Unequal Division of Property
For those living in states which do not recognize community property, gifts of separate property between a husband and wife can achieve some useful asset protection.
If one spouse is more vulnerable to potential lawsuits than the other spouse, property can simply be transferred by gift from that spouse to a living trust for the other. For example, if the husband is a physician with a high vulnerability to lawsuits and the wife is a school teacher with low lawsuit vulnerability, property can be transferred by gift from Husband to Wife’s living trust to reduce the amount of assets subject to loss in the event of a lawsuit. In theory, all assets could be moved out of the name of Husband and into the name of Wife’s trust. In the event of a subsequent lawsuit and judgment against the husband, no assets would be available to satisfy the creditor.
The advantage of this gift technique is that it is simple and inexpensive to utilize. Gifts between spouses do not create any gift tax liability because of the unlimited marital deductions for gifts between spouses.
One problem with this technique is that, in many cases, a spouse will be reluctant to relinquish all effective control over his property. If all family assets, including real estate and bank accounts are in the sole name of the wife’s living trust, the husband may not feel comfortable with this arrangement. The threat of a potential lawsuit at some future time will rarely be sufficient to overcome the desire to maintain at least equal management and control over one’s property.
Along these lines, in the event of a divorce, a court may be unwilling to rearrange any bona-fide transfers previously made between spouses. Although a court in a dissolution proceeding has broad equitable powers to divide marital assets in a fair and just manner, property which was the subject of a bona-fide gift from a husband to his wife may or may not be reallocated by a judge. In our practice, we have found that many clients are not willing to risk the possibility that they will be permanently deprived of assets previously transferred to the other spouse.
Lastly, despite the fact that the wife has a low level of lawsuit vulnerability associated with her work, the fact remains that there are numerous ways she could still be sued. Remember, as the owner of substantial assets, she becomes an inviting target for a lawsuit. Putting all of your eggs in this basket is a dangerous proposition.