Thanks to rising insurance premiums, doctors are already well aware of the perils of malpractice claims. Now, other professionals are learning how expensive and complicated a lawsuit can be. Accountants, architects, engineers, corporate directors and officers, real estate brokers, and - yes - even lawyers can be sued for mistakes, negligence, and fraud. Sometimes, a lot more than professional assets is at risk in these legal actions; a person's home, savings, cars, even the college fund for his children, could be used to satisfy a legal claim.
For a long time, many of these professionals were told to ``put everything in your wife's name.'' The house, cars, investments, and all personal property were put in the name of the spouse, who was less likely to be sued for professional services.
But things don't work that way now - if they ever did.
``You see a lot of people saying, `Put everything in your wife's name so a malpractice suit can't take it away from you,''' says Stanley V. Ragalevsky, a Boston lawyer. ``That just doesn't work.''
Mr. Ragalevsky is a partner in the Boston law firm of Warner & Stackpole and one of the authors of a booklet called ``Protecting Your Family Assets, a Guidebook for Professionals.'' The booklet is written with Massachusetts laws in mind, but many of the legal points will apply in most other states, and the central point - the need to protect family assets from creditors' claims - applies anywhere. You can get a copy by sending $5 to the Massachusetts Society of Certified Public Accountants, Three Center Plaza, Boston, MA 02108.
Putting everything in your wife's name, or anyone else's name, simply to shield it from creditors or legal judgments, Ragalevsky notes, could be nullified as a ``fraudulent conveyance.'' Most states, he says, have adopted the Uniform Fraudulent Conveyance Act. It says that if you transfer an asset with the intent to hinder, delay, or defraud a present or future creditor, the transfer can be considered a fraudulent conveyance.
``If you transfer everything to the wife, nobody - including the court - really believes that the husband doesn't have any interest in it,'' Ragalevsky says.
In recent years, he notes, more professionals have become concerned about protecting their family assets.
``If you're in an accounting firm, there could be a determination that the partners in the firm were negligent in signing a company's financial statement as being an accurate reflection of its position, when in fact it wasn't,'' Ragalevsky says. ``If there's a massive fraud, the clients could have an open-and-shut case against the accountants.''
In most cases, he says, people who are suing professionals won't go after personal assets unless, in addition to the mistake, there was a deliberate effort to cover it up or minimize it by saying things like ``it's no big deal,'' or telling the client he's exaggerating. ``Then they'll go after everything they can,'' he says.
One of the best protections for married couples who own a home is the new ``tenancy by the entirety'' law. In Massachusetts, it took effect in 1980, and about the same time in many other states. (States with community property laws may not have this.)
Tenancy by the entirety is a particular form of joint ownership that is only available to married couples. It has two main characteristics:
First, each spouse has the right of survivorship to the property, so when one dies, the survivor automatically acquires legal title to the whole property without having to go through probate. Also, the property is free of claims from the deceased spouse's creditors.
Second, property owned under tenancy by the entirety is not subject to ``voluntary partition.'' This means one spouse cannot cut off the other's survivor rights to the property. It also means a creditor, or a winning plaintiff in a lawsuit, cannot take away your home to satisfy a claim.
In some states, however, including Massachusetts, not everyone owns their home under tenancy-by-the-entirety rules. If the home was purchased before the law took effect, ownership may be under less favorable rules, which could permit a home to be lost in a judgment. A couple has to take specific legal steps to put their home under the new law. Homes purchased after the law was passed are auto-matically owned under the new rules.
There are cases, however, where joint tenancy, tenancy in common, ownership by one spouse, or one of several types of trusts may be the best way to protect a family's assets when a spouse is in a profession with a high likelihood of a lawsuit.
Another option for many professionals might be one of the ``homestead'' laws in effect in many states. These can be used to exempt at least part of a home from seizure.
Almost all of these options need a lawyer to put them into effect, and they all need legal guidance for picking the right one. The process will cost a little time and money, but one day the extra protection could be well worth having.