their assets if they get into trouble, there are laws prohibiting fraudulent transfers (or fraudulent conveyances). In a nutshell, if you make an asset transfer after an incident takes place (whether you knew about the pending lawsuit or not), the judge has the right to rule the transfer a fraudulent conveyance and order the asset to be returned to the transferor, thereby subjecting the assets to the claims of the creditor.
If you have been sued or suspect that you may be sued, there are other ways you can protect yourself. Typically, reactive last minute strategies are not very effective and may be much more expensive than the highly successful strategies that can be implemented when there are no creditors lurking.
Myth #5: “My Living Trust (Or Family Trust) Provides Asset Protection.”
There have been countless instances where clients have come to us with the impression that their revocable Living Trust provides asset protection. While you are alive, this is simply not true. Revocable Trust assets are fully attachable by any creditor as the trust is a grantor trust. Later in this Lesson you will read about Irrevocable Trusts and how they provide varying levels of asset protection for you and your heirs in addition to the estate planning they are primarily designed to achieve. A Living Trust may provide some asset protection, but that protection does not exist until one spouse dies.
Many Doctors develop a false sense of security as a result of dangerous asset protection myths. Owning assets jointly with a spouse or in your living trust will not protect them. Titling all of your assets in your spouse’s name does not work. Relying on your ability to move assets when a problem arises is a terrible plan that can easily be overturned and may result in disastrous consequences. Relying on insurance to protect you will leave too many risks to your financial well-being.
Do not be concerned or alarmed if you believed any of these asset protection myths. Do not be disappointed if your perceived protection has just been proved inadequate. With the myths dispelled, you can now follow the proper steps to implement the right type of asset protection plan for you. The next chapters should be very helpful in this regard. We will start with a philosophical discussion, and some practical examples, of the best way to protect assets.