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.
[iv] Id.
[v] Peter M. Carrozzo, Tenancies in Antiquity: A Transformation of Concurrent Ownership for Modern Relationships, Marquette Law Review 85, Issue 2, Winter 2001.
[vi] Id.
[vii] Id.
[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.
[xi] Id.
[xii] Wayne Patton, Very Old (And Good) Legal Tools, May 4, 2013, https://mwpatton.com/asset-protection-articles/very-old-asset-protection-mechanisms/.
[xiii] Id.
[xiv] 29 U.S.C. § 18.
[xv] N.C. Gen. Stat. § 1C-1601(6); N.C. Const. art. X, § 5.