If you're allergic to legalese, like many investors, you may not be familiar with Tenancy by the Entireties (TbyE). There's no need to be terribly intimidated by the acronym. TbyE simply refers to a method of ownership that is exclusive to married couples.
Keep reading to learn more about TbyE and its implications in a land trust and lawsuit context.
While ordinarily TbyE is a method of owning real estate, it can actually be used for any type of asset with a title. A car, for instance, could be owned in this manner.
The basic premise of TbyE is that neither spouse can sell their interest in the property. You may be wondering what that has to do with lawsuits. TbyE prevents a lawsuit against one spouse from impacting the other. Couples take advantage of TbyE primarily for lawsuit prevention.
Let's imagine that Jack and Sheila Johnson are a married couple. Jack and Sheila are both real estate investors with their own portfolios, but have decided to own some of their properties with TbyE.
Jack owned a condo for his first investment, ten years before he married Sheila. After marrying Sheila, the couple decided to invest in an additional three properties together, which they own with TbyE.
Seemingly out of nowhere, Jack's tenant Mark sues him. The lawsuit claims the condo has become infested with mold that originated in the bathroom. Of course, Mark's attorneys go for the jugular and seek damages that exceed the value of the condo itself. They want Jack to pay for Mark's medical expenses, lost job hours, and pain and suffering.
It might not seem very fair, but if Jack and Sheila didn't own their properties with TbyE, those could be seized easily if Mark wins a judgment. Keep in mind that Sheila did not buy the condo, nor does she directly profit from it. However, she could face the consequences for a property that is owned by Jack alone. TbyE effectively prevents Sheila from paying for Jack's mistakes, if the court ultimately sides with Mark and finds Jack liable.
Of course, if Jack had placed his condo in a land trust, the lawsuit may not have even been filed in the first place. Fortunately, his properties that he owns TbyE with Sheila are secured in land trusts. Together, they are much more difficult to sue.
Bankruptcy is a whole different ball game than other legal issues you may encounter. If a couple is taken to bankruptcy court, a creditor can indeed use the courts to "force" the sale of an asset, even if it is held in TbyE.
The legal reason for this isn't terribly complex. Essentially, bankruptcy is an issue that is defined by federal courts. TbyE, and indeed most issues relating to how trusts function, is governed by state laws. Usually, if there's a conflict between state and federal law, federal law will wins. This is why TbyE, despite being effective in other civil court contexts, won't protect both spouses in bankruptcy court.
If you and your spouse are considering TbyE for its asset protection benefits, Royal Legal Solutions can help you. Our attorneys will assist you in determining whether this strategy is the best for your situation. Don't wait until you're sued to take action. Proactivity on your part can prevent you from ending up in court. Make the smart call and schedule your asset protection consultation today.
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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