Asset Titling – The Key to Effective Asset Protection
Titling Of Property Ownership From The Asset Protection Perspective
By: C. Randolph Coleman ©2004, All Rights Reserved [*]
Tenancy In Common
What is tenancy in common?
Tenancy in common is a form of ownership of property, either real or personal, that is characterized by one or more co-tenants, each owning an undivided interest in the property. The primary feature of a tenancy in common is the lack of a right of survivorship. Where two or more persons own undivided interests in property, they are presumed to be tenants in common, unless a contrary intent is expressed in the document through which they took title. Asset titling as tenancy in common exposes the ownership of that property to the claims of the owner’s creditors.
Property held with a spouse as tenants in common does not provide the creditor protection afforded by titling property as tenancy by entireties. Generally, creditors can reach property owned as tenancy in common, at least to the extent of the interest owned by the debtor.
What is joint tenants with right of survivorship?
In a joint tenancy form of asset titling, each co-owner is considered to be the owner of an undivided portion as well as the owner of the entire interest. Upon the death of a co-owner, the surviving joint tenant(s) continue as owner(s) of a larger undivided interest of the property held in this manner. During the life of a co joint tenant, his creditors may reach the co-tenant’s share of the property. However, upon the death of a debtor survived by other joint tenants, his creditors may not reach his interest, because it is then vested in the surviving joint tenants.
There currently are no cases that prohibit a debtor creating a joint tenancy shortly before his death to avoid having the property pass through his estate, thereby making such property unavailable to those creditors who file a claim against the debtor’s estate. However, consideration should be given in such a situation to a potential action pursuant to Florida Statutes, Chapter 726, for a fraudulent transfer.
Right To Partition
Any one or more joint tenants, or co-tenants, may file an action against all joint tenants for the partition of real property owned jointly. A partition action may also be commenced to partition personalty. If the property cannot be equitably partitioned, the court can order the property sold, and the proceeds partitioned among the joint or co-tenants. However, a partition action cannot be maintained for property owned by a legal entity, such as a partnership.
From an asset protection planning perspective, the right to partition should be a factor whenever a joint tenancy or a tenancy in common form of asset titling is considered.
Tenancy By The Entirety
What is tenancy by the entirety?
Tenancy by the entireties is a form of asset titling that dates to the English common law and a time when married women could not own property individually. Tenancy by the entireties is a form of property ownership whereby a husband and wife hold property as an indivisible unit. An ownership interest in tenancy by the entity’s property is considered “nonseverable” without the joint consent of the spouses. In contrast, in a joint tenancy with the right of survivorship, each joint tenant is presumed to have an equal share that is severable by the demand of either joint tenant, regardless of whether the joint tenants are spouses. Florida is one of approximately a dozen states that recognize tenancy by the entireties (hereinafter “TBE”) as a form of ownership between husband and wife.
Tenancy by the entireties may exist in either real property or personal property.
Tenancy by the entireties does not have the technical status of being “exempt property.” Rather, it is considered to be “immune” from levy or seizure by a creditor of only one of the spouses. The property is not divisible on behalf of one spouse alone, and therefore cannot be reached to satisfy the obligations of only one spouse. However, creditors of both the husband and the wife, jointly, can attach the property so owned.
There are “6 unities” that must exist for ownership to be held as tenants by the entireties. They are:
- Unity of Possession – Both spouses have joint ownership and control. With respect to a bank account, it may be acceptable that a deposit agreement allows either spouse to withdraw independently of the other on the theory that the power to withdraw is an expression of an authority of agency given by each spouse to the other.
- Unity of Interest – Each spouse has the same interest in the account – it is not a problem if one spouse deposits all or most of the funds into the account as long as each spouse has the same interest immediately after the deposit.
- Unity of Time – The interests of both spouses in the account must originate simultaneously in the same instrument, such as on the signature card. Spouses should not try to convert an individual ownership into a tenant’s by the entireties by “adding” the second spouse to the account or property. Instead, the asset should be transferred into a new account or titling arrangement that allows for the interest of both spouses to be created at the same time and in the same instrument.
- Unity of Title – Spouses must have ownership under the same title.
- Survivorship – On the death of the first spouse to die, the surviving spouse becomes the sole owner of the entireties’ property. A general power of appointment over jointly owned assets, given to one spouse by the other spouse, will vitiate tenancy by the entirety status.
- Unity of Marriage – The parties must be married at the time the property is titled in their joint name. Only spouses enjoy the protection of tenants by the entirety ownership. If there is any ownership interest in the property by a third party, there is no tenancy by the entirety.
Although tenants by the entirety requires that the couple be married, a married couple can also own property as joint tenants, with right of survivorship. When property is held as tenants by the entirety, only the creditors of both the husband and wife, jointly, may attach the tenants by the entirety property; the property is not divisible on behalf of one spouse alone, and therefore it cannot be reached to satisfy the obligation of only one spouse. If asset titling of property is held as a joint tenancy with right of survivorship, a creditor of one of the joint tenants may attach the joint tenant’s portion of the property to recover that joint tenant’s individual debt.
