Does Tenancy By The Entirety (TBE) Offer Protection From Creditors?

Here’s an interesting scenario.

Let’s say a friend of yours who is interested in law (but isn’t a bonafide lawyer) approaches you with a suggestion. You and your spouse should consider a Tenancy by the Entirety ownership arrangement for your house.  

You ask your friend why you would consider that.

The friend responds that it can protect your house from seizure by a creditor if you can’t pay off a debt.

You mull that over, thinking of all the possibilities. Then skepticism might kick in. “Can the tenancy by the entirety offer protection from creditors?” you wonder.

The answer is: Yes . . . but.

Yes – in certain circumstances, the TBE structure can offer protection against asset seizure.

But – it would be a mistake to assume that the TBE structure provides iron-clad protection for your assets from creditors.

Reviewing the TBE Structure

Tenancy by the Entirety is a form of joint property ownership in which a married couple shares equal ownership of a particular property, like your house mentioned above. According to the setup, you and your spouse are considered a single entity that owns an asset. 

The main benefit of a TBE setup is that when one spouse dies, asset ownership automatically passes to the surviving partner. That partner can avoid the costly and time-consuming process of probate.

There are a few things to consider about TBE:

• It’s recognized in 25 states and DC; community property states don’t offer the TBE structure
• The setup is only for married couples (though some states will allow TBEs for domestic partnerships)
• Five “unity” conditions must be met to form a TBE: Unity of time, title, interest, possession, and marriage

Right now, you might be thinking that your friend is a genius. You’re married and reside in a state that recognizes the TBE legal setup. With that structure, your house is likely protected by creditors, and you could avoid the probate process when one of you dies. You’re ready to call your lawyer and take steps to switch your house deed to a TBE and re-title your property. 

But take a deep breath. The asset protection issue isn’t guaranteed. 

Theoretical Protection Against Creditors

The above friend who excited you about the TBE structure and its protection is partially correct. If a creditor has a judgment against your spouse (but not you), that creditor technically can’t seize your house for payment under the TBE structure. 

By the same token, if you’re the one who is in that creditor’s sights and your spouse is not, the TBE arrangement technically means the creditor can’t seize the house or place a lien on it to collect on an owed debt.

Now the Reality

Life sometimes isn't so straightforward when it comes to debts, judgments, and seizures. If you AND your spouse are both targeted by the same creditor, TBE won’t shield your assets from the creditor. The creditor can place a lien on your house or seize it outright. 

Then there are other issues to consider.

Death and Divorce

Under the TBE arrangement, if your spouse dies, the property automatically passes to you without the cumbersome probate process. As mentioned above, that’s the main benefit of the TBE. But your spouse’s death automatically dissolves the TBE. Assets formerly protected by that arrangement are now available to your creditors. 

The same holds in the case of divorce. You're no longer a married couple if you and your non-debtor spouse are legally parted. The TBE doesn’t exist anymore. If you continue to co-own the property with your (now ex) spouse, the ownership becomes a tenant in common arrangement. Without the TBE protection, the creditor can seize your house.

Legal Interpretations

You might think your assets are safe under the TBE. But a judge might have another viewpoint, especially if they suspect the arrangement was created specifically to avoid debt collection. An example might be a married couple that sets up a TBE for their home and then decides not to repay a credit card or other loan. This might not be you. But much of this can be left up to a judge’s interpretation.

The Right Reasons for a TBE

To reiterate, the advantage of tenancy by the entirety is ensuring a smooth asset ownership transition if a spouse dies. That asset could be protected from creditors in certain situations, but that isn’t the reason to enter into a TBE. Any creditor protection from a TBE is relatively weak.

Furthermore, TBE rules vary by state. If you decide on this path, consult with an attorney who can guide you through the process.