Avoiding risk: Why not transfer assets to spouse?

February 1, 2009

One of the most effective strategies to protect assets is not to own them if you are an "at-risk" individual.

Key Points

A One of the most effective strategies to protect assets is not to own them if you are an "at-risk" individual. For many physicians who have grown accustomed to controlling their financial matters, such a thought is nearly inconceivable. However, by efficient transfers to a spouse (or children), you can protect substantial amounts of assets.

A key element in completing an effective and non-fraudulent transfer is to be certain that transfers are made without the intent to defraud a debtor and that transfers are not made "after the fact," ie, when you are already the subject of a lawsuit.

Be aware, however, that spouse-to-spouse transfers will eliminate the "marital property" classification, which is key in determining the amount and nature of assets available to divide in the event of divorce. Assets transferred become the sole property of the receiving spouse, and are not usually included in the property eligible for division among divorcing partners.

When transferring assets, care should be taken to prevent the transfer from being classified as a "constructive trust" for the benefit of the transferor. That can be the case if a court holds that assets transferred to a spouse's name were available for the support of the transferring spouse. To minimize this possibility, any assets transferred to a spouse could be placed in his/her revocable trust. The ability of the receiving spouse to use the assets independently is an important element of such arrangements.

Transfers made for asset protection purposes also should be balanced with the need to achieve long-term estate planning goals. For example, in a situation where an "at-risk" physician transfers all assets to a spouse, the doctor would no longer be able to use the unified estate and gift tax credit. Such an arrangement has the disadvantage of wasting the credit capable of saving an estate approximately $1.5 million in estate taxes. However, for those who feel the likelihood of a lawsuit is greater than the likelihood of death, such an arrangement may be preferable.

Another aspect of transferring assets to a spouse that is worth considering is the surrender of final control of the assets. Transferring assets to a spouse also transfers the right to leave the assets in question to whomever the spouse chooses. However, there is a method of controlling the final distribution of assets that involves transferring assets via a trust with qualified terminable interest provisions (QTIP). With this arrangement, you transfer assets to an irrevocable trust that provides income benefits to your spouse for life. At the death of the spouse, remaining assets are distributed to the beneficiaries of your choice, rather than those chosen by your spouse.

Especially popular when couples have children from separate marriages, the QTIP arrangement is an effective technique for maintaining control of final asset distribution while preserving the income produced by an asset and reaping the benefits of asset protection afforded by a spousal transfer.