Groom: “I,____, take thee,_____, to be my lawful wedded Wife, to have and to hold from this day forward, for better for worse, for richer for poorer, in sickness and in health, to love and to cherish, till death us do part….”
Have you ever thought how intertwined those vows are in today’s world? Especially the part linking “poorer” with “sicker.” As the highly-paid policy wonks are fond of reminding us, married couples are one serious illness away from filing bankruptcy.
So how does a couple in a community property state like Texas keep from having one spouse’s medical bills drain away their life savings? There are three primary laws that are working against you.
Community property laws state that everything that is earned or purchased during marriage is presumed to be community property, and is equally available to the creditors of both the husband and wife. The first line of defense is to change the characterization of the property – argue an asset (a bank account, a vacation home) is not community property, but is actually the “separate property” of the healthy spouse and therefore cannot be reached by the sick spouse’s creditors.
If the couple has actually preserved the “separate” characterization of the property (side note, this is difficult to do without some serious planning), you would think that would be the end of the argument , except ……
For the second law. This one holds that each spouse has the duty to support the other spouse and is liable to anyone who provides “necessaries” to the other spouse. Most people would consider medical expenses to be a necessary. Under this second law, all of the spouse’s assets can be reached by the other spouse’s creditors.
The thoughts are coming fast and furious, aren’t they? If you have $200,000 in assets, you think, then you will just gift them away, or sell them to your kids for $10, or pop them into a trust. Any of those alternatives would be better than having the creditor take everything.
Ah, but then you have violated the third law. This one says that you can’t transfer assets to defraud your creditors. There are all sorts of ugly penalties associated with this law.
So what is a married couple to do?
One option, available only before the couple is married, is to enter into a prenuptial agreement that provides the spouses will not be liable for each other’s medical expenses.
Another option is to transfer the money out, either to an exempt asset or to a third party like a child or a trustee, before the medical debt is incurred. The intention of the transfer is not to defraud a creditor, because no debt exists at the time of the transfer. If done properly, the sick spouse may be able to qualify for Medicaid to help with long-term medical expenses.
The third option is to buy enough medical and long-term care insurance so that medical expenses are covered. The couple has to do this while still healthy enough to qualify and, of course, must be able to pay the premiums.
Note that none of those strategies will work for the healthy spouse whose sick spouse has already incurred significant medical expenses. At that point, the only viable option to preserve assets, unfortunately, is divorce.