Some states recognize the common law asset protection doctrine of tenancy by the entirety. A tenancy by the entirety is form of ownership that can only exist between a husband and wife. The other attributes of this form of ownership are the concepts of common time (i.e. it can only exist during the marriage), right of survivorship, and undivided interest.
These attributes basically mean that married couples own their property “together,” in every sense of the word. And if one spouse dies, the other spouse automatically takes sole ownership of the property.
Benefits of Tenancy by the Entirety
From the standpoint of asset protection planning, a tenancy by the entirety provides a high degree of protection. That’s because neither spouse can transfer property out of a tenancy by the entirety without the consent of the other spouse. That feature is what provides asset protection. For example, if one spouse is sued or otherwise incurs a liability, assets held in a tenancy by the entirety are exempt from the claim. In other words, they aren’t accessible by the creditors of any single spouse.
How to Use Tenancy by the Entirety
Many married couples often earn separate incomes. One way to protect those individual incomes is to deposit them into an account that owned in a tenancy by the entirety. This method is especially effective in households where only one spouse is a physician, dentist, or lawyer in a state where profits can only be shared with other licensed professionals. Income from the professional practice can be protected against potential malpractice suits by having it deposited into a tenancy by the entirety account. There is one drawback: This method only works if it’s done consistently over a long period of time. It simply won’t be effective if you wait until a lawsuit or other claim is pending before you begin. That’s because of fraudulent conversion laws.
Weaknesses
Tenancy by the entirety does suffer from a few weaknesses. One obvious weakness is that property held in this form of ownership is accessible by joint creditors of married couples. Property is also becomes accessible if a divorce occurs or upon the death of a non-debtor spouse. Also, in order to take advantage of tenancy by the entirety in the event of bankruptcy, you’d have to opt to take your state’s exemptions rather than the federal exemptions. To overcome these weaknesses, we almost always recommend the use of a limited partnership rather than sole reliance on tenancy by the entirety.
If you have questions about tenancy by the entirety and want to know if it’s available in your state, please call Lodmell & Lodmell today. We’d be happy to spend some time discussing this topic with you.
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