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. Married couples 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.*
States that recognize Tenancy by the Entirety:*
District of Columbia
Illinois (real estate only)
Indiana (real estate only)
Kentucky (real estate only)
Michigan (real estate only)
New York (real estate only)
North Carolina (real estate only)
Oregon (real estate only)
Note: As indicated above, some of these states allow only Real Property (real estate only) to be held as Tenants by the Entirety. In this subset of states, other personal property cannot be held as Tenants by the 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
A hat tip to Memphis-based estate planning attorney Mike Adams, CPA, LLM for educating us on the importance of this subject. You can read his thoughts on Joint Tenancy by Entirety in a recent whitepaper he authored. Just click HERE or email us to request a copy.
*According to Charles Schwab & Co., as of 01/01/2017.
**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. Please reach out for more information about these types of trusts.
Disclaimer: While the information presented herein is believed to be accurate, Fielder Capital Group LLC (Fielder) makes no express warranty as to the completeness or accuracy, nor can it accept responsibility for errors appearing in the document. Fielder is under no obligation to notify you of any errors discovered later or of any subsequent changes in opinions. Nothing herein should be construed as a recommendation to buy or sell any of these securities. It should not be assumed that any of the securities, transactions, or holdings discussed will prove to be profitable in the future or that investment recommendations or decisions Fielder makes in the future will be profitable or will equal the investment performance of the securities discussed herein. Fielder or its employees may have an economic interest in securities mentioned herein.