Separate Accounts From Your Spouse? Avoid This Asset Protection Pitfall!

It is becoming more commonplace for spouses and cohabitating unmarried couples to keep their financial accounts separate. While this strategy has many advantages, it comes with at least one (avoidable) asset protection pitfall. A recent article discusses what this pitfall is, and how you can avoid it.

As the article explains, tangible property that is jointly held between two spouses has an automatic layer of protection against plaintiffs and bankruptcy creditors in most states. This protection comes from the fact that plaintiffs and creditors often will not pursue tangible assets that they can only gain a half interest in. Most often, tangible assets must be liquidated in order to be of any benefit to a creditor or plaintiff. However, this would be impossible if, for example, a creditor and your spouse are half owners of your home.

Alternatively, tangible assets that are owned separately are considered fair game because the creditor or plaintiff can pursue the entire interest. However, this problem can be easily solved through the use of trust accounts. If spouses would like to keep their assets separate, they can each create a trust account to hold the assets. This will not only protect the assets from creditors and plaintiffs, but it can also facilitate the transfer of the assets upon either spouse’s death.