Holding assets as tenants by the entireties presents such distinct and real problems that it is best to refrain from using these types of holdings as a primary method to protect and preserve wealth.
Ask yourself as a lawyer, business person, entrepreneur, or professional whether holding assets (or having clients hold their assets) as tenants by the entireties is an effective method of wealth preservation. Without hesitation, the answer should be no. The common practice in some jurisdictions, (especially Florida) of encouraging clients to acquire and hold assets as tenants by the entireties with a spouse as a possible wealth preservation methodology is ill-founded, ill conceived, and potentially disastrous.
In states, such as Florida, that allow husbands and wives to hold assets as tenants by the entireties, a creditor of one of the spouses may not (under certain circumstances) attach the tenancy by the entireties assets unless both spouses are indebted to the creditor. It became common practice to counsel clients to hold their assets as tenants by the entireties to protect their joint assets from future creditors’ claims. The practice by lawyers and others of advising clients to form tenancy by the entireties estates is suspect and may result in a possible legal malpractice claim given (i) the recent reluctance of judges to apply an ad hoc approach to creditors’ claims against debtors who held assets as tenants by the entireties (i.e., increasing judicial discretion in favor of creditors), (ii) increasing divorce rates, and (iii) the unpredictability of death.
Unfortunately, counsel and other financial advisors tend to ignore the vicissitudes of life and the impact that an unexpected event may have on an overall wealth preservation and asset protection plan. Advisors must remember that a tenancy by the entireties immediately terminates upon divorce or death.
Example. A judgment exists against Mr. Jones, and his wife unexpectedly dies. The tenancy by the entireties assets that, under some circumstances, could be exempt from the claims of creditors would then, in a “blink of a legal eyelash” be owned by Mr. Jones and, therefore, be subject to the claim of his creditors. Any subsequent transfer by Mr. Jones could possibly be deemed a fraudulent conveyance (the discussion of which is beyond the scope of this article), and he could encounter a myriad of legal problems and exorbitant legal and accounting fees and the like. There is also the real possibility that Mr. Jones will lose some or all of the tenancy by the entireties assets.
The concept of tenancy by the entireties and the treatment of tenancy by the entireties assets in Florida became of great interest to many real estate developers and other players of the “leveraged asset game” in the mid 1980s and early 1990s when the RTC and FDIC problems occurred. Florida was known as a bastion for out-of-state developers and investors who moved to Florida to take advantage not only of Florida’s wonderful climate but its debtor-friendly laws concerning unlimited homestead and tenancy by the entireties assets.
The common law principle of tenancy by the entireties relates to joint ownership of assets and applies only to husband and wife. It does not apply to mother-daughter, father-son, mother-son, girlfriend-boyfriend, etc. Twenty-five states currently recognize tenancy by the entireties as a form of property ownership for both real and personal property. 1 Tenancy by the entireties is an estate that can exist between husband and wife only where both spouses own and control the whole estate. 2 In Florida, real and personal property held by the entireties create different legal inferences. Real property owned by a husband and wife is presumed to be held as tenancy by the entireties and the creditor must refute the presumption to gain access to the property. 3 The burden is on the debtors when personal property is owned as husband and wife to demonstrate an intent to create a tenancy by the entireties. 4
Moreover, to create a tenancy by the entireties under Florida law, unities of time, title, possession, marriage, and interest are required. 5 Thus, both spouses must (i) receive title in the same conveyance, (ii) hold title to the property, (iii) have equal right to use and possess the entire property, (iv) be married to one another, and (v) have an equal interest in the whole of the property. 6 If any of these unities are not satisfied, there is no tenancy by the entireties.
Additionally, clients must determine whether the financial institution where they wish to create a tenancy by the entireties account provides for such accounts. If the bank or financial institution does not have tenancy by the entireties accounts, a tenancy by the entireties account cannot be created. For example, the author is familiar with a case the author refers to as the “Case of the Wise Guy Bank Director.” (This is an unreported case.) In this instance, the director of a bank in New Jersey who was being chased by several creditors moved to Florida and opened what he believed to be a tenancy by the entireties account with his wife. Unfortunately, this bank director did not bother to read the bold print on the account opening card which stated that “ZYZ Financial Institution does not offer its customers tenancy by the entireties accounts.” Although counsel for the bank director made a valiant effort to persuade a trial court judge that the husband and wife intended to create a tenancy by the entireties account, the judge ruled that if the institution did not offer tenancy by the entireties accounts, it would be legally impossible to have a tenancy by the entireties account. Chalk one up for the creditors.
