A Guide to Wills, Estate, Trust and Guardianship Litigation

In his Commentaries, William Blackstone stated that estates “may be held in four different ways: in severalty, in joint-tenancy, in coparcenary, and in common.”[1]  Tenancy in severalty was sole ownership and “the most common and usual way of holding an estate,” with “little or nothing peculiar to be remarked concerning it, since all estates are supposed to be of this sort, unless where they are expressly declared to be otherwise.”[2]

Blackstone wrote more about what we would today call concurrent estates.[3]  Blackstone gave first billing to the historic joint tenancy with right of survivorship.[4]  Next was the tenancy in coparcenary, which for the purposes of today’s discussion, all that needs to be said about that estate is that it has been subsumed by today’s tenancy in common.[5]  Last was the tenancy in common, which Blackstone considered the default tenancy.[6]

For most of his life and writings, Blackstone wrote about only those three estates.[7]  It was not until the posthumously published Commentaries of 1783 that another estate entered the fray: tenancy by the entirety.[8]  It was only noted by a one sentence reference, inserted into a discussion about joint tenancy:

And therefore, if an estate in fee be given to a man and his wife, they are neither properly joint-tenants, nor tenants in common: for husband and wife being considered as one person in law, they cannot take the estate by moieties, but both are seised of the entirety, per tout et non per my; the consequence of which is, that neither the husband nor the wife can dispose of any part without the assent of the other, but the whole must remain to the survivor.[9]

This estate is now known as the tenancy by the entirety, and the entire body of law that eventually developed originated from this one sentence.[10]  This estate was originally never mentioned because Blackstone didn’t think of it as an estate with a “plurality of tenants” given that the marital unit was “one person in law,” so rather than viewing what became tenancy by the entirety as a concurrent estate, Blackstone saw it as a version of tenancy in severalty.[11]

Blackstone’s tenancy by the entirety, in which “neither the husband nor the wife can dispose of any part without the assent of the other,” became an alienable estate in the husband, subject only to the wife’s contingent but indestructible right of survivorship.[12]  The married woman had no choice in the matter because she had no cause of action against her husband.[13]  The woman would continue to have no choice in the matter as long as she remained unequal in the eyes of the law.[14]

Passage of the married women’s property acts in the middle decades of the nineteenth century rattled the foundations of the tenancy by the entirety.[15]  In some states, courts took the position that once the rights of married women to hold property were recognized, there was no longer any need for tenancy by the entirety.[16]  In England, the estate’s original home, after passage of the 1882 Married Women’s Property Act husband and wife took as joint tenants, and in 1925 the estate was abolished.[17]

The tenancy by the entirety, similar as it is to joint tenancy with the right of survivorship, remained a concurrent estate with different qualities and was still male-dominated well into the twentieth century.[18]  The North Carolina Court of Appeals blankly stated in 1971 that “husband and wife do not ‘share equally’ in an estate by the entireties.  The husband has the exclusive right during coverture to possession, control, and use of the land.”[19]

With an utter slowness only known to the law, state legislatures in the late twentieth century began to equalize the rights of the married woman over property held in the tenancy by the entirety.[20]  For example, North Carolina adopted the Tenancy by the Entirety Reform Act in 1982, which provided: “A husband and wife shall have an equal right to the control, use, possession, rents, income, and profits of real property held by them in tenancy by the entirety.”[21]

[1] 2 William Blackstone, Commentaries 179 (Clarendon Press 1766).

[2] Id.

[3] John V. Orth, Tenancy by the Entirety: The Strange Career of the Common-Law Marital Estate, 1997 B.Y.U. L. Rev. 35, 36 (1997).

[4] Id.

[5] Id., at 37.

[6] Id.

[7] Id., at 38.

[8] Id. 

[9] 2 William Blackstone, Commentaries 182 (photo. Reprint 1978) (R. Burn ed., 1783).

[10] Orth, supra note 3, at 38.

[11] Id., at 39.

