|Tenants by the Entireties (TE)
Some states allow married couples to own property titled as “tenants by the entireties” (TE). Owning property as TE means that each spouse has an undivided interest in the “whole” property. Even though each spouse owns 50% of the marital residence, they each have an undividable right to use the whole property.
A creditor cannot force the sale of either spouse’s interest because to do so would affect the other spouse’s enjoyment of the “whole” property. Therefore, if you live in a state where married couples can own property as TE, then by good fortune, your marital residence is protected. (FYI, this is starting to be chipped away at by state courts which are starting to carve out exceptions. Please contact an APS™ advisor to learn if this affects you).
Problems with TE
1) Besides the fact that few states allow property to be held as TE, TE does not protect the marital home from joint creditors of both spouses. Let’s look at an example of how this problem might come into play.
Dr. and Mrs. Smith are having a Christmas party where they have invited over all the staff from Dr. Smith’s medical practice. Everyone has a nice meal; and then from 7 pm-midnight, several of the staff members proceed to drink multiple gin and tonic drinks that Dr. Smith was only too happy to provide.
After Dr. Smith’s personal nurse has seven (7) gin and tonic drinks, she looks at Dr. Smith and says she is going home. Dr. Smith can see that his nurse is obviously drunk and lets her drive home anyway due to the fact that she only lives a few miles away.
The nurse pours herself into a car and then drives home. On the way home, she crosses the center line and then hits an oncoming car causing a crash that kills all four passengers.
The four passengers happened to be four cardiologists coming home from their Christmas party, and each one of them had an annual income of $750,000 a year.
Who is going to get sued in the above example?
Oh, by the way, the nurse died as well.
The nurse is going to get sued; and her auto insurance company is going to simply hand over the $1,000,000 coverage to be divided up among the families of the four cardiologists.
Dr. Smith AND his wife are going to get sued by both the doctor’s and nurse’s heirs. Why? Because they gave alcoholic drinks to a guest and let her drive home when she was obviously drunk. You may have heard of lawsuits against bars and taverns called “dram shop” cases? A dram shop case is when a bar serves too much alcohol to a patron and then lets an obviously drunk patron drive home drunk. The bar is liable.
In our above example, Dr. and Mrs. Smith are sued in a similar negligence case as a bar would be sued when letting an obviously drunk person drive home.
But the house is owned as tenants by the entireties. Doesn’t that protect Dr. and Mrs. Smith? Unfortunately, the answer is no. Why? Because both Dr. and Mrs. Smith own the house where the party and negligence took place; and they will both be sued, thereby, putting all their assets, which are owned jointly, at risk. A house owned as TE is owned jointly and is at risk.
2) What if a client is not married? Tenants by the entireties is not available to a client who is not married. When is this a problem? It potentially could be a problem for a younger client who has not yet been married and has significant equity in his/her residence. (However, younger clients typically have significant debt on their houses which makes the house an asset a creditor will not want).
What about divorce?
When a client ages 55-65 gets divorced, the minute the divorce is final whichever spouse ended up with the house no longer owns the house titled as tenants by the entireties. Therefore, when a client gets divorced and if the house is owned personally by the client after the divorce, the house is absolutely at risk to creditors.
If you would like to determine if you can own your home as Tenants by the Entireties with your spouse, please contact a locally “Rated” APS™ advisor.