Rothman Gordon: Ownership of Assets, Part V: Ownership of Property After Ten Years of Marriage

Ownership of Assets, Part V: Ownership of Property After Ten Years of Marriage

Part IV was about the couple who, after ten years of marriage, had one of the spouses inherit $250,000 from a grandparent. That article dealt with the importance of using the funds to assure maximum contributions to retirement savings and then to qualified college savings plans.

In the case of a non-working spouse who receives the inheritance, there is a risk that, by fully funding a child's college education, the inheriting spouse may have relieved the other spouse from the legal obligation to contribute to the child's education in case of divorce. For example, assume the full cost of four years of college is $25,000 per year or $100,000. If the inheriting spouse, a wife, contributes $110,000 to a college savings plan for a young child, she may well have fully funded the child's college education. Since that was a gift (a completed gift) from the parent to the child, the money in the college savings plan belongs to the child. Therefore, the inheriting (and non-working spouse) has relieved the working spouse of the obligation to educate that child. This can have significant impacts on the distribution of assets and child support obligations in the event that the spouses thereafter divorce. Additionally, since the non-working spouse has given away a substantial amount of money in contributing to the education of the child, the non-working spouse can be left without a significant nest egg if a divorce occurs.

Now, let us consider the case of a working spouse, a physician, who inherits the $250,000. In Pennsylvania (where malpractice claims are on the increase and tort reform may not occur), it makes great sense for the working spouse to transfer $110,000 of the inheritance into a qualified college savings plan for each child and to transfer the balance into joint names with the spouse. While this has the same risk described above in the event of divorce (e.g., giving up money and fulfilling a spouse's support obligation), it has a very valuable attribute of protecting the assets from a malpractice claim. In our example, assets given to the children via the funding of the qualified savings plans, no longer belong to the physician/parent. Rather, they belong to the child, so the assets are not subject to the claims against the parent. Additionally, when assets are titled in the joint names of a husband and wife, they are generally not subject to the claims of a creditor of one of the spouses alone. Therefore, the transfer into joint names insulates the assets from a malpractice claim, while still allowing both spouses to enjoy the property.

Articles are not intended to be comprehensive. Readers should not act upon any information herein without seeking specific legal advice from the Firm's attorneys.

We are required by Treasury Regulations to advise that this writing is not intended as a reliance opinion and cannot be used for purposes of avoiding IRS penalties.