Prior to the Florida Supreme Court’s decision in Beal Bank v. Almand and Associates, 780 So.2d 45, 53 (Fla. 2001), when a married couple took title to real property, it was presumed under the law that title was as tenants by the entireties. For personal property, the presumption was not present. Beal Bank modified the law regarding the presumption of title with respect to married couples acquiring title to personal property. In Beal Bank, the Court said: “we conclude that stronger policy considerations favor allowing the presumption in favor of a tenancy by the entireties when a married couple jointly owns personal property.” Id., at page 57. The Supreme Court went on to say: “accordingly, we hold that as between the debtor and a third-party creditor (other than the financial institution into which the deposits have been made), if the signature card of the account does not expressly disclaim the tenancy by the entireties form of ownership, a presumption arises that a bank account titled in the names of both spouses is held as a tenancy by the entireties as long as the account is established by husband and wife in accordance with the unities of possession, interest, title, and time and with right of survivorship. The presumption we adopt is a presumption affecting the burden of proof pursuant to section 90.304, Florida Statutes (2000), thus shifting the burden to the creditor to prove by a preponderance of evidence that a tenancy by the entireties was not created. [Footnotes omitted.] Id. at page 58.
The effect of Beal Bank is to allow married couples greater protection from the creditors of one of the spouses where they have personal property owned by them jointly. With respect to bank accounts at least, the presumption is that an account owned by husband and wife is owned as tenants by the entireties, unless is specifically states that they do not own the account as tenants by the entireties. With respect to other forms of personal property, it is important that the asset titling documents for the property specifically state that the property is owned as tenants by the entireties, or that at least it does not specify some other form of ownership, such as joint tenants with right of survivorship.
Notwithstanding the Beal Bank case, married couples should be extremely careful in simultaneously establishing tenancy by the entireties accounts, and labeling them as such. Where a financial institution does not provide a “check the box” alternative for tenants by the entirety, prudence dictates that the parties write on the account agreement “TBE” when opening an account. If in doubt about the status of an account, document intent and the joint origin of the ownership to the extent necessary to clearly establish the parties intended and expected that tenants by the entireties was established.
If a married couple owns real estate outside of the State of Florida, it must be determined whether the state in which the property is located recognizes tenancy by the entireties as a form of ownership. Most states, including Colorado and North Carolina, do not recognize tenancy by the entireties. If the state where the real property is located does not recognize tenancy by the entireties, then the ownership should be converted to an intangible so that Florida law will apply. This can be done by transferring the property to a land trust, a partnership, a corporation, or a limited liability company, the interests in which will be held as tenants by the entireties between the spouses. For more information on Asset Protection planning and Estate Planning see The Florida Estate Planning, Elder Law and Asset Protection Blog.
Attacks On Tenancy By The Entireties Protection
If a husband and wife are jointly obligated for the debt, the creditor may subject property held by them as tenancy by the entireties to the satisfaction of the debt. Note that the homestead exemption may still secure the marital residence from certain joint debts.
The creation of a tenancy by the entireties does not divest creditors of preexisting liens, which already have attached to the debtor’s interest in the property. The creation of ownership of property by spouses as tenants by the entireties cannot be a fraud upon the creditor of one of them. Whetstone v. Coslick, 157 So. 666, 668 (Fla. 1934).
Planning opportunities are available where a debt arises against only one spouse and property is already titled as tenancy by the entireties. “[A] sale, gift or other disposition of property which is by law absolutely exempt from the payment of the owner’s debts cannot be impeached by creditors as in fraud of their rights. Creditors have no right to complain of dealing with property which the law does not allow them to apply to their own claims, even though such dealings are with a purpose to hinder, delay or defraud them. Based on Dean, it appears that the transfer of a tenancy by the entirety account from a debtor spouse to the nondebtor spouse when both joint owners are living should not be a fraudulent transfer because such an asset would already be exempt as a tenancy by the entirety account. Therefore, if one spouse become ill and the spouse who is likely to be the surviving spouse has a judgment against him or her, effective planning can be initiated by conveying the entirety property to the spouse who is ill and providing in the will or trust of the ill spouse that the assets of the ill spouse will not pass outright to the surviving spouse with creditor problems, but perhaps to a QTIP trust for the benefit of the surviving spouse.
No Shield to Federal Tax Liens
Another case that has continued the attack on tenancy by the entireties property as an asset protection tool is the US Supreme Court’s ruling in United States v Craft. In Craft, the Supreme Court ruled that a federal tax lien against one spouse attached to tenancy by the entireties property, even though there was no liability to the IRS by the other spouse. Craft established that the collection rights of taxing authorities clearly exceed the private creditor’s collection rights in states, which have a tenancy by the entirety property right. Florida residents are significantly affected now that Florida’s tenancy by the entirety, which clearly shielded assets from creditors for over a century, can no longer shield the entireties property from a federal tax lien after the Craft ruling.
