Traditionally, physicians worried about losing their assets to malpractice suits tried to protect themselves by keeping all assets in the name of a spouse. I'm told some medical schools even advise students to do this post-graduation.
I've always had reservations about this strategy. Traditionally, I worried: 1. That the spouse could go on a pre-divorce spending spree with no legal repercussions; and 2. that the courts would use the law of "implied trust" to make a judicial finding that the assets in the spouse's name were still subject to any malpractice judgment. Rather than discuss these two concerns ad nauseum, today I'll discuss a newly revealed pitfall to this strategy.
Last week, a federal bankruptcy court in Alabama handed down In re Dorsey, 2011 Google Scholar 4392011633671183587 (M.D. Ala. 2011). The case is full of findings against Mr Dorsey (the debtor) for his behavior and actions leading up to bankruptcy. In addition to other failed asset protection strategies, Mr Dorsey sought to avoid having his assets seized by his creditors by transferring assets to his spouse. Here is what the court had to say about that:
Alabama courts have regularly held that "[c]ourts are to automatically infer constructive fraud if the transfer was made to a family member and there was no valuable consideration." Mixon v. Robinson (In re Robinson), 2008 WL 1756357, *2 (Bankr. S.D.Ala. Apr. 14, 2008); Peoples v. AuburnBank, 814 So.2d 297, 300 (Ala. Civ. App. 2001); McPherson Oil Co., Inc. v. Massey, 643 So.2d 595, 596 (Ala. 1994) (emphasis added). Here, it has already been established that all three transfers were from Dorsey to his wife, a family member. Second, the transfers all lacked any sort of valuable consideration. Therefore, without even having to further discuss the issue of insolvency, it is evident that these three transfers also were fraudulent conveyances under Alabama's constructive fraudulent transfer provisions. Id at II.C.2.
This section of the opinion should scare anyone from relying on the interspousal transfer strategy in the future. What the court is stating, in laymen's terms, is that during a lawsuit against one spouse, transfers of assets between spouses will automatically be presumed to be fraudulent and creditors will be able to get the transferred assets. According to the court, this is true even if at the time of the transfer, no lawsuit was yet on the horizon and no one was insolvent. If another court were to follow this rationale, using the earnings of a breadwinner spouse to purchase assets in the name of a lower income spouse would fail as an asset protection strategy.
While I'm not a fan of interspousal transfers, there are many other asset protection strategies I can recommend. Give me a call at 609-568-0109 and I would be happy to discuss.
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