A tenancy by the entireties estate treats a marital couple as one in the eyes of the law, and as such, when property is held as tenants by the entireties, an individual spouse may not voluntarily or involuntarily alienate the property without the consent of the other spouse. 7 Thus, one spouse cannot dispose of any part of the estate without the consent of the other, nor may either spouse subject the property to the payment of his or her individual debts. 8 Therefore, tenancy by the entireties properties are not ordinarily (as a matter of “black letter” law) subject to execution by judgment creditors for the debt of an individual spouse. 9 Creditors with claims against both spouses, however, may reach the tenancy by the entireties assets by attaching the property held as tenants by the entireties. 10 Therefore, tenancy by the entireties property is exposed only to the extent of the spouses’ joint obligations.
Attorneys and their clients forget that in many situations unexpected happenings cause financial disasters. For example, if a husband and wife own their automobiles jointly, in the event of an accident that causes personal injury to a third party, the tenancy by the entireties assets will be exposed to claims by the injured party. The same rule applies if a husband is driving a wife’s car or a wife is driving a husband’s car. In any such event, tenancy by the entireties assets will be exposed to the claims of creditors for damages in excess of any insurance coverage.
Property held as tenancy by the entireties may be exempt where an individual spouse debtor institutes bankruptcy proceedings. Under section 541 of the Bankruptcy Code (Code), when a debtor files a bankruptcy petition, a bankruptcy estate is created. This section states that “all interests of the debtor and the debtor’s spouse in community property as of the commencement of the case” is included within the bankruptcy estate. Courts have interpreted this section to include the debtor’s interest in property held as tenancy by the entireties. 11 Therefore, since tenancy by the entireties property is property of the estate, the property is subject to creditors’ claims unless exempted under section 522(b)(2)(B) of the Code. 12
Pursuant to section 522(b)(2)(B) of the Code, a debtor may exempt tenancy by the entireties property if the state in which the debtor resides has opted out of the federal exemptions. This section of the Code states that a debtor may exempt from property of the estate “any interest in property in which the debtor had, immediately before the commencement of the case, an interest as a tenant by the entirety or joint tenant to the extent that such interest as a tenant by the entirety or joint tenant is exempt from process under applicable non-bankruptcy law.” Therefore, if there are no objections raised in response to the debtor’s claim that the property is exempt based on a tenancy by the entireties, “the property will emerge from the bankruptcy in the hands of the debtor subject to creditor’s claims under state law.” 13
Any creditor, however, may file an objection to the debtor’s claimed exemption in an attempt to make the tenancy by the entireties assets available to satisfy the claims of the creditors. 14 After an objection is filed, the bankruptcy court must determine whether the creditor’s objection should be sustained pursuant to the Code and similar existing case law. If the objection is sustained, the tenancy by the entireties assets will be available for distribution to creditors.
The protection ostensibly afforded to tenancy by the entireties holdings may immediately evaporate not only upon an untimely death or divorce, but such assets are now at the additional risk of the discretion of courts attempting to curtail the protective nature of tenancy by the entireties. Michael Massey, Esq., states that “practitioners, trustees, and clients often are clueless as to how a debtor’s entireties assets will emerge from a bankruptcy proceeding [and] the answer will be decided based on which bankruptcy judge happens to hear the debtor’s case.” 15
Limitations on Use of Tenancy by the Entireties. One example that illustrates how judges are attempting to limit a debtor’s use of tenancy by the entireties to protect assets from creditors was the decision of Judge A.J. Cristol in In re Juan E. Planas. 16 Judge Cristol’s ruling “substantially eroded, if not completely eliminated, a debtor’s ability to claim an exemption pursuant to 11 U.S.C. § 522(b)(2)(B) for tenancy by the entireties property if the debtor and the debtor’s non-debtor spouse have any joint debt.” 17 Judge Cristol’s opinion was overruled after appellate review by the United States District Court for the Southern District of Florida. 18Nevertheless, certain judges, banks, finance companies, lenders, and creditors’ attorneys believe, as did Judge Cristol, that the “debtor’s haven” status apparent in states authorizing tenancy by the entireties must be limited. Therefore, it is conceivable that these states, either through judicial determination or legislation, will minimize these common law debtor protections.
