A new statute which became effective 7/1/2014 has made it important that you make yourself aware of how a very old legal concept works, called “tenancy by the entirety.” The summary below is meant to act as a quick guide to make you familiar with tenancy by the entirety. Remember, Tennessee recognizes tenancy by the entirety in the common law, while some other states do not. Tennessee now allows the long-standing asset protection exemption of Tenancy by the Entirety to apply even after a transfer is made into a trust – so this is a timely and important topic.
1. What is Tenancy by the Entirety? A tenancy by the entirety is a form of joint ownership similar to the more familiar joint tenancy form of ownership where the surviving spouse has a right of survivorship, but offers exemption from the claims of creditors of either of the spouses. A tenancy by the entirety can be created only between husband and wife, because the couple is considered to be one person or one unit. As such, the spouses do not take the estate in equal shares, but rather they hold title as one unit, with each being deemed to have full ownership.
2. How does a couple create a Tenancy by the Entirety? In Tennessee, where a conveyance is not clearly intended otherwise, it is presumed that a conveyance to a husband and wife creates a tenancy by the entirety. The marital designation (such as “husband and wife” or “married”) generally is the only “legalese” that is required to take ownership as a tenancy by the entirety, although it is appropriate to be clearer as to intent for assets other than the marital home.
3. Can one spouse or any other event sever a Tenancy by the Entirety? Although the tenancy by the entirety resembles a normal joint tenancy, it is very different from the joint tenancy because severance of the tenancy by one tenant (an individual spouse) is not possible. Neither spouse acting alone can destroy or disrupt the nature of the tenancy (as would be possible in a typical joint tenancy). In other words, an individual spouse cannot convey his or her interest individually. The interest must be conveyed by the marital unit. A divorce terminates the unity of husband and wife and, therefore, the tenancy by the entirety; in Tennessee, the tenancy by the entirety is converted into a tenancy in common at divorce. The death of either spouse terminates a tenancy by the entirety (see below).
4. What rights (or limitations) do creditors have? Since the property is held by the marital unit, an individual spouse’s creditor cannot seize that individual’s interest (and then force the sale of the property). Only a creditor of the marital unit may enforce a lien against the property – meaning that both spouses must be liable before the tenancy by the entirety property will be subjected to creditors. Note that, in bankruptcy, Tennessee has an odd rule about an “expectancy” value so this is not an absolutely effective exemption. If upon the death of one spouse the surviving spouse has a creditor, that creditor can reach the property after the death of a spouse. However, if the deceased spouse is the one with a creditor, the surviving spouse will not be subject directly to the claims of the deceased spouse’s creditors (although there are some circumstances where the exemption is limited in scope after the death of a spouse in probate court or in a trust administration).
5. Why does this new statute matter? As indicated above, a new Tennessee statute specifically makes the creditor protection exemption continue to apply to property that is tenancy by the entirety prior to being transferred into a joint revocable living trust where the spouses are the sole beneficiaries (and other conditions are met). In the past, it was common that property would be left outside of a trust to retain that exemption – but now all married couples should examine whether property should now be moved into a trust.
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