When a husband and wife own separate individual assets and one of the spouses is a defendant in litigation a common asset protection planning strategy is to title all the respectively owned separate assets in to tenants by entireties. Tenants by entireties (TE) assets are exempt from claims against either of the individual spouses. This asset protection technique would enable the debtor spouse to protect his separately owned assets by the transfer of title to TE.
A debtor’s asset transfer may be set aside if the transfer renders the debtor insolvent unless the debtor receives reasonable consideration. The debtor and non-debtor spouse may defend allegations of fraudulent transfer by arguing that the transfers were for reasonable consideration in the form of his share of TE property received from the non-debtor spouse.
This planning was tried unsuccessfully in a recent Pennsylvania case. The case illustrates some pitfalls to avoid in exchange of assets between debtor and non-debtor spouses. In this case, a judgment was entered against the husband. The husband and non-debtor spouse each separate owned three parcels of real estate (six parcels in total). Each spouse transferred all their real estate to tenants by entireties.
The court found that the debtor’s conveyances were reversible as fraudulent transfers. The court pointed out that after the transfers each spouse maintained sole control and management of their previously owned three parcels. Also, the court found that the wife’s property did not have significant equity. The small equity in the wife’s properties was the most serious flaw.
When debtor’s exchange assets with family members the valuation of the assets is suspect because of the absence or “arms length” negotiation. It is important to appraise assets before transfers are made. Asset appraisals should be conducted by independent, licensed appraisers. In this case the result may also have been better if the couple transferred the real estate to a n LLC owned and managed jointly. Any difference in the appraised value of the real estate could be made up through cash payments from one spouse to the other in order to equalize the consideration.