Hawaii is on the verge of a step forward in the field of asset protection, with pending legislation awaiting the Governor's signature that, if signed, would extend the shield of creditor protection available to married couples. Hawaii is among a group of states, approximately half in the nation, to recognize property held in tenancy by the entirety (TBE). Tenancy by the entirety is a form of property ownership in which each spouse owns the entire interest in the property; it is similar to joint tenancy with right of survivorship, but unlike joint tenancy, it can be established only between a husband and wife. While both spouses typically have equal right to use the property that is owned as tenants by the entirety, neither can sell, lease, or transfer the property without the other's written consent. Upon death of one spouse, ownership of the property transfers automatically to the surviving spouse, thereby avoiding the cost and trouble of probate. Thus, property held in TBE cannot be transferred by will, but instead goes directly to the surviving spouse, who is then free to dispose of the property through will at his or her death.
North Carolina is also among the states that recognize TBE, allowing married couples to own real property in TBE when intent to own the property as tenants by the entirety is manifested in the deed. Among the foremost advantages to TBE ownership is the protection it provides against creditor claims of just one spouse. In order to reach property owned as tenants by the entirety, there must be a claim against both spouses jointly. However, property might not remain in a TBE indefinitely. Events such as divorce, conveyance of title in the property to one spouse, or conveyance of the property into a trust can convert ownership in the property to a tenancy in common or joint tenancy, thereby forfeiting the creditor protection provided by the tenancy in common. Thus, transferring property held under TBE into a trust would give creditors of each individual spouse a valid claim over that spouse's one-half interest in the property.
In contrast to North Carolina's TBE law, HB2623 would amend provisions of Hawaii state law so that transfer of property held in TBE to a trust would not forfeit creditor protections. The property would continue to be owned in TBE and thus would maintain immunity from separate creditor claims. Allowing married couples to transfer real estate into trust without losing the creditor protections afforded by TBE provides estate tax and asset protection advantages. First, placing real estate in trust avoids the risks associated with simultaneous death, which would result in half the property being probated in the estate of each spouse. There is the risk that the surviving spouse might fail to transfer the real property into the trust after the death of the first spouse to die. Secondly, any interest in TBE property held in the trust of the first spouse to die can also be used to fund a credit-shelter to save estate taxes at the death of the second spouse.
Let's hope our friends in Raleigh follow suit sometime soon.
View more from the North Carolina Estate Planning Blog.
Herman-Giddens, JD, LLM, TEP, CFP, Attorney at Law (NC, FL, TN),
Board Certified Specialist in Estate Planning and Probate Law (NC). North
Carolina Registered Guardian, Solicitor, England and Wales. Follow
his blog, North Carolina Estate
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