April 03, 2014

Tenancy by the entirety: a simple, important tool to protect your home from creditors

When a deal goes bad for a professional, entrepreneur, or business owner, it raises a concern that creditors may be able to take their home. But many Kentucky residents may already have protected that asset just by owning it with a spouse.

In many instances, property owned by a husband and wife in a tenancy by the entirety is protected from joint creditors of the spouses. Kentucky, as well as many of the states, recognizes tenancy by the entirety.[1] Property owned by the entirety creates a right of survivorship in the spouse. Upon the death of a spouse, the survivor becomes the sole owner. This is not a transfer, but rather the extinguishing of the deceased spouse's interest.

Kentucky provides strong support for "innocent", i.e., non-debtor, spouses through tenancy by the entirety. Under the common law, five unities create a tenancy by the entirety: interest, time, title, possession, and marriage. But severing the unity of marriage transforms the ownership to tenancy in common.[2] As long as the marriage remains intact after creditor problems arise, the creditor can only force the sale of the home upon the death of the non-debtor spouse. Kentucky law does permit the creditor to attach and execute upon the debtor-spouse's contingent property interest.[3] But selling the debtor's contingent interest does not affect the spouses' present possessory interest remains untouched. As long as the non-debtor spouse lives, a judgment creditor cannot sell the land. A debtor who maintains the unity of marriage amidst creditor problems will have this simple, yet strong, form of asset protection.

When working with clients who own or may acquire Kentucky real property, advisors should remember the asset protection benefits of entireties property. For instance, shifting ownership to one spouse may carry a price in lost asset protection benefits. [4] Similarly, it should be considered to protect assets owned prior to marriage.

Kentucky, unlike other states, has limited asset protection. Entireties property is a significant exception. Advisors and married clients should make the most of the asset protection opportunities of entireties property.

Image above courtesy of National Archives & Records Administration (Dwight D. Eisenhower Presidential Library).

[1] Alford v. Rogers, Ky., 262 S.W.2d 676 (1953); Cowan v. Pleasant, Ky., 263 S.W.2d 494 (1954); Hoffmann v. Newell, Ky., 60 S.W.2d 607, 249 Ky. 270 (1933).

[2] Nelson v. Mahurin, 994 S.W.2d 10, 15 (Ky. App. 1998).

[3] In re Brumbaugh, 250 B.R. 605, 608 (Bankr. W.D. Ky. 2000).

[4] This is often done to equalize assets and fully realize the benefit of credit shelter estate tax planning, a topic for a later post.