There are all types of ways to protect your assets from creditors. Some protections are creatures of state law. For example, Texas and Florida provide significant protections to your homestead. Also, many insurance policies (such as life insurance) are beyond the reach of creditors.
Physicians in some specialties and in some states are reasonably worried of being sued well beyond their policy limits. Even if the actual number of physicians who lose their property or homes is small, the worry is real.
So, reasonable steps looking at asset protection makes sense. This should be done with asset protection professionals. The asset protection needs for a freshly graduated pediatrician will be different than for a seasoned neurosurgeon with years of practice. So, any asset protection plan should be right-sized based on the size of the estate and the actual risk.
The first step in asset protection is right-sizing the amount of insurance you have for said risk.
Not infrequently, physicians will place title of their house or cars in their spouse’s name. The statistical problem with that approach is that the risk of divorce is greater than being sued above and beyond policy limits. Meaning, if you divorce, you could lose your stuff.
Which brings us to Gilbert versus Gilbert, 2024 WL 1472047 (Ky.App., April 5, 2024). This is an unpublished opinion, but still instructive.
Morgan and John Webster Gilbert were married on December 29, 2013, and their daughter was born in June 2014. Morgan filed the underlying dissolution action in August 2018, and a status quo order requiring John to continue to pay her credit card during the pendency of the proceedings was entered.
The final hearing was held in February 2019. Therein, Morgan stipulated to John retaining sole custody of their daughter and, contingent on her compliance with the ordered drug testing, agreed to one-hour of visitation a week supervised by GreenHouse. Additionally, Morgan expressly made no claim for permanent maintenance. The primary issue submitted to the court was the disposition of the marital residence.
John Gilbert was a neurosurgeon. John owned the house prior to his marriage. Supposedly, John gifted the house to Morgan shortly after they were married.
Disputing this, John explained that, because he was in “a high-risk specialty and sometimes neurosurgeons get sued beyond malpractice limits and lose everything,” for “asset protection” he conveyed the title to Morgan with the understanding that she would return it if they separated.
Do you see where this might be going?
On December 30, 2020, the court entered an order rejecting Morgan’s claim that the house was a gift and awarded it to John as his nonmarital property. So, as of this date, John still owned his house. Then…
On March 24, 2021, the court granted Morgan’s request for an additional hearing on timesharing and maintenance and amended the final judgment to award her the residence. The court explained that, given John’s credible testimony he deeded Morgan the residence to prevent its forfeiture to a potential judgment creditor, it was persuaded that its prior property order was contrary to the former Court of Appeals’ holding in Justice v. Justice, 310 Ky. 34, 219 S.W.2d 964 (1949), that courts of justice should never enforce a contract made for fraudulent purposes.
So, now the house was owned by Morgan.
Dr. John Morgan appealed.
The appellate court noted that it had been down a similar road before.
In Justice, the husband brought an action to be restored title to property he purchased while married that had been transferred to the wife solely in her name prior to their eventual divorce. 219 S.W.2d at 964. The wife averred that, at the time of the conveyance, the husband was being threatened with a civil suit, and the husband did not deny the allegation. Id. at 965. Affirming the judgment quieting title in her favor, the Court explained, “notwithstanding the statutory provisions requiring that the property rights of the parties upon the granting of a divorce should be restored, such restoration could not and would not be enforced if the party had, during the marriage relation, conveyed the property to [their spouse] for fraudulent or immoral purposes.” Id. at 965-66. Thus, the holding of Justice is directly contrary to the remedy espoused by John, and the court did not misinterpret the law.
The appellate court then referenced a second case.
Further, we disagree with John that the holding in Digenis offers any respite … The husband in Digenis, like John, testified repeatedly that he had titled nonmarital property acquired during the marriage in his spouse’s name as a means of asset protection. 2017 WL 3328119, at PAGE_6. … However, in its analysis, the Court expressly rejected the husband’s position as contrary to Kentucky law and, citing Justice, the Court affirmed the circuit court’s refusal to award him the disputed property. Id. at PAGE_6-7. The Court explained, “[a] person who conveys property … to avoid the reach of creditors is generally at his grantee’s mercy as to whether he will ever get his property back; the ‘clean hands’ maxim bars either party to the conveyance from obtaining affirmative judicial relief to enforce the arrangement.” Id at PAGE_7. Ergo, the court did not err in refusing to apply the Restatement.
On appeal, Morgan was allowed to retain title to the house on the basis that John had made a gift that he meant to be binding. As for the understanding that John had with Morgan that she would return the house to John if they ever got divorced, the Court of Appeals held that understanding was not enforceable.
Well, would the transfer have even worked to shield the house from creditors had the marriage stayed intact? Hard to say. The creditor would have had to demonstrate that the transfer was fraudulent. When the transfer took place would be an important fact in determining how bulletproof the transfer might be. If the transfer took place years before any threat loomed, then perhaps it would have withstood scrutiny. If the transfer took place after the doctor had been sued, then likely not.
Please remember that the risk of divorce is greater than the risk of being sued above and beyond policy limits. That statistic should inform strategies on asset protection.
What do you think?
It troubles me that the court assumed fraud when assets were transferred to a spouse. Does the “threat level” or the timing thereof really matter? As pointed out, the practice of divesting significant assets is common practice among surgeons. I am confident that plaintiff’s attorneys do much the same! Seems to me these rulings stem from social envy. Cui bono?
If one wanted to protect one’s house from creditors, why not use an irrevocable intervivos trust?
The doctor in this case should have done that at the time of marriage, protecting the house from the spouse in the event of dissolution.
One loses control of the assets, as I understand it.
But it would provide robust protection against both departing spouses and creditors.
I think Medical Justice has this exactly right: Yes, there are risks for a settlement exceeding your covered medical/surgical liability limits. But the risks of divorce and family dissolution is much greater, in statistical terms. So, protecting your assets must cover other factors. Let’s try to put them in some kind of order:
1. Divorce and family dissolution.
2. Sham peer review and astronomical attorney bills
3. Allegations of Medicare fraud, billing abuses and breaking Stark regulations by illegal partnerships, kickbacks, etc.
4. Illness, disability and inability to continue surgical practice, including family members in need of care.
5. Going to Federal prison and loss of your medical license
6. Finally, risk of legal settlement greater than your liability coverage
We can dance around these and put them in slightly different order, but we can probably agree generally. So if you want to try to remediate these risks, it makes more sense to concentrate on the biggest ones.
If marital breakup is the biggest risk, perhaps THAT issue should get your greatest attention. Toward this end, why not re-consider the reasons you got married. And your children.
Marital loyalty appears to be numero uno. Then, spend some time learning the Karpman Drama Triangle to try to avoid having your marriage land in it. Then, take it in order: Learn not to rely only upon your income to become the arbiter of your existence.
Finally, reconsider the possibility of a greater power than yourself, by reading books like the “Return of the God Hypothesis” by Stephen Meyer, PhD.
By becoming a physician, you reached the heights of human accomplishment. You’ve scaled the academic mountain and succeeded. Perhaps now it’s time to stand back from demands of income alone. You already earn at least 4-5 times what most Americans make. You do not need a gigantic estate to find yourself meaningfully and happily retired, along with your existing spouse.
Michael M. Rosenblatt, DPM