In Planas, Juan Planas filed an individual Chapter 7 bankruptcy petition as the debtor. He listed his residential homestead, household goods, bank account, brokerage account, equity interests in two corporations, and a warehouse as exempt since both he and his wife (the non-debtor spouse) jointly held the property as tenants by the entireties. In response to these claimed exemptions, the trustee filed renewed objections, in which the trustee objected to all of debtor’s property being claimed as exempt on the grounds that classification as tenancy by the entireties is not a proper basis for an exemption. The trustee further argued that the trustee is entitled to liquidate all tenancy by the entireties assets for the benefit of the creditors of the individual bankruptcy debtor property if the debtor and his non-debtor spouse are jointly liable on any obligation. Judge Cristol sustained the trustee’s objections finding that the trustee could liquidate the debtor’s interest in the alleged tenancy by the entireties property for the benefit of the entire bankruptcy estate and not merely for the benefit of joint creditors.
Even though Judge Cristol’s decision was later overruled, he attempted to limit the protections afforded to debtors. Judge Cristol relied upon Moore v. Bay, 19 concluding that it was proper to allow the trustee to use a small joint claim as a lever to overturn tenancy by the entireties immunity for the benefit of the general estate, not solely for joint creditors. Judge Cristol reinforced his position by asserting that if courts deny a creditor the opportunity to benefit from tenancy by the entireties property within the estate, it would violate the Code’s aim of equalizing distribution of the bankrupt estate among creditors. Judge Cristol’s challenge to the long-standing traditional tenancy by the entireties doctrine may encourage judges, banks, finance companies, lenders, and creditors’ attorneys to challenge existing tenancy by the entireties law.
Joint Spousal Bank Accounts
In an article published in the Wall Street Journal, John McKinnon discusses the “legal quagmire” of Florida’s rules and the proof required to establish tenancy by the entireties ownership of joint spousal bank accounts. 20 In Florida, depositors must show an intent to create a tenancy by the entireties account, whereas in other states the marital couple is afforded a presumption that a joint account is held as tenancy by the entireties unless otherwise indicated or disproven. 21 The case of Beal Bank, SSB v. Almand & Associates illustrates the “legal quagmire” presented by the ambiguous rules concerning joint-spousal bank accounts. 22
In Beal Bank, the court was presented with the issue of whether a debtor can safeguard a marital joint bank account from creditors by invoking the doctrine of tenancy by the entireties when there is no written proof that the account was intended to have tenancy by the entireties ownership. The appellees, Amos Almand, Jr. and Amos Almand, III, defaulted on mortgage and note obligations. Beal Bank obtained a foreclosure judgment and garnished nine accounts. The Almands argued that the accounts were insulated from garnishment because they were held as tenants by the entireties with their wives. The appellate court issued a per curiam opinion with the judges agreeing that a particular account was not subject to the execution and that another account was subject to execution. The judges, however, disagreed on the remaining accounts. The court held that certain accounts in the joint names were subject to execution while other joint accounts were exempt from execution.
The judges used their judicial discretion to determine if the requisite intent to create a tenancy by the entireties account was present. Judge Cobb decided that the remaining accounts should not be exempt from execution since the husbands did not know the legal significance of a tenancy by the entireties account and the wives did not testify as to the intent behind creating the accounts.
Judge Harris and Judge Sharp believed that the Almands satisfied their burden of demonstrating an intent to create tenancy by the entireties accounts since the five unities existed and the Almands intended to create accounts “with the attributes” of a tenancy by the entireties estate. They dismissed the notion that the debtors are required to know the legal significance of a tenancy by the entireties estate to create one. Rather, “the only intent necessary to be proved… is the intent that each spouse owns the entire account and not a divisible portion thereof.” 23
In the event of a divorce, matrimonial issues will affect the ownership of tenancy by the entireties assets once a divorce is final. Tenancy by the entireties properties, both real and personal, no longer exist upon the division of the marital estate as the property is divided between the former spouses. Thus, a creditor of one of the spouses may attach that former spouse’s interest in such assets. In a recent article, Nicole Lindsey stated that “today, divorce is as common an occurrence as marriage itself.” 24 The increasing rate of divorce throughout the U.S. diminishes the effectiveness of tenancy by the entireties. Once a divorce is finalized, debtors who once were protected by the tenancy by the entireties are now subject to claims made by creditors. According to U.S. statistics, “in 1920, 170,505 divorces were granted in the United States, or 1.6 people per every 1,000 people in the total population were granted divorces [and] [i]n most states that level had more than doubled to 845,000, or 4.0 per 1,000, by 1972.” 25 These statistics combined with Lindsey’s statement that in 1998 “an estimated fifty percent of the marriages that are entered into will end in divorce” suggest that tenancy by the entireties is not the best asset protection tool to adopt when an unexpected divorce may arise in the near future. 26
Death of Spouse
Finally, death immediately causes all assets held as tenancy by the entireties to be exposed to creditors of the surviving spouse. Tenancy by the entireties assets are protected only as long as both spouses are living. Upon the death of a spouse (if the non-debtor spouse predeceases the debtor spouse), the creditors will be able immediately to attach the former tenancy by the entireties assets.