[12] Orth, supra note 3, at 41.

[13] Id.

[14] Id.

[15] Id.

[16] Id.

[17] Orth, supra note 3, at 41.

[18] Id., at 42–43.

[19] Dearman v. Bruns, 181 S.E.2d 809, 811 (N.C. Ct. App. 1971).

[20] Orth, supra note 3, at 43.

[21] N.C. Gen. Stat. § 39-13.6(a) (1983), now codified at N.C. Gen. Stat. § 41-58(a) (2021) using the neutered term “spouse” instead of “husband and wife.”

To summarize what we learned in law school, tenancy by the entirety is a form of co-ownership held by a married couple with the right of survivorship.[1]  The tenancy arises as a result of title acquired by a married couple jointly subsequent to their marriage.[2]  The tenancy is created by deed or conveyance to the spousal unit, unless it is clear in the instrument that some other kind of tenancy is intended.[3]  Traditionally, this estate could exist only between married persons,[4] but currently a few states allow persons in civil unions or domestic partnerships to hold property as tenants by the entirety.[5]  A tenancy by the entirety is presumed even if the conveying document fails to mention that the couple is married.[6]  When land is conveyed to spouses, absent contrary intent, they take by the entirety, and upon either’s death the other spouse takes the entire property by right of survivorship.[7]  A tenancy by the entirety will not occur if the couple is not married at the time of the conveyance.[8]  Neither will the estate arise if the couple eventually marries after the conveyance.[9]

To create a tenancy by the entirety, the five unities must be present: time, title, interest, possession, and person.[10]  The unity of time requires that the couple must take possession at the same instant of time.[11]  The unity of title requires that the couple take interest from the same source.[12]  The unity of interest requires that each member of the couple have the identical interest in the land involved.[13]  The unity of possession means that the possession of one is the possession of the entire marriage entity.[14]  The unity of person involves the common-law concept that after marriage a married couple is but one person, one legal entity.[15]  The tenancy by the entirety cannot be created by descent or operation of law, but only through deed or will.[16]

In a tenancy by the entirety, if either spouse individually transfers or encumbers the property, then the other spouse’s right of survivorship would be extinguished.[17]  Thus, the assent of each spouse is required to alienate or encumber the entirety property.[18]  States still take one of two approaches to entireties property: (1) maintaining the “oneness” of the spousal unit so that neither spouse can act unilaterally; or (2) giving parity to the wife so that she also can alienate part of the tenancy during her lifetime.[19]  The survivorship element is maintained in both approaches.[20]

Concerning creditors of the spouses, states are either “full bar” or “modified bar” jurisdictions.[21]  In full bar jurisdictions, a creditor of one spouse cannot attach an interest in the entirety property.[22]  However, in a modified bar jurisdiction, a creditor of one spouse does enjoy some rights in the property, which must accommodate the non-debtor spouse’s interest.[23]  Most states are full bar jurisdictions and require both spouses to act together to alienate the property.[24]  Modified bar jurisdictions permit creditor attachment of a debtor spouse’s interest.[25]  There are generally two types of modified bar jurisdictions. In some jurisdictions creditors of one spouse can only attach the contingent survivorship interest of the debtor spouse, subject to the non-debtor’s spouse’s right to lifetime enjoyment of the property and right of survivorship.[26] Other jurisdictions allow the creditors of only one spouse to require the debtor spouse’s right of survivorship and the right to one-half of the rents and profits from the property, subject to the non debtor spouse’s right of possession and right of survivorship.[27]

Title of the entirety property is in the husband and wife only as an entity and not in either of them alone.[28]  Thus, if a creditor of one spouse procures a judgment against the spouse on their individual debt and another creditor procures a judgment against the other spouse on their individual debt, then the two spouses could nevertheless convey good title to a third person not subject to either of the judgments.[29]  As a result, lenders and creditors will require spouses sign notes and obligations as co-makers, making them jointly liable.[30]

Jurisdictions recognizing tenancy by the entirety differ as to whether the tenancy may be established for holding personal property.[31]  Most jurisdictions permit personal property to be by held tenants by the entirety.[32]

[1] 1 Patrick K. Hetrick, et al., Webster’s Real Estate Law in North Carolina § 7.04[1][a] (Matthew Bender, 6th ed.).

