Readers of Owner to Owner are familiar with the various types of business ownership, including limited liability corporations and family partnerships, but what about asset ownership outside of the business? While our business owner clients and their trusted advisors are experts at structuring corporate ownership of various share classes, real estate and other assets held under corporate umbrellas, many are much more passive when it comes to asset location within their personal balance sheets. For example, when a married couple begins putting together a personal balance sheet, the columns we frequently see are individual columns for each spouse, a column for the business and then a catch-all column usually labeled “joint” containing a laundry list of accounts and no additional detail. Clients with this type of balance sheet are frequently surprised to hear that many states allow up to three types of concurrent property ownership, so when someone says, “I would like to set up a joint account,” it begs the question, which is the best choice? That question is important, as each form of joint ownership serves different purposes, which may or may not make sense depending on the family’s goals, assets and liabilities.
Before jumping into more details on joint property ownership, it is important to clarify the different property classifications. Generally, property can be classified as real property, tangible personal property or intangible personal property. Digital assets – photo streams, Facebook accounts, mobile game currencies and so forth – are a work in progress, still being categorized and addressed. Real property is used to classify real estate, specifically land and anything affixed to it, and personal property is everything else that an individual owns. As the adjectives suggest, tangible personal property is physical in nature, while intangible personal property is not. Items such as jewelry and paintings would be considered tangible personal property. Intangible personal property is almost anything in one’s investment account: stocks, bonds, LP interests and so forth. Some property is titled – a house, a car or even the name on top of one’s investment statement – whereas other property is not. When titling an asset, it is critical to consider, preferably with the assistance of legal or tax advisors, the title that reflects an individual’s goals and desires with respect to the property at hand.
The five most common ways to title assets held outside of trust are:
- Sole Ownership: The complete ownership of property by one individual who possesses all associated ownership rights, including the right to use, sell, gift, alienate, convey or bequeath the property. An individually titled personal account is a good example. An asset owned in this way will pass through the owner’s probate estate at death.
- Tenancy in Common (TIC): An interest in property held by two or more related or unrelated persons. Each person holds an undivided, but not necessarily equal, interest in the entire property. Each owner’s share will pass through his or her personal probate estate at death.
- Joint Tenancy with Rights of Survivorship (JTWROS): An interest in property held by two or more related or unrelated persons. Each person holds an undivided equal interest in the whole property. Upon the death of the first tenant, that interest is transferred to the second tenant outside of the probate process.
- Tenancy by the Entirety (TBE): An interest in property held by two or more related or unrelated persons (though generally spouses). Each person holds an undivided equal interest in the whole property. Upon the death of the first tenant, that interest is transferred to the second tenant outside of the probate process. The ownership cannot be severed without the consent of both spouses/tenants.
- Community Property: A civil law statutory regime under which married individuals own an equal undivided interest in all property accumulated or commingled during their marriage.
Readers who had to read the middle three twice to hone in on the differences are likely not alone. While these differences can appear subtle, choosing the right title for the situation can result in significant benefits for the owners when it comes to features like creditor protection, probate and the unilateral authority (or lack thereof) of each tenant.
TIC is the most prevalent type of ownership between non-spouses. As described earlier, for property owned by TIC, each person holds an undivided, but not necessarily equal, interest in the entire property. Consider the following example: James and Jill own a 10-story commercial building together, titled as TIC. Undivided means that James does not own the top five floors and Jill the bottom five, but rather that James and Jill both own a percentage of the entire property that does not have to be equal.
JTWROS, on the other hand, is typically how spouses own property together. Due to the survivorship feature, assets titled this way pass to the surviving spouse/tenant outside of the probate process, which saves time, energy and money during an often difficult time – after a spouse’s passing. One potential downside to this simplicity is that because assets titled this way get to skip the probate process, they also do not funnel through the deceased owner’s will. This means that a beautiful estate plan could be undone if the deceased owned all of her property jointly with rights of survivorship. In that (extreme) example, the will would govern none of her property; all would pass by operation of law outside of the will and probate estate and as provided on the account ownership forms.
TBE also has this survivorship feature. However, unlike JTWROS, when an asset is titled TBE, it cannot be severed without the consent of both spouses. In the select states that allow this titling, there are important creditor protection benefits that result from this severability feature.
Community property is more nuanced, beyond the scope of this discussion and found only in certain states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.
Tenancy by the Entirety
The decision around which type of ownership to choose is a question for one’s attorney or tax advisor due to the many state-level nuances associated with each – but our main point here is that it is most certainly worth asking. As such, the balance of this article focuses on the creditor protection that may come with titling an asset as tenancy by the entirety.
A handful of states recognize the TBE title, which is derived from common (or case) law. Generally, this title is recognized only when used by spouses and can apply to both real and personal property depending on the state. Certain states limit the title to real property, while others allow it to be used for anything from commercial property interests to an investment account. In states that allow TBE, it can be a powerful asset protection tool.
While there are many commonalities between JTWROS and TBE, there are critical differences in the legal consequences stemming from some relatively common scenarios, including when an owner declares bankruptcy, attempts to recover funds transferred by one spouse without the consent of the other or has a creditor that is unique to him or her. For example, when property is titled in joint tenancy, a creditor of only one of the joint tenants can attach the property to recover that tenant’s individual debt. Alternatively, if the property was titled as TBE, only a creditor of both spouses, jointly, would be able to attach that property to a claim because TBE property is only severable with the consent of both spouses. A claim from a creditor unique to one spouse would not have the consent of the other spouse to sever TBE property.
In a litigious society, the creditor protection benefit can be considerably advantageous, especially for owners of a business or significant real estate. Ownership of these types of assets can result in increased exposure to potential liabilities, which typically grow in tandem with the business with the addition of employees, land and more robust infrastructure. Insurance is a necessity to mitigate the effects of potential litigation, but it is also important to consider the way nonbusiness assets are titled to potentially limit the reach of creditors. Examining that titling might lead one to ask, “Why can’t I title my nonbusiness assets in my spouse’s name?” This is a common occurrence. For example, a doctor with a large practice or general partner may use such a technique to try to protect against malpractice or joint and several liability. The problem with this approach is that it neglects to consider the potential liabilities of the other spouse, who may not have as much liability exposure but is not immune from it. Accidents happen, and perhaps a better technique for titling those assets to avoid adverse recourse could simply be to use the TBE title. If instead of sole ownership those assets were titled TBE, in some states, assuming no nefarious intent, each individual spouse’s creditors may be barred from attaching the TBE property to a claim due to the severability characteristics that have been highlighted.
One final benefit that may be afforded in certain states, as noted by the Florida Bar Journal, is that neither spouse can unilaterally affect the transfer of an interest in or funds from TBE property. If a spouse does, for example, transfer an asset (funds, securities and so forth) without the consent of the other, the TBE nature of those funds continues even if they are no longer in an account titled TBE. In this case, the other spouse may recover the funds, even after death (through claims by heirs). Alternatively, when property is held as JTWROS, either spouse can unilaterally affect a transfer, essentially severing the joint nature of that property.
There are a number of factors to carefully consider when choosing the title that fits one’s unique situation best. These decisions should be carefully thought out and made with the assistance of attorneys and advisors. Beyond title, there are structures outside of the scope of this article, such as asset protection trusts, that may also be considered if creditor protection is one’s singular goal. If you are interested in learning more about titling assets, asset protection or any other topics raised in this article, please reach out to your Brown Brothers Harriman relationship manager or wealth planner.
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