THE PRIMARY RESIDENCE
* When persons own real estate together, the relationship among the co-owners is defined by the form in which they own the property, which is referred to as a tenancy.
Tenancy by the Entirety: A tenancy by the entirety is available to married couples and protects each spouse from debts incurred by the other spouse for as long as the couple is married and the property serves as the residence of the non-debtor spouse. The protection may cease if the marriage ends and will cease if the property no longer serves as the primary residence of the non-debtor spouse. Note that a tenancy by the entirety does not provide protection against debts or liabilities for which both spouses are responsible.
Homestead: A declaration of homestead recorded with the public land records will protect up to $500,000 equity in the residence. A homestead takes precedence over most debts | liabilities and usually take precedence over liabilities that result from business activities (even liabilities incurred prior to recording the homestead). If the equity in the residence exceeds $500,000 a creditor that obtains a court judgment--subject to the discussion above relative to tenancy by the entirety--can force a sale to access the excess.
For married couples, the combination of tenancy by the entirety and homestead is attractive because it protects a non-debtor spouse from claims against the debtor spouse in any amount--even beyond $500,000--and as to their common creditors provides up to $500,000 protection. The combination is especially attractive in circumstances where one spouse is engaged in business (more likely to incur liabilities) and the other is an employee (less likely to incur liabilities).
An Alternative: Nominee Trust: If both spouses are likely to incur common creditor claims (for instance, if the spouses are engaged in business together) and|or if equity in the residence presently or in the foreseeable future might meaningfully exceed $500,000, is might be preferable to “disguise” ownership of a property. When this option is preferable, it works best when taking title to newly acquired property--as opposed to attempting to conceal already owned property.
Owner(s) considering this option must realize that it is an (entirely legal) alternative--and not in addition--to the protections afforded by tenancy by the entirety and homestead. In Massachusetts, property may be owned by a “nominee trust” (or sometimes a “realty trust”). Essentially, title as reflected in the public land records is in the name of another (referred to as a “trustee”). The “true” owners are not disclosed in the public land records. Ideally the trustee has a different last name. The trustee must be trustworthy.
While in general homestead protection is available for a residence in trust. obtaining homestead protection requires that the resident--rather than the trustee--be disclosed in the public land records, essentially defeating the purpose of the trust.
In considering a nominee trust, note that if the “true” owners are discovered (which might happen if a creditor pursued a claim in court and obtained a court judgment), then the creditor may seek to apply the property(ies) to payment of its claim(s). Finally, use of a nominee trust may defeat local real estate tax exemptions otherwise available if a trust were not employed.
Some Options to Avoid: It is not advisable to place property in the name of a child. The property is then subject to the chid’s creditors (think of an auto accident) or subject to division in a divorce. Complications can arise of the child predeceases the parent(s). Further, while allocating assets between spouses generally is unobjectionable, transferring assets to others may run afoul of the rule that one cannot gift his or her assets to avoid applying the assets to payment of current or reasonably foreseeable creditors (referred to as the Fraudulent Transfer Act).
Similarly, it is generally not possible to create a trust, transfer your own property to a trust, and claim that the transferred property is no longer subject to payment of creditor claims.
REAL ESTATE OTHER THAN THE PRIMARY RESIDENCE
Real Estate: Limited Liability Company: Couples could create a limited liability company to take title to real estate. The limited liability company defines the rights of its participants (referred to as members) with respect to the property. In theory, creditors can only reach membership rights, that is, could only reach, for instance, the right to receive income from the property and could not compel the limited liability company to sell the property.
OTHER NON-REAL ESTATE ASSETS
Generally assets in retirement accounts that are defined in the tax code are protected from creditor claims for as long as the assets remain in the account(s). The corollary is that distributions from the account(s) are not protected. It is, however, difficult for creditors to pursue distributions. If excess assets have been accumulated, some portion may be contributed to a retirement account to protect those assets. Many life insurance polices are also protected from creditor claims.
OTHER CONSIDERATIONS
Review Estate Plan: Engaging in any of these activities provides a good occasion to review or create an estate plan.
Always Consult an Accountant: In an real estate or significant transaction, an accountant should be consulted to avoid (to the extent possible) running afoul of provisions providing for capital gains tax exclusion on the sale of a principal residence and provisions providing favorable tax valuations of properties upon death (referred to as receiving a “step up in tax basis”) and any other applicable provisions.
Do not Take any Action Without Consulting an Attorney: The above is a summary. Asset protection strategies require careful consideration by one experienced in asset protection. Do not take any asset protection activity without consulting an attorney.
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image author: Nick Youngson: http://www.nyphotographic.com/
