Medieval knights of St. John (Hospitallers), riding on bay horses
The basic right of a person to dispose of his or her possessions at death (testamentary transfer) originated in ancient times. The ability for the deceased to then protect the transfer of those possessions against claims by the State or government, or against other creditors, also originated in legal traditions which began hundreds, or thousands, of years ago. North Carolinians benefit from both legal traditions. Our ability to direct our assets and cherished possessions that we collected while on earth to those we wish, may represent our last basic freedom exercised when we leave this world.
The ancient Greek biographer and essayist Plutarch (born approximately 46 AD), attributed the legal reform allowing a person to freely transfer his belongings at death to whomever he pleased, to the Athenian legalist Salon, born about 630 BC.[i] The ancient Romans later developed “fidei commissum” (meaning to commit something to one’s trust), a sophisticated system developed to leave property to one’s heirs after death (testamentary trusts.)[ii]
The English legal scholar William Blackstone explains that the law that developed in many societies gives a real property owner, who occupies a property, the right to peaceably transfer that real property at death, according to his wishes, to another chosen owner and occupier. Blackstone notes that this ordered transition of real property from one owner and occupier to another was necessary “for the peace of society,”[iii] and prevents “an infinite variety of strife and confusion.”[iv]
ORIGINS OF NORTH CAROLINA REAL PROPERTY ASSET PROTECTION LAW
The real property laws transferred to, and now used in North Carolina, were originally developed several hundred years ago within the English feudal system. At that time, the king was the only absolute owner of land, with his lords subsequently holding land from the king. The practice of “wardship” provided that a lord would provide land to a male tenant (where the tenant could grow crops and raise livestock, marry, and raise a family.) In exchange, the tenant provided services such as military service, or “knight service”, to protect the lord and king.[v]
Originally, at the ward’s death, all land reverted to the lord, and the widowed wife and children could then become impoverished. The lords, and kings, eventually learned though that the wards would fight harder for them if the wards and their families were better treated, and thus began to allow the wards to keep the land within their families.[vi] Extended families or clans now developed on inherited lands, that would fight hard for the lord and king.
Because families could now keep their livestock and crops on land that they had a continued right to occupy, widows and children no longer became so impoverished upon the father’s death. More prosperous families meant that the lords and kings now had access to more wealth within their kingdoms which they could tax, in order to fund their extended wars and military campaigns.
Two types of concurrent real property possession developed in feudal England 600 years ago that provided additional financial protection to families. Both joint tenancy (land held by more than one person) and tenancy by the entirety (land held as one unit by husband and wife) landholders enjoyed the right of survivorship (the decedent’s land was automatically passed to survivors), and freedom from the estate creditors of the decedent.[vii]
Joint tenancy, and tenancy by the entirety real property ownership remains alive and well in modern North Carolina. North Carolina law adopts the English common law definitions of both joint tenancy and tenancy by the entirety real property ownership. Here, surviving joint landowners automatically inherit the real property ownership interest of a deceased joint landowner by operation of law, with the surviving joint landowners not legally responsible for any individual estate debts of the deceased joint landowner.
The 1960 North Carolina legal case Wilson County v. Wooten[viii], which held that the welfare departments of Durham and Wilson counties could not attach bank account assets transferred to a beneficiary via right of survivorship, likely protects all right of survivorship transfers (including joint with right of survivorship, or JTWROS, real estate transfers) not otherwise specifically available to estate creditors under NC statutes, from the decedent’s estate creditors.
Wilson County v. Wooten implies that the Executor or Personal Representative of the decedent’s estate (and the creditors of that estate) would have no claim to such transferred JTWROS real property. A more recent 1994 legal case, Miller v. Miller[ix], reconfirms that in North Carolina, JTWROS property is not part of a decedent property owner’s estate, and that the surviving JTWROS property owners take the entire property, free and clear of the claims of heirs or creditors of the deceased JTWROS property owner.
ORIGINS OF NORTH CAROLINA ASSET PROTECTION TRUST LAW
In medieval England, creditor protection additionally became available during the evolution of English trust law. English legal scholars borrowed from the much older Roman fidei commissum trust law, and developed ways to leave property in trust to heirs free from creditors.[x] That refined English trust law, brought to the United States’s original 13 colonies (including North Carolina) from England, was used by founding father Thomas Jefferson to establish an asset-protected testamentary trust for his daughter Martha Randolph. With this trust, Thomas Jefferson left assets to daughter Martha protected from the creditors of Thomas Jefferson’s indebted son-in-law Thomas M. Randolph.[xi]
All 50 states, including North Carolina, have now adopted and enforce English trust law providing various types of asset protection trusts which convey creditor protection to beneficiaries.