In the aftermath of Craft, the Internal Revenue Service issued IRS Notice 2003-60. The Notice states that the IRS “will under certain circumstances, not apply Craft, with respect to certain interests created before Craft, to the detriment of third parties who may have already reasonably relied on the belief that state law prevents the attachment of the federal tax lien. The IRS, on a case-by-case consideration, “will not assert the federal tax lien rights where doing so may disturb the settled expectations” of those persons who may have been under the belief that a federal tax lien against one spouse would not attach to entireties property – provided that the entireties interest was created before the Craft case (April 17, 2002).
If the tenancy by the entireties property is sold or transferred after the ruling in Craft, the property is subject to the federal tax lien in the hands of the transferee to the extent of one-half of the transferee’s interest. Similarly, if the tenancy by the entireties property is awarded to the nonliable spouse after the Craft ruling, the nonliable spouse takes the property encumbered with the tax lien. If the tax-lien-debtor spouse dies, the tenancy by the entireties aspect of the entireties property is extinguished by operation of law, so there is no longer an interest of the debtor to which the federal tax lien would attach. Therefore, when the debtor spouse dies, “the surviving nonliable spouse takes the property unencumbered by the federal tax lien. However, if the “entirety” aspect was terminated prior to death, then the federal tax lien would attach. If the nonliable spouse dies first, the “entirety” aspect is terminated by operation of law, and the surviving debtor spouse is then vested with the whole title to the property, encumbered by the federal tax lien.
Bankruptcy Court Considerations
When a married couple owns property held as tenancy by the entireties, and there is debt in existence for which both are liable jointly at the time of a bankruptcy filing, it is unclear whether the joint debt causes the tenancy by the entireties-owned property to be exposed to the creditor(s) of only one spouse.
Under Florida law generally, when property is held as tenancy by the entireties, an individual spouse may not voluntarily or involuntarily alienate tenancy by the entireties property without the consent of the other spouse. It logically follows, then, that a creditor of only one spouse cannot reach the TBE property to satisfy its claim without the consent of the other spouse, and only a joint creditor, one who has a claim against both spousal tenants, may reach the tenancy by the entireties property which is not otherwise exempt.
A traditional common asset planning technique entails placing all or a substantial portion of assets in tenancy by the entireties form while keeping all debts separate, i.e., incurring debts only on an individual, not joint, basis. By structuring assets in such a manner, the debtor avoids subjecting tenancy by the entireties property to any creditor claims absent any joint debt, except in only a few limited circumstances. The invincibility of this technique comes into question once one spousal tenant files bankruptcy and claims an exemption pursuant to §522(b)(2)(B) for property held as tenancy by the entireties with the nondebtor spouse.
Planning Considerations with Tenancy by the Entireties
In light of Craft and the continuous attack on tenancy by the entireties protection, it is prudent that practitioners be extremely cautious when using tenancy by the entireties to title or restructure assets for the purpose of protecting assets from creditors, and must carefully investigate and review a client’s entire financial position taking nothing for granted. To avoid a malpractice claim, due diligence should be painstakingly thorough and extend to reviewing such items as bank signature cards and account applications, rather than merely accepting a client’s representation on a worksheet.
It is critical that asset titling for bank and stock brokerage accounts, mutual funds, etc., be confirmed to be titled as tenants by the entireties, or tenancy by the entireties, on the account documents and signature cards to expressly state their intent.
One should always consider the inherent risk of planning with entireties property, such as the untimely death of the spouse without a creditor problem resulting in previously exempt asset passing outright to the surviving spouse with a creditor problem. The debtor surviving spouse may find it difficult or impossible to transfer such property without violation the fraudulent transfer statutes. Clients and practitioners must understand that a joint debt that seems insignificant in the context of a sophisticated asset or estate plan, such as a joint credit card with a small balance of only a few $100 or a joint phone bill could, arguably, completely undermine efforts to protect the couple’s assets if one of the spouses were to file for bankruptcy. Accordingly, clients should be advised to have adequate means to satisfy any joint debts before ever filing for bankruptcy. Clients who invest in real estate or other leveraged assets may wish to do so in the form of a business entity which becomes the obligor, so that the clients themselves do not have any “personal joint debt.” Similarly, the client must be counseled to avoid tax liens if tenancy by the entireties property is used as a part of the asset protection plan, or be prepared to have any tenancy by the entireties property subject to levy by the IRS.
Tenancy by the entireties ownership frequently is incompatible with other estate planning objectives. Practitioners must provide clients with alternatives to take advantage of their individual unified credit if the bulk of their assets are owned as tenancy by the entireties. The use of life insurance is an alternative to dividing tenancy by the entirety property to allow each spouse to have sufficient assets to take advantage of their individual exemption amount.
[*] This document was originally written in 2004 for presentation to a continuing legal education seminar for lawyers, attorneys, certified public accountants and financial advisers. The footnote references to various case citations and other legal support for the statements made have been removed. The information presented was current as of the date of its original publication in 2004. The laws dealing with asset titling, asset protection planning, including statutory and constitutional exemptions from creditors’ claims is constantly evolving through statutory changes and case law decisions. You should not rely on any of the information contained herein without consulting with an experienced asset protection attorney or lawyer to determine whether the law has changed.