What are the Disadvantages of Tenancy by the Entirety?
If you’re considering various asset protection strategies in a state that acknowledges “Tenancy by the Entirety,” it’s essential to understand its limitations. While this form of property ownership, available in states like DE, FL, IN, IL, MD, HI, MA, MI, NC, OH, PA, TN, VT, VA, WY and the District of Columbia, does offer some benefits, it is not a foolproof asset protection strategy and should not be viewed as a substitute for an Asset Protection Trust (APT).
What is Tenancy by the Entirety?
Tenancy by the Entirety is a unique form of co-ownership designed specifically for married couples. Under this arrangement, both spouses own the entire property equally, and neither can independently sell or encumber it without the other’s consent. One of the touted benefits is that, in many jurisdictions, creditors of only one spouse cannot place a lien on the property, providing a layer of protection against individual debts.
However, despite this apparent protection, there are significant limitations that can compromise your financial security.
Key Disadvantages of Tenancy by the Entirety
1. Inflexibility in Property Management: Should one spouse become incapacitated or pass away, difficulties can arise. For instance, transferring or encumbering the property may require cooperation that may not be feasible in such circumstances.
2. Challenges in Estate Planning: Tenancy by the Entirety can complicate estate planning. Unlike joint tenancy, where one spouse can easily pass their interest to an adult child, this arrangement blocks such straightforward transfers, potentially complicating inheritance.
3. Vulnerability After a Tragedy: A stark example of this vulnerability can be seen in unforeseen circumstances. Consider a scenario where one spouse, Ms. Feelgood is driving home on a cold November afternoon, when it begins to snow. The weather causes Ms. Feelgood to crash on the road, resulting in her death, and several injuries and the death of another motorist.
At the time of her death, “Tenancy By The entirety” automatically transfers everything over to her husband Dr. Feelgood and leaves his estate vulnerable and at risk to future lawsuit claims without an Asset Protection Trust. This realistic predicament highlights the failure of this strategy to provide adequate asset protection in the wake of significant financial liability. Not only has Dr. Feelgood lost his wife, but now he stands to lose his entire estate.
4. Lack of Estate and Creditor Protection Post-Death: After the death of one spouse, if the surviving spouse does not take proactive steps, they may find that fluidity in asset management is compromised. For example, a surviving spouse may be unable to disclaim the deceased spouse’s interest effectively, potentially entangling their estate in legal issues that could have been avoided with better planning.
5. Tenancy by the Entirety States: Not every State recognizes this form of ownership. It is only available in certain states.
The Case for Asset Protection Trusts
Given these disadvantages, relying solely on Tenancy by the Entirety for asset protection is unwise. An Asset Protection Trust (APT) presents a more robust solution. Unlike Tenancy by the Entirety, an APT can be structured to shield assets from creditors, lawsuits, and other risks, helping safeguard your estate effectively.
– Creditor Protection: Assets held in an APT are generally protected from claims against the grantor, offering peace of mind not afforded by Tenancy by the Entirety.
– Strategic Management: An APT allows for more flexibility in managing and transferring assets, offering greater control over your estate and ensuring that your wishes are honored.
– Tax Benefits: An APT also retains the mortgage interest deduction and capital gains benefits associated with residential sales, something that is not guaranteed under Tenancy by the Entirety.
Conclusion
While Tenancy by the Entirety can serve as a tool for certain estate planning needs, it is inadequate as a comprehensive asset protection strategy. The risks inherent in this form of ownership can expose your estate to vulnerabilities that an Asset Protection Trust can effectively mitigate. For those serious about safeguarding their assets, consulting with a qualified estate planning attorney to explore APTs is a prudent next step.
Don’t leave your legacy to chance—invest in a strategy that provides real protection.
Call us for a legal consultation and talk with an asset protection lawyer at (888) 773-9399
By: Brian T. Bradley, Esq.