ORIGINS OF NORTH CAROLINA CORPORATE LAW PROVIDING ASSET PROTECTION TO BUSINESS INVESTORS
The idea of a “corporation” also developed in medieval Europe. The word “corporation” originates from the Latin corpus, which refers to a group or body of people. The original idea of a corporation, which evolved in medieval European business entities, provided that the corporation would allow a body of people to survive “in perpetuity,” and not be limited by the lives of any single stockholder.[xii]
The Catholic Church was one of the first European organizations that took advantage of a “perpetual existence.” As corporate law later developed in England, the concept of personal asset protection for investors, or stockholders, in risky businesses was first used in the 1600s by the Dutch East India Company. The Dutch East India Company, which issued what were likely the first stock certificates, played a major role in the Western exploration of the entire world.[xiii]
The ability of investors to invest in bold new corporate enterprises while keeping their personal assets safe, which spread from England, through Europe, to the United States (and North Carolina), was significantly responsible for the entire industrial revolution, and for much of the wealth and prosperity that many North Carolinians still enjoy today.
EXPANDED ASSET PROTECTION IN NORTH CAROLINA: BANKRUPTCY LAW, PROTECTED RETIREMENT ACCOUNTS, AND PROTECTED LIFE INSURANCE TRANSFERS
Asset protection ideas originating long ago have spread to other later creditor protection constructs protected by federal and/or North Carolina law. Our current President of the United States has personally benefitted from federal business bankruptcy laws (also available to North Carolina residents) many times, which provided his businesses with a fresh start. Federal ERISA law provides asset protection to funds held within North Carolina residents’ qualified retirement plans, such as IRA and 401K plans.[xiv]
The cash value of life insurance policies which name the insured person’s spouse or children as beneficiaries has long been protected against creditors in North Carolina, with this protection enshrined within the North Carolina Constitution. Life insurance payouts to these beneficiaries, following the insured person’s death, are protected against the insured person’s estate creditors also.[xv]
Most asset protection techniques now available to North Carolina citizens, and protected under federal and state law, have been many, many years in the making. By allowing more families to keep more of their assets, our economy continues to provide jobs and income, our people enjoy a healthier and more successful existence, and our government earns more tax dollars from its more prosperous citizenry, which it can better distribute to our less fortunate.
[i] Plutarch, Plutarchs Lives: Translated from the Original Greek, with Notes, Critical and Historical, and a life of Plutarach. New York: Derby & Jackson, 1859.
[ii] George Long, Fidei Commissum: A Dictionary of Greek and Roman Antiquities. John Murray, London, 1875.
[iii] William Blackstone, Commentaries on the Laws of England, Book 2, Chapter 2. Boston: Beacon Press, 1962.
[v] Peter M. Carrozzo, Tenancies in Antiquity: A Transformation of Concurrent Ownership for Modern Relationships, Marquette Law Review 85, Issue 2, Winter 2001.
[viii] Wilson County v. Wooten 251 N.C. 667, 111 S.E.2d 875 (1960).
[ix] Miller v. Miller 117 N.C. App. 71 (N.C. St. App. 1994).
[x] Jay Adkisson, A Short History of Asset Protection Trust Law, Forbes, January 26, 2015.
[xii] Wayne Patton, Very Old (And Good) Legal Tools, May 4, 2013, https://mwpatton.com/asset-protection-articles/very-old-asset-protection-mechanisms/.
[xiv] 29 U.S.C. § 18.
[xv] N.C. Gen. Stat. § 1C-1601(6); N.C. Const. art. X, § 5.
Whenever I draft wills for a young couple expecting their first baby, or for a couple who already have at least one child, I always set up a children’s asset protection trust for them within the will documents. In case the parents pass away before their children have finished their education, or in case the parents become incapacitated so that they can no longer financially care for their kids, the parents always want to plan for a responsible adult family member or friend to manage their children’s assets for them as trustee of the children’s asset protection trust, in a way where the assets of the children’s trust will be protected against any possible future liability, creditor, or financial problems encountered by one of their children.
