As many of you may already know, tenants by entireties (TbyE) is a way of holding title to assets, typically real estate, only available to married couples. The benefit of TbyE is that in theory neither spouse can convey, sell, or encumber their present possessory interest in the real estate. In effect the spouses own the property as one. That means that if spouse A gets hit with a lawsuit and loses, as a general rule spouse A's creditors can't take away the property held as TbyE. If the liability was joint to both spouses, that is to say both A and B were hit with, and lost, the lawsuit, TbyE probably isn't going to provide any protection. Also, when the first spouse dies, the surviving spouse becomes the sole owner of the property, this feature of TbyE is called the survivorship interest.

Keep in mind that the concept of TbyE ownership is a function of state law. When we start discussing the ramifications of a bankruptcy filing we enter the realm of federal law, with the federal bankruptcy laws typically trumping state law.

The first instance of federal law trumping state law is the ability of the bankruptcy trustee to force a sale of jointly owned property. Yep, in theory TbyE is supposed to protect against this, but in reality a number of jurisdictions will allow the bankruptcy trustee to sell property a debtor jointly owns with their spouse as TbyE. Once the property is sold, the trustee takes the debtor spouse's share and gives the non-bankrupt spouse, who is now sleeping in the gutter, their share. This is a bit of a pyrrhic victory as the married couple, and any kids, are forced to move out of their home. Sure, they might have received some cash from the forced sale, but chances are the credit rating of the married couple is probably now shot

Another concern is the right of survivorship each spouse has in the property. Some states consider the right of survivorship of property owned as TbyE as a separate property right that can be freely sold or encumbered without the permission of both spouses. Thus if spouse A wanted to sell off their right of survivorship in the property, spouse A would not need the permission of spouse B. Same thing with if A merely wanted to obtain a loan on their survivorship interest, no need for Spouse B's signature on the paperwork.

At this point some of you might be starting to think this is another outlandish example, no bank is willing to make a loan on something so speculative as the survivorship interest, no sane person would be willing to purchase it either.

As I sit here typing this article, I am also bidding via a bankruptcy sale on someone’s survivorship interest.

The back story is spouse A of a married couple decided to file for bankruptcy. (True story, just hiding the identities for privacy purposes.) Their personal residence has over 100K of equity inside of it, much more than the particular state's homestead exemption. My guess is the plan for the couple was for spouse A to file bankruptcy... wait a few months, then have spouse B file bankruptcy with the intent being the bankruptcy trustee can't touch the equity in the property since it is held as TbyE.

The problem with the plan is that the bankruptcy trustee is selling off spouse A's survivorship interest in the property, an asset that I, acting as an investor, am now bidding on the survivorship interest.

Stop and think of the ramifications if I'm successful on my bidding. How many banks are going to be willing to refi a property where some absolute stranger has ownership in this weird thing called a survivorship interest of the property? How about purchasers of the property? Can either of our illustrious spouses sell the property? Nope, they can't convey clear title if someone else is to receive the property upon their death. The net result of a third party having a survivorship interest on a piece of property is the third party has a veto right on the actions of the spouses and their real estate.

So how does this affect you and your life? There is a very large segment of our readership that believe that while they may be subject to malpractice suits, all they have to do is title their property as TbyE and they will be protected. Typically these readers have MD behind their name.

The thought process is that the MD spouse might incur liability, but non- MD spouse won't, and thus the nasty creditors can't take the property due to the property being owned as TbyE.

So what happens if you live in a jurisdiction where the survivorship interest is an asset that can be bought, sold, encumbered, or otherwise transferred by a single spouse?

You're out of luck.

If the other side knows about and understands the right of survivorship, the control of your property is now in play. Once someone else owns the right of survivorship, are you going to be able to sell the home? How about take out a loan on the property? Doubtful. Someone else now effectively has veto power over your property. By the way, what happens if your spouse gets in an accident and dies? Yep, your creditors now own your home.

All by itself, Tenants by entireties is not a sound asset protection plan.

Being the broken record that I am let me close with a plea for you to get your house in order. The typical phone call now a days is one that includes the subject of upside down real estate. Once we hear that, there is a high likelihood we can't do anything for that person as movement of assets is probably going to be perceived as some sort of fraudulent conveyance rules. In short, you waited too long and there is little if anything you can do that isn’t going to be attacked later.

If you're serious about putting together a plan to protect the assets you have worked hard to build up for you and your family give us a call, don't wait until its too late. On the other hand, if your life is too busy and hectic for you to stop and devote some time to setting things up, when you do give a call because of impending doom, don't be offended if we tell you, "You asked for it."