By: Frank Byrd
Harvest Exchange
February 2, 2018

"Own It" (but Title It Properly)

Amen of the Week:

"I think frugality drives innovation, just like other constraints do. One of the only ways to get out of a tight box is to invent your way out."

—Jeff Bezos, founder and CEO of Amazon

"Own It" ... but Title It Properly

How you title your property matters. Big time. Couples (married or otherwise) typically title their property as Joint Tenants with Rights of Survivorship. Few appreciate that this might have significantly negative tax and legal ramifications. There are alternative legal structures that may offer protection and peace of mind when unfortunate situations arise. The good news is that some of structures cost you nothing to implement.

One such legal strategy is to hold assets as Tenants by Entirety: a special form of Joint Ownership that can provide greater protection from creditors for you and your family’s assets. Only certain states allow Tenancy by Entirety, but if you live in a state that does, you should strongly consider changing any assets owned Joint Tenants with Rights of Survivorship to "Tenancy by Entirety" ownership.*

An Example: Suppose a married couple owns their home and titles it Joint Ownership with Rights of Survivorship (JTWROS). The wife owns a business and takes out a business loan backed by a pledge of her personal assets (a “personal guarantee”, as banks often require). During a recession, her business runs into trouble and her company defaults on the loan. Her creditors can now take the couple’s home. By contrast, if this couple’s home had instead been titled as Tenants by Entirety, the wife’s creditors could not have exercised a claim on the house at any time during their marriage. If the wife dies before her husband, her creditors lose all ability to exercise claims against their property.**

It is important to recognize that this additional protection applies only when the assets have been pledged as collateral by only one spouse. In other words, the home mortgage must have been in the Wife’s single name to have kept the home outside of creditors’ reach. This is why couples should typically avoid co-signing loans whenever possible. For similar reasons, couples should not title automobiles in joint name to avoid exposing both spouses to liability in the event of an auto accident.

If you live in a state that allows it*, you should strongly consider changing any Joint Ownership With Rights of Survivorship assets over to Tenancy by Entirety.* Have questions? We're here to help you think through the pros and cons of various asset titling strategies.

Yours in the Field,

Frank Byrd, CFA and Peter Cook, CFA, CFP

For more information on the legal basis behind this protection, please see by estate planning attorney Mike Adams.

*According to Charles Schwab & Co., as of 01/01/2017, the states that recognize Tenancy by the Entirety include: Alaska, Arkansas, Delaware, District of Columbia, Florida, Hawaii, Illinois, Indiana, Kentucky, Maryland, Massachusetts, Michigan, Mississippi, Missouri, New Jersey, New York, North Carolina, Oklahoma, Oregon, Pennsylvania, Rhode Island, Tennessee, Vermont, Virginia and Wyoming. Note that the following states allow only Real Property (real estate) to be held as Tenants by the Entirety: Illinois, Indiana, Kentucky, Michigan, New York, North Carolina, and Oregon. In this subset of states, other personal property cannot be held as Tenants by the Entirety.

**If the husband dies first, the creditors might ultimately be able to take the home (assuming the claim remains in force). Fortunately, in some states, there is the ability to create a trust to keep the property out of creditors’ hands even in this event.

In some states, however, there are trusts that create additional protections to secure the property from creditors in this event. Please reach out for more information about these types of trusts.

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Originally Published at: "Own It" (but Title It Properly)