By Steven Ulrich, CFP®, ChFEBC℠
The homeownership rate in the United States is about 64 percent, of which married couples make up the majority (United States Census Bureau). A home is typically a couples’ most significant investment, so ensuring proper asset protection should be a priority. Some states allow for a type of property ownership called Tenancy by the Entirety (TBE). TBE is a form of property ownership that exists exclusively for married couples, where each spouse owns 100 percent of the property, and is the frequently presented option for married couples titling a house. However, what many don’t realize is that TBE is not exclusive to real estate, and can also be applied to personal property, such as bank and investment accounts or car and collectibles.
But is TBE always the best option for all married couples?
Advantages of TBE
Owning personal or residential property as TBE is a tool that roughly half of the U.S. and the District of Columbia allows, yet based on our experience, we see few clients utilize this structure because its advantages are not well-known. Some married couples may want to consider re-titling their property, especially sizable bank or investment accounts, as TBE for two primary reasons.
Property owned as TBE cannot be severed, such as in a lawsuit against one spouse, without the consent of both co-owners. Because of this severance protection, creditors of one spouse alone have no claim to property held as TBE, (assuming it wasn’t established through fraudulent means).
TBE considers the spouses as “one”; essentially the marriage is the owner of the property and cannot be acted upon without the consent of both parties of the marriage. This added legal protection may make TBE ownership a compelling alternative to traditional joint ownership options, like Joint Tenancy with Rights of Survivorship or Tenancy in Common.
Avoidance of Probate
Upon the passing of the first spouse, TBE property avoids going through probate, the costly and burdensome legal process of validating a deceased person’s will. Keep in mind however, that once the first spouse in a TBE arrangement passes away, the TBE asset protection disappears.
The property becomes the possession of the surviving owner, requiring additional estate planning action to be taken to protect the property for the benefit of the surviving spouse. Without further planning, property owned solely by the surviving spouse may be subject to probate at their passing.
Cautions before changing to TBE
Despite its benefits, TBE is not a one-size-fits-all financial planning solution, so it may not be the right fit in your situation.
Someone in a second marriage may not want to own property through TBE, as they may prefer their property to be passed down to a child or charity instead of their spouse. In those types of scenarios, owners could utilize Joint Tenancy with Rights of Survivorship or a Transfer on Death designation instead.
TBE property is also considered marital property in the case of a divorce, which may be a disadvantage to the original property owner. This means that if a solely-owning spouse re-titles their property to TBE upon their marriage, that property then becomes subject to an equitable distribution at the divorce instead of otherwise being separate property and thus unrelated to divorce proceedings.
Because TBE property is viewed as effectively being owned by the marriage, neither spouse can dispose of the asset without the consent of the other. While this provides for the creditor protection of TBE, if each spouse prefers independent access to the property, then TBE may be unnecessarily prohibitive.
Another downside to TBE property is the limited availability nationwide, which can create planning complications for families with properties in multiple states. Additionally, not all states that provide for TBE allow personal property to be retitled as TBE.
Whatever the specific situation, it’s important to consider your intentions for your property upon your passing. To determine the best type of property ownership for your needs, consult your financial advisor and other professionals well-versed in the legal complexities and tax implications involved in property ownership options. If possible, try to get these professionals in a room together to collaborate so that you and your spouse have a comprehensive financial strategy that fully meets your needs and goals.
To learn more about TBE or other types of property ownership, contact your financial advisor or click here to contact us.
Neither Cassaday & Company, Inc., Royal Alliance Associates, nor its agents or representatives can provide tax, legal or accounting advice. Please consult your attorney or tax advisor about your specific circumstances.