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Does Your Asset Protection Plan Have A Hole?

By: Investor Solutions

By: Investor Solutions, Inc.

Cheap isn’t always better. Beware; your “cheap” asset protection plan may have a serious crack in it, enough for creditors to get in!

In many states, one of the easiest and cheapest forms of asset protection is to title one’s assets as Tenants by the Entirety (it’s free). Dating back to English common law, Tenants by the Entirety is a form of ownership reserved only for husbands and wives. Back in the day, we lowly women were unable to own property without the consent of our husbands. And while we are now empowered and independent enough to own property individually, this type of ownership has survived to the present day.

In most states (including Florida), assets titled as Tenants by the Entirety (let’s use TBE for short), are deemed to be assets of the marriage and are indivisible. Neither husband nor wife actually owns the assets directly and both spouses must approve the distribution or sale of the asset. The survivor of the marriage inherits the whole asset and it bypasses the probate process.

Since both spouses must consent to a severance of this property, TBE offers a measure of protection for assets held in that manner. Unfortunately, the protection is limited and can result in a potentially disastrous outcome.

If a married coupled owns assets as TBE, upon the death of one spouse the property will once again be subject to the surviving spouse’s creditors. TBE assets are protected only as long as both spouses are living.

So, just imagine a neurosurgeon (the highest risk specialty in medicine) owning all of his assets as Tenants by the Entirety with his wife. In the midst of a malpractice lawsuit, his wife suddenly dies in a freak accident. His assets are immediately exposed to his potential creditors and no other transfers/planning can be accomplished, barring a fraudulent transfer. Disaster!

Equally tragic is a situation where both spouses are sued. If both husband AND wife is named in a lawsuit and the plaintiff wins, their marital assets are up for grabs!

Take business owner Bob and his homemaker wife Wilma. They are multi millionaires with all of their liquid assets titled in Tenants by the Entirety. One day Bob decides to take their jointly titled Ferrari for a spin. In his quest for speed, Bob runs over two pedestrians and is sued in civil court for negligence. Since both names are on the title of the car, Bob and Wilma’s TBE accounts are completely exposed for their creditor/victims to collect their punitive damages. This is a total debacle!

I like things that are cheap, and I like things that are easy. But, experience has taught me that sometimes a cheap buy can turn out to be more expensive than originally planned. This couldn’t be truer when it comes to certain strategies for protecting your assets.

Now, don’t misinterpret my message. I’m not advocating exhaustive and expensive asset protection plans that fatten up lawyers and financial salespeople’s wallets (refer to my recent article in Miami Medicine “The Hunt for Physician Assets”). But, every person’s situation is unique, and their planning should be customized as such. While titling assets as Tenants by the Entirety can be a quick fix, its long term ramifications can be truly catastrophic. Proceed with caution.