Asset Protection

HOW TENANCY-BY-THE-ENTIRETY PROTECTS ASSETS

Tenancy-by-the-entirety is a unique form of joint tenancy. It is only for a husband and wife. Tenancy-by-the-entirety (T/E) originates from the theory that marriage unifies the husband and wife, and their property is thus owned by the two by the unity or entirety.

With T/E titled property owned by both spouses in unity, neither the husband nor wife can singly transfer their interest in the property, which is possible with other tenancies. The death of either spouse awards the surviving spouse the entire property. In that respect, a tenancy-by-the-entirety is similar to joint tenancy. The tenancy-by-the-entirety remains until the husband and wife simultaneously transfer the property, they divorce, or one spouse dies.

Thirty-one states allow tenancy-by-the-entirety, although their laws vary. The trend is away from this tenancy, which is considered inconsistent with modern legal transactions and the individuality of husband and wife.

How effectively can tenancy-by-the-entirety protect assets from creditors? The answer will depend on whether state law treats a tenancy-by-the-entirety differently from regular joint tenancies.

Some states consider the two tenancies the same. A creditor of one spouse can reach the debtor spouse's interest, force the sale of the property and obtain proceeds due that spouse. These few states comparably protect the three tenancies

tenancy-in-common, joint tenancy, and tenancy-by-the-entirety. If you live in one of these states, then titling marital property as tenants-by-the-entirety provides no protection.

Most other states virtually immunize T/E property from creditors of one spouse, but not creditors common to both spouses. Other states protect only certain assets, such as the family home, and others partially protect property. For example, Massachusetts protects the family home from the creditors of one spouse while the other spouse resides there, but not thereafter. Florida, a state with strong tenancy-by-the-entirety laws, protects not only the T/E titled marital home but also other assets. Real estate and other property, such as bank accounts, stocks, bonds, cars and boats, can all be sheltered through tenancy-by-the-entirety.

States with tenancy-by-the-entirety laws provide creditors a patchwork of rights. Because tenancy-by-the-entirety laws vary considerably among the states, we cannot generalize their adequacy to protect. You must review this one question with your lawyer.

One tenancy-by-the-entirety feature is that it commonly applies only to the marital home. Second, its creditor protection cannot outlast your marriage. When either your marriage ends through divorce or death, so does the tenancy and its protection. If the non-debtor spouse predeceases the debtor spouse, the protected assets immediately vest with the debtor spouse and become exposed to his creditors. For instance, a husband with a judgment can protect the marital home titled as tenancy-by-the-entirety from his creditor. Upon his death, his interest in the home automatically passes to his wife free of the creditor claim against the husband. However, if the wife died first, the husband's creditor can claim the entire home now fully titled with the debtor spouse. Chances a husband will predecease his wife are about four to one, so it may be a worthwhile gamble to rely upon tenancy-by-the-entirety when the husband has the greater exposure.

A bankruptcy trustee can usually force a sale should one spouse under a tenancy-by-the-entirety go bankrupt. The non-bankrupt spouse could recover his share of the proceeds, which does not protect whatever equity the bankrupt spouse may have in the property. However, state homestead laws or bankruptcy exemptions may partly or fully shelter this equity.

Tenancy-by-the-entirety protects only against creditors of one spouse. When both spouses are indebted to the same creditor, that creditor can recover property held in the entirety. Except for mortgages, spouses should avoid joint obligations, and particularly large business debts. Joint obligations significantly increase the risk of losing marital property to creditors.

A surviving spouse's rights to the entire property upon the death of the other spouse are standard with the tenancy-by-the-entirety. Property under tenancy-by-the-entirety also avoids probate where the deceased spouse's creditors must file claims. Vested with full title to the property, the surviving spouse can dispose of the property free of claims against the deceased spouse. Should both spouses die simultaneously, the property would be equally distributed between the husband and wife's estates as it would under tenancy-in-common.

The more powerful IRS cannot as easily be stopped by titling assets as tenants-by-the-entirety. If only one spouse owes the IRS, the property may be partly protected, although a tax lien against one spouse will cloud the property's title. At least one circuit court has allowed the IRS to seize T/E property where only one spouse was a tax delinquent. Protecting property through other devices is recommended where divorce or death of a spouse is foreseeableif the spouses share common creditors or protection is otherwise questionable.

Joint tenancy and tenancy-by-the-entirety are quite similar except for three important differences:

1. Tenancy-by-the-entirety can only be between husband and wife. Unmarried persons may title property jointly or as tenants-in-common. Married couples mostly elect tenancy-by-the-entirety in states where it broadens or completely protects against creditors. Property should expressly state whether it is titled as tenancy-by-the-entirety, or it may be considered a less protective joint tenancy.

2. One joint tenant can terminate the joint tenancy by transferring his interest. Tenancy-by-the-entirety property must be transferred simultaneously by both spouses.

3. Some states allow a tenancy-by-the-entirety only for real estate, perhaps only the home, and no other property. Joint tenancy can apply to any property.