When thinking about wealth management, people tend to focus primarily on growing their assets. But the critical other side of the equation is asset protection–not losing what you have acquired with the financial resources you have accumulated.
Typically real estate is the primary asset that needs to be protected, although some of the concepts I will describe here also apply to other big-ticket items. Note: Do not consider this as legal advice. I’m not a lawyer. My purpose is just to alert you to some issues you might want to discuss with a qualified attorney.
Beyond Fires and Storms
The first thing you think about when it comes to protecting your real estate is homeowners’ insurance. Yes, that’s important. But after fire and storms, another big hazard is losing your home in a legal dispute, bankruptcy, or a divorce settlement. Or having things turn out the wrong way when your estate is settled after you die.
The key is how the real estate is titled. If you’re married, you’ve got two basic choices: tenancy in common, and tenancy by the entirety. (Keep in mind this is governed by state law, so some of the finer points may vary by state.) The first legal titling method, tenancy in common, can be problematic. While you and the other co-owner each has a claim to half of the value of the property, each person’s claim on that asset is subject to creditor’s claims.
So, suppose for example, that your spouse has a business that incurs a lot of debt, fizzles out, and files for bankruptcy. Although that business’s creditors can’t go after your share of the property, they can go after your spouse’s. And that could force a sale of the property to satisfy your spouse’s debt obligation.
What Kind of Tenancy?
Also, with tenancy in common, one of the spouses can sell or give his or her share of the property to someone else. (If that doesn’t happen, then the surviving spouse after the death of the first there is no warranty that one would gain an undivided interest in the property.) With tenancy in common, in practice, following a divorce, if not covered in the divorce decree your ex-wife could give her share of your home to her new husband (or vice versa). Awkward!
The common alternative that prevents such scenarios is called “tenancy by the entirety.” That essentially means that both spouses own the undivided whole of the property. That in turn means that creditors of one spouse cannot lay claim to any part of the property. (However, if a claim is against the couple itself, then it could be subject to such claims.)
Also, with tenancy in common, there is a presumption of a right of survivorship. That means that one spouse’s interest property automatically conveys to the surviving spouse upon the death of the first one. That is not the case, one spouse can plan the transfer to someone other than the spouse on her or his share. If no will the laws of the state on intestacy will prevail.
In my next blog, I will introduce the concept of using a trust for varied asset protection purposes.
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