Clearly, the many unknown events that face anyone trying to preserve and protect wealth may negatively affect tenancy by the entirety holdings. Wealth is very difficult to earn and in this day and age exceedingly easy to lose. Wealth is irreplaceable. Accordingly, the use of tenancy by the entireties holdings presents such distinct and real problems that one must refrain from using these types of holdings as a primary method to protect and preserve wealth. Other solutions should be considered, including, but not limited to, exempt assets under state law. If the situation warrants, the client should seriously consider the use of an offshore asset protection trust or one of its several variations as a more reliable wealth preservation methodology.
1 Massey, “When the Tenancy by the Entirety Doctrine Meets the Bankruptcy Code: Clash of the Titans,” 73 Fla. B.J. 49 (July/August 1999) (citing Null, “Tenancy by the Entirety as an Asset Shield: Unjustified Safe Haven for Delinquent Child Support Obligors,” 29 Val. U. L. Rev. 1057, 1114 n.207 (1995)).
2 In re Himmelstein, 203 Bkrptcy. Rptr. 1009 (Bkrptcy. DC Fla., 1996).
3 Losey v. Losey, 221 So. 2d 417 (Fla. 1969).
4 First Nat’l Bank of Leesburg v. Hector Supply Co., 254 So. 2d 777 (Fla. 1971).
5 In re Himmelstein, note 2, supra; In re Planas, 199 Bkrptcy. Rptr. 211 (Bkrptcy. DC Fla., 1996) (citing First Nat’l Bank of Leesburg, note 4, supra).
6 Note 2, supra.
7 In re Himmelstein, note 2, supra; Hadley v. Koehler, 19 Bkrptcy. Rptr. 308 (Bkrptcy. DC Fla., 1982).
8 9 Am. Jur. 2d Bankruptcy §943 (1991).
9 Hadley v. Koehler, note 7, supra.
11 In re Monzon, 214 Bkrptcy. Rptr. 38 (Bkrptcy. DC Fla., 1997).
13 Chaneles, “Tenancy by the Entireties: Has the Bankruptcy Court Found a Chink in the Armor?,” 71 Fla. B.J. 22, (Feb. 1997).
15 Massey, supra note 1, at 49.
16 199 Bkrptcy. Rptr. 211 (Bkrptcy. DC Fla., 1996).
17 Note 13, supra, at 22.
18 Planas v. Feltman, 1998 WL 757988 (DC Fla., 1998).
19 284 U.S. 4 (1931).
20 McKinnon, “Court Hears Case on Ownership of Joint Accounts,” Wall St. J. (2/3/99), page F2.
21 Sorenson and Martino, “Marital Bank Accounts as Entireties Property: What is the Current State of Florida Law?,” 73 Fla. B. J. 60 (April 1999).
22 710 So. 2d 608 (5th Dist. 1998).
23 Id.; See also Sorenson and Martino, supra note 21, at 61.
24 Lindsey, “Marriage and Divorce: Degrees of ‘I Do’ an Analysis of the Ever Changing Paradigm of Divorce,” 9 U. Fla. J.L. & Pub. Pol’y 265 (Spring 1998).
25 Id. (citing Zelig, Comment, “Putting Responsibility Back Into Marriage: Making a Case for Mandatory Prenuptials,” 64 U. Colo. L. Rev. 1223, 1224 (1993)).
26 Lindsey, supra note 24, at 266.
Clients must determine whether the financial institution where they wish to create a tenancy by the entireties account provides for such accounts.
A debtor may exempt tenancy by the entireties property if the state in which the debtor resides has opted out of the federal exemptions.
Death immediately causes all assets held as tenancy by the entireties to be exposed to creditors of the surviving spouse.