[2] Id.

[3] Id.

[4] Id.

[5] See, e.g., Delaware (13 Del. Code § 214); District of Columbia (D.C. Code § 42-516(a)); Vermont (VT. Stat. Ann. tit 15 § 1204(e)).

[6] Id.

[7] Webster’s, supra note 22, at § 7.04[1][b].

[8] Id.

[9] Id.

[10] Id.

[11] Id.

[12] Webster’s, supra note 22, at § 7.04[1][b].

[13] Id.

[14] Id.

[15] Id.

[16] Id.

[17] Webster’s, supra note 22, at § 7.15.

[18] Id. 

[19] Fred Franke, Asset Protection and Tenancy by the Entirety, 34 ACTEC J. 210, 212 (2009).

[20] Id.

[21] Id.

[22] Id. There are some limitations on this general rule which will be discussed in Section III, infra.

[23] Id.

[24] Franke, supra note 40 at 212.

[25] Id.

[26] Hoffman v Newell, 249 Ky. 270 (1933).

[27] Morris v. Solebee, 48 Ark. App. 123, 125 (Ark. Ct. App. 1995).

[28] Webster’s, supra note 22, at § 7.16.

[29] Id.; see infra Section V.

[30] Id.

[31] Franke, supra note 40, at 213.

[32] Id.

While in full-bar jurisdictions, a creditor of one tenant by the entirety cannot attach an interest upon entirety property, the United States Supreme Court has carved out an exception for federal tax liens under 26 U.S.C. § 6321.[1]  In United States v. Craft, the Court held that the delinquent taxpayer owns an interest in “property” or has “rights to property” in entirety property, such that the IRS can levy upon that property pursuant to 26 U.S.C. § 6321.[2]

Justice O’Connor, writing for a 6-3 majority, stated the issue as “whether a tenant by the entirety possess ‘property’ or ‘rights to property’ to which a federal tax lien may attach”[3] and “[w]hether the interests of respondent’s husband in the property he held as a tenant by the entirety constitutes ‘property and rights to property’ for the purposes of the federal tax lien statute, 26 U.S.C. § 6321, is ultimately a question of federal law.”[4]

The Court stated that Mr. Craft owned many “sticks” in the bundle, and that the federal government could obtain a “lien” on those “sticks.”[5]  For example, Mr. Craft possessed a right of survivorship stick, and according to the Court, this stick is “property” or “rights to property” as those terms are understood in 26 U.S.C. § 6321.[6]  This does not mean the government has a lien on the entirety property, but merely a lien on the right of survivorship.[7]  Thus, if Mr. Craft survived Mrs. Craft, still owning the property as tenants by the entirety, the IRS would have stepped into Mr. Craft’s shoes.[8]

There are other “sticks” that Mr. Craft possessed in the property, such as the right to profits from the land and the right to exclusion.[9]  If the property had been leased, then the government’s lien would have attached to any rental payments; however, in this case, the property owned by Mr. and Mrs. Craft as tenants by the entirety never produced any income, and therefore, there was nothing of value to which the tax lien could attach.[10]  Mr. Craft possessed a right to exclude stick, but  how do you value that?  The government would have a lien on that stick but how could it be levied upon?

