Tenancy by the entireties is a simple way to protect real estate from creditors and avoid probate upon the death of the first spouse. Tenancy by the entireties and liability insurance should be the first line of creditor protection.
In North Carolina, any conveyance to a husband and wife while they are married will constitute a tenancy by the entireties in the property unless the conveyance specifically states that some other type of ownership is intended. We often see couples who purchased property together prior to their marriage, and do not re-convey the property after they are married. In this case, they own their land as tenants in common and none of the protections discussed below apply. A simple deed from husband and wife to husband and wife will establish a tenancy by the entireties.
One of the most important benefits of tenancy by the entireties is that it grants special creditor protection over that real property. With the exception of federal tax liens, property owned as tenants by the entireties is subject only to the joint creditors of the couple and not the sole creditors of only one spouse. It is important to note that this applies only to real property.
In the past, this creditor protection was one reason that some couples elected not to convey real estate to their revocable trusts. However, beginning in 2015, North Carolina law provides that any real property held by a husband and wife as a tenancy by the entireties and conveyed to their revocable or irrevocable trusts still has the same immunity from the claims of their separate creditors as if they had continued to hold the property as a tenants by the entireties. This continues as long as the spouses remain married, the property continues to be held in the trusts, and the spouses remain the beneficial owners of the real estate.
It is important to remember that upon divorce, the tenancy by the entireties is immediately severed and the property is held by the former spouses as tenants in common. Therefore, judgments of one spouse can attach to that spouse’s ½ undivided interest immediately upon entry of the divorce decree. We once collected on a judgment after several years when the debtor divorced. When he and his wife sold their vacation home after their divorce, the judgment had to be paid in order to clear title.
When a couple owns property as tenants by the entireties and one spouse dies, his or her property interest is extinguished and title to the property immediately vests solely in the surviving spouse. This allows real estate to pass to the surviving spouse without being subject to the creditors of the deceased spouse. On the other hand, the judgment creditors of the surviving spouse attach to the property immediately upon death of the first spouse.
In a recent case, our client wished to sell her house after her husband's death. The property had belonged to her husband prior to their marriage. They later conveyed the property to themselves as husband and wife. Unfortunately the deed was executed and recorded prior to their marriage. Therefore, they owned the property as tenants in common. The husband died without a will. At his death, his wife continued to own her one-half interest, as well as one-third of his interest. However, their four children inherited two-thirds of his one-half interest. Three of the four children were minors. In order to sell the property, the wife had to become guardian of the estate for her three minor children and petition the court for approval to sell the property. This could have been avoided if the deed had been recorded after their marriage.