Asset protection for Bernie (cont'd), and separate property.

November 22, 2012, by

TE BLOG. Scales of justice. 11.2012.iStock_000015782295XSmall[1].jpg
Lars's meeting with Duncan and Bernie resumes. Duncan says the effect of a married couple's liabilities on their community and separate property is a little tricky, but it's important in cases where the question arises. He gives an illustration. A woman from a wealthy family marries a guy who's a budding obstetrician. If she allows her separate property to become community property, either by agreement or by commingling, and a medical malpractice case arises against her husband, then her property is exposed to the case. If she keeps it segregated and makes no community property agreement, the claimant may not get at it.

Duncan lines out part of the theory. The income of a married person from work is community property. The idea is a married couple is like a partnership, with each performing a different part of the work, but with both contributing to the overall effort. So the income from work is community, but so are the liabilities. Not so with the wife's separate property. If the assets from her family were in trust for her, that would likely be even better protected than separate property.

Duncan: "So let's take the idea a little further. What if a married couple, like maybe Liza and Bernie, converted some of their community property to Liza's separate property?" It turns out there are some timing issues. Mostly, Bernie is pretty much done building, so the property now made separate would have been community when the construction work was done. If Bernie and Liza had created separate property earlier, before a lot of the contracting was done, it would now hold up better as asset protection. Duncan says that in addition, we must remember the fraudulent conveyance rules already discussed. That is, a transfer to separate property probably wouldn't work if it were done to evade a known claim.

Duncan clangs one more warning. A transfer to separate property has potential downside as well as benefit. If Bernie made a bunch of their assets Liza's separate property, and then Liza divorced him, Bernie wouldn't come out so well in the property division. A transfer for asset protection is a transfer for other purposes as well.

Lars knows most of this. He has some risk as a CPA. He and Kyra have a family LLC and most of the interests are documented as her separate property. This gives two forms of protection, the separate property and then the entity itself. And he's not worried about getting divorced, although he and Kyra have learned not to take anyone for granted, including themselves. Besides, he figures he'd get stripped pretty clean in a divorce anyway, no matter what the legal configuration of their assets.