One of my clients explained his plan to protect a mortgage he held as part of his owner-financing of his sale of an investment rental home. The debtor and his wife sold a house and agreed to finance part of the sale proceeds through a secured mortgage note. The debtor and his wife faced a potential joint judgment creditor.
First, the debtor and his wife each established a self-directed IRA and conveyed into their IRA significant cash from their existing IRA and 401k plans. At the sales closing, the clients had the buyer pay the purchase price balance in the form of two separate and equal notes and mortgages payable to each spouse. Then, each spouse purchased the note and mortgage held by the other spouse with money in their self-directed IRAs. The note purchase price was based upon an independent appraisal of the note’s fair market value. As a result, each spouse held in their self-directed IRA a note from their buyer equal to one-half of the total owner-financed portion of the sales price.
I do not know if this plan would work in a creditor’s collection of a joint judgment. I have not seen or heard of any court decision involving this type of asset protection plan. The reciprocal note purchase appears to be a collusive attempt to defraud a creditor, but the complication of undoing the plan probably serves as an effective deterrent to creditors outside of bankruptcy.