All of my client parents agree that such asset protection for their kids is a good thing! But while parents definitely want asset protection for their children, my younger client parents frequently are a lot more cavalier (“it won’t happen to me”) about asset protection for themselves.
Many of my client parents initially ask me for the following will planning:
- Sweetheart Will. If either one of the parents pass away leaving a surviving parent, all of the deceased parent’s assets benefit the surviving parent. The surviving parent can then use this money to take care of the children.
- Surviving Parent Wants Benefits in Cash. Except for the deceased parent’s share of the home, his or her personal property, or retirement account proceeds, the surviving parent receives the deceased parent’s assets “outright,” or in cash. Any life insurance (important in financially protecting young families) owned by the deceased parent benefits the surviving parent directly, in cash.
- The Parent’s Assets, Retirement Accounts, and Life Insurance Proceeds Flow Directly Into the Children’s Asset Protection Trust When Both Parents Pass Away. When both parents pass away, all of their assets, and any life insurance (and any retirement account proceeds in inherited retirement accounts) flow into the children’s trust, where a trusted adult family member can manage trust assets for the children as they grow and complete their educations. Once assets are held within the family trust, if one of the 17 year old children later has a car accident creating financial liability, all of the children’s family trust assets within the family trust are protected from the liability claims brought by an opposing attorney.
This is a pretty good strategy, but it can be greatly improved! The parents’ desire to receive their deceased spouse’s assets unhindered in cash (in Step 2 above), and life insurance benefits unhindered in cash, may leave the liability window open! This open liability window could seriously chill the financial outlook of both the surviving parent, and the surviving children.
DON’T LEAVE THE LIABILITY WINDOW OPEN!
Most parents would want to guard against the following tragic scenario: The dad is works late one night, falls asleep at the wheel driving home, and has a car accident killing both himself and the driver of the other car.
As is typical, both the mom and the dad are the co-owners of the car that dad was driving. The opposing plaintiff’s attorney receives a large financial judgement for the family of the other deceased accident victim, greatly in excess of mom and dad’s automobile liability policy limits.
If the unlucky mom and dad had set up a sweetheart will, where many of the deceased dad’s assets flowed directly to the mom in cash, and the dad’s $500,000 life insurance policy benefitted mom directly, both mom and the surviving children may be in trouble! The dad’s individual assets may have to pay vehicle liability claims in probate, where valid creditor claims have to be paid before the deceased person’s assets can flow through the will to beneficiaries. Thus there may be none of dad’s own assets left for mom, and the kids, to live on!
What about the $500,000 life insurance policy? Well, since mom was a co-owner of the car, the opposing plaintiff’s attorney could sue her individually, even though she was not even in the car with her husband during the accident. Since mom receives the $500,000 from the life insurance policy directly, and in cash, all of the $500,000 insurance proceeds may now be available to the opposing plaintiff’s attorney. And if mom never gets the $500,000, the children will now never get it either, because the liability window was left wide open!
THE SURVIVING PARENT’S ASSET PROTECTION TRUST
North Carolina law would have allowed, however, the dad to have set up a testamentary asset protection trust (testamentary irrevocable 3rd party trust) in his will benefitting mom, which is a type of “vault” which could have protected assets that dad left for mom from any of mom’s future creditors. Even though North Carolina probate rules would not have protected dad’s individual assets from his own probate creditors (for example the auto accident claim holders), dad could have set up his $500,000 life insurance policy where mom’s testamentary asset protection trust was the direct beneficiary of dad’s life insurance benefits, not mom individually. Planning this way, where dad’s $500,000 life insurance benefits would flow directly into mom’s asset protection trust, could have saved the $500,000 life insurance proceeds for both mom, and the children.
Some younger parents worry that leaving assets from a deceased spouse in trust for them may be too restrictive. But in North Carolina, the surviving parent can be the full manager, or “trustee” of his or own asset protection trust, writing checks to himself or herself as needed for his or her health, education, maintenance, or support, or for his or her children’s same needs. A “right of withdrawal” may also be written into the surviving parent’s asset protection trust, where, as beneficiary of the trust, the surviving parent can decide to withdraw any portion, or all, of the trust funds out the trust at any time, for any purpose.