Tenants by the Entirety - Asset Protection of your Home in New Jersey
For doctors and other professionals exposed to potentially large personal liability, a common question is "How can I protect my house from a judgment creditor". This question is usually motivated by the desire to protect your spouse and children given the litigious nature of a person's chosen profession. Holding the deed jointly with your spouse as Tenants by the Entirety may address some of these concerns.
Asset protection planning ranges from the very simple to the highly complex. The risks and benefits of various planning techniques also runs the gamet. Absent a fraudulent conveyance (a topic for another day) if you give away an asset, your creditors cannot reach that asset. By giving away an asset to a spouse, you can maintain some influence over the asset - by having a continuing relationship with your spouse - yet put the assets beyond your creditors. Of course, the problem always arises of what happens if at some point in the future you no longer have influence over your spouse due to death, divorce, or your spouse's own liabilty concerns.
Generally speaking unless one spouse has taken steps to guarantee the debt of another, one spouse is not responsible to use his or her own assets to pay the obligations of the other spouse (with the glaring exception of disability and Medicaid). Although it is a gross oversimplification of asset protection planning, if Wife has significant assets, and Husband has none, a judgment creditor cannot attach assets of Wife to satisfy the debts of Husband. If Husband transfers assets to Wife (absent any fraud), so that all of the family assets are held by Wife, then a judgment against Husband in the future cannot attach to the family assets held by Wife. The downside to this is (1) a future divorce, where Wife now has all assets, and (2) assets being deemed to Husband through the Wife because Husband continues to exert control over the assets.
For many people, the home is the largest asset. There are also obvious emotional ties to the home that drive people to protect it from creditors. Real estate owned by a husband and wife in New Jersey can have a special form of joint ownership called Tenants by the Entirety. When a deed conveys property to two people as husband and wife, a Tenancy by the Entirety is automatically created. A Tenancy by the Entirety is similar to Joint Tenants with Rights of Survivorship, in that the surviving spouse will take title to the entire property outside of probate. However, it also includes the additional benefit of protecting the property from some creditors. A home held as Tenants by the Entirety may only be reached by creditors of joint debts of both the husband and wife. In the event of an individual debt of or judgment against a husband or wife, the property may not be partitioned, sold, or encumbered without the permission of both spouses - in essence, protecting the property from a forced sale as the non-debtor spouse is unlikely to consent to the sale. Further, neither spouse may convey his or her interest in the property without the consent of the other.
To understand the downside of a Tenancy by the Entirety as an asset protection device, you must first understand the underlying rationale of why creditors cannot partition the home. The rationale of a Tenants by the Entirety is that it would be patently unfair to the non-debtor spouse to force a sale of the primary residence to satisfy a debt the non-debtor spouse did not incur. However, this does not prevent the creditor from placing a judgment lien on the property - just from forcing the liquidation of the property to exercise the lien. This leads to the downside....if the non-debtor spouse dies, sole title to the property by operation of law passes to the debtor spouse; if the debtor spouse has sole title to the property, there is no bar to the creditor forcing the liquidation of the property to satisfy the judgment. This means that Tenancy by the Entirety can be an extremely effective asset protection plan - but only if there is never a divorce or death of the non-debtor spouse. Since these events are out of the potential debtor's control, a person very concerned about liability protection might look at other methods.