BEWARE: Toxic Contracts

If you want to save your money, go to a bank. If you want to KEEP what you saved, you NEED legal protections.
If you want to save your money, go to a bank. If you want to KEEP what you saved, you NEED legal protections.

Q. What 4 second activity can ruin your credit, cost you your life savings, leave you homeless, and humiliate you?

A. Signing the wrong contract!

In my book, Love & Money I teach readers how to spot and avoid “Toxic Contracts”. These are agreements which are so harmful, that no amount of clever lawyering can undo them. In today’s “Gotcha” climate, ignorance of the law is not an option. Ignorance of the law will get you STEAMROLLED! Here are some tips for common missteps to keep you legally protected:

  1. Pre-Nuptial Agreements (aka Pre-Nups): Never sign a totally one-sided Pre-Nuptial agreement. In doing so, the partner with fewer assets is jeopardizing his/her future financial security. At the same time, the party with more wealth runs the risk of a court throwing the agreement out because it is very unfair.
  2. Nursing Home Documents: Exercise caution (and get legal advice) before signing anything in a nursing home. Adult children are increasingly being asked to sign documents when parents enter rehab. Unfortunately, this can result in a binding obligation to cover the cost of a parent’s care. In my book, I tell the story of someone who ended up having to sell his home to cover the cost of his grandmother’s care, because he inadvertently signed a guarantee.
  3. Tax Returns: Signing a tax return you haven’t read can be disastrous. The so-called “Innocent Spouse” protections that shielded Christina Ferrare from John DeLorean’s tax crimes aren’t as strong as they once were. Today, there is an expectation that both partners are familiar with household finances. Claiming ignorance and innocence did not help Teresa Giudice avoid prison on account of her husband’s tax and mortgage fraud.
  4. Estate Planning: The most common toxic contract takes the form of bad estate planning. This can be a “one-size fits no one” trust, granting Power of Attorney to the wrong person or putting your house in your children’s names. Many parents incorrectly think that “turning the house over” to the children will protect the property from future possible long term care bills. In reality, putting the home into the children’s names will increase property taxes while simultaneously saddling them with a large capital gains tax consequence. This is because gifted assets go to the recipient with a “tax basis” equal to the donor’s original cost. When the home is later sold, the children will be slammed with taxes. Once the parents sign that deed transferring the house, it can never be taken back. In the book, I share a story of a man who put his house in his daughter’s name. She was then tragically killed in a car accident. Unfortunately, she did not have a will. This resulted in the house passing to the son-in-law by virtue of state “intestate” law. Do you think he returned the house to his father-in-law? Not quite. Dear old dad was effectively homeless with no one to blame but himself.

As I tell my clients, if you want to save your money, go to a bank. If you want to KEEP what you saved, you NEED legal protections.

Ann Margaret Carrozza @mylawyerann is a renowned Asset Protection and Estate Planning Attorney who served for 14 years as a New York State Assemblywoman. She is a TV legal contributor and the author of Love & Money.

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