Many people have the false conception that they will be able to get solid asset protection if they co-own property. Some of the common ownership types include joint tenancy, tenants in common, and tenancy by the entirety. While these can offer some benefits, these methods of ownership will not offer solid asset protection; and actually may make it worse.
Tenants in Common (T.C.) (The rights of the owner in the property that is held as tenants in common).
Every owner of the property held as tenants in common will own an undivided interest in that property. For example, three individuals from separate families own a vacation home, with each person having 1/3 ownership.
What is the difference between a Tenants in Common and Joint Tenancy?
The ownership is transferable. This is different than with joint tenancy. If a tenant in common passes away, the interest in the property would then be passed to their heirs, not the co-owners.
Disadvantages of Tenants in Common
The tenants in common is an asset and this asset will be subject to any creditors.
The major problem with using tenants in common as ownership is that other tenants can do what they wish with their interest. For example, one of the tenants in commonâ€™s could get a loan on their 50% interest. Since their interest owned is subject to creditors with regard to asset protection, the amount of interest can be taken from the owner if ordered by the courts. Using the doctor as an example, if he owned property as a tenant in common with two other people, 1/3 of the interest in property would be subject to creditors if there were to be a malpractice suit. The doctorâ€™s interest is not asset protected in any way.
This form of ownership will not give asset protection.
What is a Tenancy by Entirety?
Tenancy by the Entirety (T.E.) This type of ownership has different characteristics than the other two ownership forms mentioned.
Advantages of Tenancy by Entirety
- Tenancy by Entirety will only apply to married couples.
- The property right cannot be divided or alienated. Neither of the spouses will be allowed to sell the property without the approval from the other spouse.
- This ownership will provide protection over joint tenancy and tenants in common if either spouse happens to incur a liability.
- There is an automatic right of survivorship which means that upon the death of one spouse, the property will be transferred to the living spouse.
What states are Community Property?
There are nine states in the United States that will treat property owned by a couple differently than other states. These “Community Property” states include:
- New Mexico
Rules of Community Property
If you are residing in these states and are married, the rules of property ownership will apply and it states that the interest of each spouse in the community property will be subject to the claims of creditors of the other spouse. This means that all assets deemed community property will be at risk.
Disadvantage of Community Property
Owning community property is a mistake and will not help with any planning in regards to asset protection.
Disadvantages of Tenancy by Entirety
The property owned will be subject to joint creditors, which can include the IRS or really any creditor as long as the creditor sues both spouses.
Tenancy by the entirety does have one benefit. If one of the spouses is sued, the property will not be subject to the creditors. However, there are various disadvantages to this type of ownership. The property will not be protected from joint creditors in a tenancy by entirety, including state government, personal injury suits and the IRS. For example, if the couple has a teenage child who got drunk when consuming alcohol belonging to the parents and then killed another person in a car crash, the property will not be protected.
Tenancy by the entirety can protect from single creditors, but it is not an available option in most states.
Relying on co-ownership is not the way to protect your assets. The best thing to do is have an Asset Protection Irrevocable Trust or establish a Limited Liability Company or Partnership whose shares or membership units are owned by the Irrevocable Trust.
Read more on joint tenancy as asset protection.