One of the more valuable “sticks” in Mr. Craft’s bundle is the right to alienate his property.[11]  The majority opinion does not discuss this stick much at all despite the majority’s recognition of the limited nature of a tenant by the entirety’s right to alienate.[12]  The Court does state that “[n]either spouse may unilaterally alienate or encumber the property.”[13]  The majority also stated another truth of entirety property:

In determining whether respondent’s husband possessed “property” or “rights to property” within the meaning of 26 U.S.C. § 6321, we look to the individual rights created by these state law rules.  According to Michigan law, respondent’s husband had, among other rights, the following rights with respect to the entireties property: the right to use the property, the right to exclude third parties from it, the right to a share of income produced from it, the right of survivorship, the right to become a tenant in common with equal shares upon divorce, the right to sell the property with the respondent’s consent and to receive half the proceeds from such a sale, the right to place an encumbrance on the property with the respondent’s consent, and the right to block respondent from selling or encumbering the property unilaterally.[14]

However, holding that 26 U.S.C. § 6321 enables a “lien” to attach to Mr. Craft’s “right to alienate stick” results in exactly what the Court has stated cannot be done, unilaterally encumbering the property.[15]

In dissent, Justice Thomas (joined by Justices Stevens and Scalia), pointed out that the IRS’ own manual states that property owned as tenants by the entirety is an asset of the taxpayer, but it is not subject to a federal tax lien via 26 U.S.C. § 6321.[16]  Apparently, when a federal tax lien question is involved, the government always wins.

The Craft case presents an interesting question: how courts should value the interest of an individual who co-owns foreclosed property with a delinquent taxpayer?[17]  When a married couple acquires entirety property, each party gets to use his or her property and the property of someone else (the co-owner) and each cotenant has the right to use and enjoy the entire property as if he or she were the sole owner; however, when one party sells, he or she sells property subject to the rights of someone else, which will presumably diminish its selling price.[18]

What happens when, as in Craft, one of the co-owners has a tax lien on the property?  What amount would the government collect on the levy?  The IRS takes the position that, “[a]s a general rule, the value of the taxpayer’s interest in entireties property will be deemed to be one-half.”[19]  Some courts have agreed with the IRS.[20] Other courts disagree and require that the value of the innocent spouses of right of survivorship be protected.[21]  Craft did not address the valuation of each spouse’s individual interest in the property.  According to valuation professionals, “when two people own property and one of them sells his or her undivided half interest, the selling party will suffer a percentage discount.”[22]  For example, “a partial interest in timberland was devalued at 55% of the pro rata share of the selling price.”[23]  Employing this 55% discount, a selling owner of an undivided half interest will net 22.5% of the selling price of the property.[24]  Conversely, the remaining owner’s portion causing said 55% discount must be worth 77.5% of the selling price.[25]  The reduction in value is caused by the fact that these tax levies do not extinguish the existing property rights of other owners.[26]  These lingering property rights will reduce the value on sale of a partial interest in property because the new owner takes subject to them.[27]

Congress has addressed the issue of dealing with the lingering rights of the remaining tenant.  Under Section 7403 of the IRC, the IRS can sell property and extinguish the property rights of all owners.[28]  Section 7403 and Section 6331 are the two ways the IRS can sell the property of delinquent taxpayers.[29]  However, the non-delinquent owner must be compensated as well, which is not an easy venture.[30]  With two equal owners, using the 55% discount mentioned earlier, the government would pay the non-delinquent owner 77.5% of the value of the property for their intertest in the land.[31]  Is that what happens in real life?

In 1983, the Supreme Court described how to value the continued use of property in United States v. Rodgers.[32]  In Rodgers, a delinquent taxpayer husband died, owning a half interest in a Texas marital home.[33]  The decedent’s half of the community property was held by his estate, which was also a party to the case, along with his children who might have received his share, but for the tax lien.[34]  The decedent’s wife had remarried and continued to live in the home with her new husband.[35]  If she had consented to a sale she would have received half the proceeds, but because she maintained the home as a residence, the Court said she had, under Texas law, a protected right to stay there and use the entire home.[36]  Texas law had vested in “each spouse an interest akin to an undivided life estate and a remainder interest.”[37]  The Court calculated the dollar value of the undivided life estate and remainder interest for those two property interests as follows:

The exact method for the distribution required by § 7403 is not before us at this time.  But we can get a rough idea of the practical consequences of the principles we have just set out.  For example, if we assume, only for the sake of illustration, that a homestead estate is the exact economic equivalent of a life estate, and that the use of a standard statutory or commercial table and an 8% discount rate is appropriate in calculating the value of that estate, then three non-delinquent surviving or remaining spouses, aged 30, 50, and 70 years, each holding a homestead estate, would be entitled to approximately 97%, 89%, and 64%, respectively, of the proceeds of the sale of their homes as compensation for that estate.  In addition, if we assume that each of these hypothetical non-delinquent spouses also has a protected half-interest in the underlying ownership rights to the property being sold, then their total compensation would be approximately 99%, 95%, and 82%, respectively, of the proceeds from such sale.[38]

Recent cases determine the value of the spouses’ interest in the entireties property in the manner described in Rogers.[39]  In United States v. Cardaci[40] the government brought an action seeking to force the sale of the marital home owned by the delinquent taxpayer and his wife as tenants by the entirety in New Jersey.[41] The court began its analysis by stating that under 26 U.S.C. §7403(c) it “may” decree a sale of the property and that the word “may” necessarily implies a degree of discretion based on the four non-exhaustive Rogers factors.[42]

First, a court should consider the extent to which the government’s financial interests would be prejudiced if it were relegated to a forced sale of the partial interest actually liable for the delinquent taxes.  Second, a court should consider whether the third party with a non-liable separate interest in the property would, in the normal course of events (leaving aside§ 7403 and eminent domain proceedings, of course), have a legally recognized expectation that that separate property would not be subject to forced sale by the delinquent taxpayer or his or her creditors.  Third, a court should consider the likely prejudice to the third party, both in personal dislocation costs and in practical undercompensation.  Fourth, a court should consider the relative character and value of the non-liable and liable interests held in the property.  Those factors come with the caution that, because they do not constitute an exhaustive list, they should not be used as a mechanical checklist to the exclusion of common sense and consideration of special circumstances.  At the same time, however, the limited discretion accorded by § 7403 should be exercised rigorously and sparingly, keeping in mind the government’s paramount interest in prompt and certain collection of delinquent taxes.[43]

The Third Circuit remanded the case to the district court to determine whether it should exercise its discretion to order the sale of the marital home.[44]  It is interesting that the court ruled that among the equitable factors the district court must consider was the equitable interest of the couple’s son, his wife, and their three children who also lived in the home.[45]  In the event that the court chose to exercise its power to order a sale of the property, the interest of the tax payer and his wife should be valued as follows:

Although Popky’s simple 50/50 rule does not control, we cannot agree with the District Court’s calculation of the Cardacis’ respective interests in the marital home.  In a tenancy by the entirety, each spouse has a concurrent interest in the present value of the property, in a life estate, and in a right of survivorship.  But because both the probability of obtaining the property upon the death of one’s spouse and the value of the life estate depend on life expectancy, any calculation of the cash value of those interests must of necessity be based on actuarial statistics.  That is a logical rule.  To give one admittedly extreme example, it stands to reason that a healthy twenty-six-year-old wife would have a greater interest in a life estate than would her ailing eighty-nine-year-old husband.  While each spouse would have the same rights to the home, the measurable property value that they would be likely to receive from the property is not the same.  Therefore, a method of calculation is needed that takes into account each spouse’s concurrent interest in the present value and their varying interests in life estate and survivorship rights.  See Newman, 359 A.2d at 477 (“The purchaser at an execution sale under a judgment entered against a tenant by the entirety acquires the right of survivorship of the debtor spouse as well as the interest of the latter in the life estate for the joint lives of husband and wife.”).

