Despite [some] admitted shortcomings of Community Property Divisions, they can be a fantastic asset protection tool for those who currently have no significant debts or creditors, and have a strong and lasting relationship.
Let me start by saying that Virginia is not a community property state but every plan I’ve designed for clients includes language for both community property and separate property. Why? Because some clients have lived in a community property state and others might move to one. I’ve promised clients that their trust will be mobile when they need it to be.
Community property is a unique form of ownership between spouses in only nine states (AZ, CA, ID, LA, NV, NM, TX, WA, and WI). In any marriage, there is going to be a question of what’s “his stuff,” “her stuff” and “our stuff.” Question: how can you protect those assets that are not owned solely by you or solely by your spouse, but rather by the two of you as “community property?”
A recent article in Forbes titled “Community Property and Creditor-Debtor Law Explained” provides a nice overview of the asset protection features of community property.
The article is not only informative, but is also replete with color-coded charts. Basically, whenever an asset falls into the category of “our stuff,” a community property couple should consider a community property division. As a result, each spouse will own his or her separate property, plus one-half of what was community property before the division. From an asset protection perspective, doing so may reduce the couple’s potential risk to creditors and litigation.
Let me end as I started by saying Virginia is not a community property state. The good news is that it does offer superior asset protection. This protection is formed when a married couple titles their assets as “Tenants by the Entireties” or “TBE”. Owning assets as TBE fully protects the asset, (including those subsequently funded to the couple’s revocable trust) from attack by creditors, if only one spouse is sued. Obviously, planning should take place after consultation with your estate planning attorney who will know how to address your specific situation as there are a number of difficulties that can arise. In the case of community property, you are dividing assets long before any potential divorce or any estate property shifts. In the case of TBE, you are taking what might have been separate property and transferring it to joint ownership. In other words, asset protection is a particular attitude with which to approach planning more generally and these planning issues have to be understood in that context.
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Reference: Forbes (May 20, 2012) “Community Property and Creditor-Debtor Law Explained”