Epic Real Estate Investing - Ye Olde "Transfer Assets to Your Spouse" Protection Trick | 403

Episode Date: June 5, 2018

It's the oldest trick in the book, and we've all heard it - transfer assets to your spouse to save yourself from the IRS, right? Today on Tax Hacker Tuesday, Tim Berry puts his myth-busting cap on to share a real court case and the truth behind this famed protection trick. Learn more about your ad choices. Visit megaphone.fm/adchoices

This is Terrio Media. Did you know that up to 50% of your lifetime income will be wiped out by taxes? What if you could stop this madness? Isn't it about time you play on a level playing field with the wealthiest 1%? Now you can. Tim Berry, attorney at law, shares here each and every week current tactics and strategies that anyone can implement to hack the tax code. Protect your assets and keep what's rightfully yours.

It's time for Tax Hacker Tuesday. Today's little discussion is it kind of goes along the lines of that old phrase of, I wish I had a dollar for every single time I heard whatever phrase. And in particular, the phrase we're going to be talking about today is all the people who I've talked to over the years who say, you know, I don't really need to do anything to protect assets because what I'm going to do is I'm just going to shift everything over to my spouse. And they're not going to do anything that generates liability, so I'll be protected. So let me share with you a quick court case that came down. This was a bankruptcy case, and then also there's a district court, a federal district court case that follow up after the bankruptcy case.

And both the cases are out of the middle district of North Carolina. And here's the fact pattern. We had this one individual who was fired by an insurance company, and so he does the American thing. He sues the insurance company. So on March 1st, he got a judgment of about a million dollars. Now, for some reason, this individual, did not keep a bank account. So he gave the entire million dollars over to his wife. So we have here, after the funds of her depositor account, Victoria, his wife, put some money inside the money market account. They went out and they were very echo conscious. They bought a new Prius automobile. And she gave about $90,000 to her kids as well. Now, these people,

they tried to figure out what they needed to do from a tax viewpoint. So they hired a couple of tax professionals to find out if the judgment of a million dollars was taxable. Well, they got an answer they didn't really like and they heard that yes, it was taxable. So the individual, get this, he goes ahead and files a tax return showing he owes $356,000 to the IRS, and he was so kind as to include a payment for a whopping $1,000. He didn't make any other further payments. Then, evidently known that the writing is on the wall, his wife, went ahead and formed an LLC with her two sons. Now, here's the interesting thing. Remember,

this guy filed his tax returns for 2006. Presumably he filed him in 2007. In 2009, the IRS had been trying to get the money from the husband. He couldn't. So now the IRS starts going after his wife. And by the way, this is the interesting dynamic. His wife was a doctor. Not sure why he would give the assets to somebody in a high liability profession. And that was the excuse she used for creating the LLC was to give asset protection. But bottom line is she's making money. And now the IRS is saying, hey, look, husband isn't really making money. There's nothing for us to really take from husband. So we're going to start going after the wife. And the wife starts screaming, foul, foul, you can't do that. It wasn't my tax liability. It was my husband's liability. And the IRS

comes back and says, you know what? It was a friend. It was a friend. fraudulent conveyance to move those assets to you, and then you in turn made a fraudulent conveyance to your sons by giving them gifts, as well as putting the assets inside the LLC. So please, Ms. Doctor, give us all the assets. And so that's what this was, was a court case to determine if, in fact, the LLC was a mere nominee of the husband from day one, and if all the transfers he made over to her were fraudulent conveyances. And I'm not going to bore you with all the details. all the court cases and everything. But I think you pretty much can guess where this is going to go.

The IRS was successful. They said that the wife was a mere nominee of the husband. They said that the transfer of the assets from the husband to the wife was a fraudulent conveyance, and now the IRS could be going after those assets. Well, kind of age-old story from there. The husband and the wife presumably didn't like this decision, so they went ahead and they went to district court as well, federal district court, and they tried to say, hey, we're, we don't believe in that one opinion. We want a different outcome. And well, the district court

comes out and says, hey, this was already determined in the bankruptcy court. And based upon the finding of the bankruptcy court, we're going to consider that the husband has an ownership in the transferred funds such that his wife qualifies as his nominee. And so thus the United States, the IRS's levy on her accounts was proper. Moral of the story. You can't just transfer assets over to your spouse and expect them to be protected. First off, you've got to see if that transfer was, in fact, a fraudulent conveyance. If you had any debts coming due, or if you already had debts,

and if the transfer made you insolvent or made it so you couldn't pay those debts, the other side is going to have a very easy argument to say that you made a fraudulent transfer. Also, nominee theory. They can come back and say that your spouse was your nominee. They followed all your orders. If only that was true, huh? They followed all your orders in regards to the assets. And so they were your mere nominee.

And then if the spouse does anything weird with the assets, no big deal. And so they can drive back the assets from wherever the spouse placed them. Long and short of it. Moving assets to a spouse is never a good idea. It's never a good idea. A lot of people have the best of intentions, but those intentions don't fully pay off. Better solution.

The takeaway item from this video is you need to have a valid structure. You need to do things correctly and move those assets to something else in particular, probably a trust, and that's probably going to give you the best asset protection. That's it for today as we dream of a tax system that works just for you. But until then, you have Tim Berry. See you next Tuesday for another episode of Tax Hacker Tuesday. This podcast is a part of the C-suite radio network. For more top business podcasts, visit c-sweetradio.com.