How to protect assets and residence from creditors, hospital bills and federal/private student loans?

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How to protect assets and residence from creditors, hospital bills and federal/private student loans?

A married couple of individually incurred educational debt federal and private prior to marriage would like to protect their primary residence and assets from potential creditors, in case of them the gets ill and acquires catastrophic hospital bills. What would be the best way to protect surviving spouse from the hospital bills and educational loans of the ailing spouse if that spouse dies? How can the house be protected as well?

Asked on March 3, 2019 under Estate Planning, Florida

Answers:

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 2 years ago | Contributor

To oversimplify, the only way to really protect assets is not own or control them. Anything owned can be reached; anything not owned but which is controlled so that you "effectively" own it (can use it, sell it, spend it, invest it, etc. at your discretion) can potentially be reached, even if in a different entity or structure. (I.e. say you put a house into an LLC, but the two of you own and control the LLC; a creditor may be able to show that the use of the LLC is just a sham and a fraud, since by exercising 100% control of the LLC, you exercise the same control over the house as if it were in your name.)
Only if you don't own or control it can it not be reached. 
One option is to put major assets (like a house) into an irrevocable (not changeable) trust of which you are not the trustees, but where the purpose of the trust is to use the asset(s) for your benefit, but NOT subject to your control or discretion--i.e. the trustee, not you, decides what to do with the assets. Done correctly (you'd want a trusts and estates lawyer to set up the trust for you), this provides a great deal of asset protection. However, the down side is, even if the trustee is honest and competent, you give up direct control over the asset(s)--that is, if you want to do something different with it than the trust provides for or trustee wants, you can't; and a dishonest or incompetent trustee can steal or waste/lose your assets.
Or you can avoid owning things which can be reached by creditors to the greatest degree possible: rent, instead of owning a house; lease cars, instead of buying. Things owned by others cannot be taken by creditors. You may be able to even get a nicer house or car if leasing rather than buying, but of course are building no equity or value at all: the money you pay to lease is someone else's profit. And if you go this route, you'd then to the greatest extent possible put your money (absent a what you need to live one, a reasonable cushion, and some "fun" money) into the sorts of accounts that are protected from creditors: IRAs, 401ks, college saving plans for children, etc. And/or put money into the sort of assets which are harder for creditors to locate, since if they can't find them, they can't get them: e.g. art work, jewlery, gold, etc. There are downsides to this, since you are tying up money in illiquid (not easily liquidated or used) assets, is that you could find yourself asset rich but cash poor, without readily accessible funds.
Or combine the tactics: some things in a trust or trusts, lease others, maximum contributions to 401s, some hard-to-locate phyical assets, etc.
Speak to an estate planner: there are techiques, but doing them right tends to be complex and they all have downsides in terms of loss of control, loss of liquidity, and/or losing the appreciation from certain things (like RE) owned by you. You want to make sure you pick the best options for you and have them correctly executed.


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