Transferring Assets to the Non-Business-Owner Spouse

April 13, 2006

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When considering your overall asset exemption plan, if no (or a very small) homestead exemption is available, an ownership strategy similar to tenancy by the entirety involves transferring personal assets, such as a home, to the non-business-owner spouse. It carries the same risks of loss as tenancy by the entirety in the case of divorce, but with additional risks as well.

Some business owners make these transfers so that the business's creditors will not be able to reach those assets. This strategy adds an extra layer of protection if the business creditors are able to reach the owner's personal assets outside the business, which is possible in certain circumstances, such as where the owner makes a personal guarantee of a business debt or personally commits a tort such as negligence.

Thus, this strategy can be quite effective in shielding assets from creditors. (If you go this route, be careful of the timing of the transfer--if it occurs while you are being hounded by creditors, they may be able to attack the transfer as fraudulent.)

However, the risks inherent in this strategy are usually not worth the benefits. In a divorce action, the other spouse will own all the assets at the time of the proceeding. While judges in divorce actions normally have the power to make an equitable division of property acquired during marriage regardless of whose name is on the property, separate individual ownership creates a strong presumption in making the ultimate allocation of property between the spouses.

Worse yet, as the sole owner of the property, a spouse can sell and use the property at will, regardless of the wishes of the nonowning spouse. This can be particularly perilous in the case of a home or business property.

Therefore, this strategy is not recommended, especially in light of all of the other strategies available to business owners.