TEP sets the record straight. We obtained a copy of the infamous $1 deed. Recall the New York Times reported that Joe Paterno deeded his house to his wife in order to protect it in case of lawsuits stemming from the Penn State scandal. The deed corrects a mistake in an earlier 1997 deed. It looks like this real estate transaction had been planned for years, just as Joe Paterno’s attorneys said so in the New York Times.
The New York Times is reporting that Joe Paterno deeded his residence to his wife, as her sole and separate estate. (Check out the home on Zillow by clicking here.) Pundits are speculating this is a move to protect his assets in case he is sued. Paterno’s lawyers on the other hand are claiming it is a part of a “multiyear estate planning program,” and the transfer “was simply one element of that plan.” Who’s correct?
So which is it? Estate planning or asset protection? It is probably both. Under the Uniform Fraudulent Transfer Act, as enacted in Washington State, giving away one’s assets as a means of playing a pauper in the face of an expensive lawsuit does not work, even when the assets are given to a spouse (talk to Mike Mastro about that). But this is Pennsylvania.
Pennsylvania is a little different. In Pennsylvania, assets jointly held by spouses are generally protected from the creditors of one spouse. (In Washington, one spouse’s separate property is first liable, and then his share of community property if the judgment is not satisfied first by separate property. See DeElche v. Jacobsen, 95 Wn.2d 237, 622 P.2d 835 (1980)). So in this case, Joe’s house was probably already well protected. But, what if Joe Paterno’s wife were to pass away? Without some additional planning, this could result in Joe inheriting the home from his wife, ergo, it is back in Joe’s name, and now Joe’s creditors can pursue it (assuming there is an unsatisfied judgment against him). By deeding the home to his wife as her sole and separate property, if she passes away first, the home will pass to the beneficiaries named in her Will rather than to Joe. The odds are that Joe’s wife has a provision in her Will that allows Joe a life estate in the home, with its remainder to vest in the kids.
In any event, by deeding the house to his wife, the ultimate result is that creditors will have more difficulty recovering it from Joe, if it can be done at all, which gives him leverage in negotiating a settlement with whoever is about to sue him.
Forbes.com recently posted this article detailing the bankruptcy trustee’s fraudulent conveyance claims in the Michael Mastro bankruptcy. The takeaway from the article is this: There is no magic pill once you’re in trouble with creditors.
Who is Mike Mastro? Michael R. Mastro was a Seattle-based real estate developer and hard money lender. After real estate dried up in 2008, so did Mastro’s cash flow. He could not make payments to his lenders (who were in essence fronting the money that he lent to his borrowers), and they forced him into bankruptcy. Just before things got bad, Mastro and his wife madly moved assets around, trying to hide them from creditors. Continue reading