A fair approach must therefore rely on joint-life actuarial tables to reflect the interests of both spouses. See In re Pletz, 221 F.3d 1114, 1117–18 (9th Cir. 2000) (following the Fifth Circuit in adopting a rule that calculates respective interests in marital property using joint-life actuarial tables).  Such an approach accounts for differences in anticipated life expectancies and ensures that the concurrent interests of both spouses are correctly calculated, rather than valuing the non-liable spouse’s interest as if she possessed an exclusive life estate.  Furthermore, it avoids the dilemma created by the District Court’s methodology, which resulted in a sum of the various interests that exceeded one hundred percent of the value of the property.  Cardaci, 2014 WL 7524981, at *12 (“Mr. and Mrs. Cardaci own property interests that, combined, appear to be worth more than 100 percent of the property.”).  The use of joint-life actuarial tables should assist in calculating spouses’ respective interests in a way that does justice to both the property owners and the government.  And, if a non-liable spouse will be practically undercompensated after that method of calculation, that fact is an important but separate consideration for the Court to take into account.[46]

Valuing the equal right to use entirety property can be contrasted with an equal right to use cash, which is consumed or diminished by a cotenant’s use.[47]  In Craft, the Supreme Court held that cash from rent or sale of entireties property is split in half, even though the Court “express[ed] no view as to the proper valuation of respondent’s husband’s interest in the entireties property.”[48]

A recent application of Craft can be found in In re Morgan, out of the United States Bankruptcy Court for the Middle District of North Carolina.[49]  Before the Court was an objection to a debtor’s claim for property exemptions filed by the Chapter 7 Trustee.[50]  The dispute at issue was whether, and to what extent, the Debtor may exempt property held as a tenancy by the entirety when the IRS holds a valid tax lien against that property and is a priority and general unsecured claimant in the Debtor’s bankruptcy case.[51]  The Court held that under the reasoning set forth in Craft, the tax lien attached to the Debtor’s entireties interest, despite the protections afforded by North Carolina law against non-joint creditors.[52]  Therefore, under “applicable nonbankruptcy law,” the tenancy by the entirety interest held by the Debtor is not “exempt from process” by the IRS, nor from the claims of joint-creditors of both the Debtor and his non-filing spouse.[53]

The facts of this case are as follows: the Debtor filed for Chapter 7 bankruptcy on July 16, 2021 and in the debtor’s schedule of assets, he listed an ownership interest in real property located in Winston-Salem valued at $315,500.[54]  The Debtor owned the property with his non-filing spouse as tenants by the entirety.[55]  The debtor claimed the property as exempt given its status as a tenancy by the entirety.[56]  The debtor had an $18,000.00 priority unsecured claim owed to the IRS.[57]  The Trustee objected to the exemption, arguing that the property was not exempt from bankruptcy to the extent of the IRS debt.[58]  The debtor contended that the property was not a part of his Bankruptcy estate at all.[59]

In beginning its analysis, the Court stated that “[t]he Fourth Circuit Court of Appeals, as well as this Court, have clearly held that the bankruptcy estate includes interests in entireties property even where only one spouse has filed.”[60]  The Court then summarized the Bankruptcy Code’s provisions that allow the debtor to prevent the distribution of certain property by claiming it as exempt.[61]  Here, the debtor employed the § 522(b)(3)(B) exemptions, which exempts

[A]ny interest in property in which the debtor had, immediately before the commencement of the case, an interest as a tenant by the entirety or joint tenant to the extent that such interest as a tenant by the entirety or joint tenant is exempt from process under applicable nonbankruptcy law.[62]

Here, the “applicable non bankruptcy law” was North Carolina law, which as a full-bar jurisdiction exempts tenancy by the entireties interests from the claims of non-joint creditors: a full-bar jurisdiction.  Under North Carolina law, “if one spouse files for bankruptcy, a trustee may sell property held as tenants by the entirety only if there are creditors in the case as to whom both spouses are indebted.”[63]  As a result, the Court stated that “[t]he Trustee’s Objection may be sustained, therefore, to the extent there are joint creditors of both the Debtor and his non-filing spouse.”[64]  There was in this case: a secured mortgagee.[65]

However, the Court said that its “analysis does not end there,” because applicable nonbankruptcy law also includes federal law.[66]  The Court then quotes from the Internal Revenue Code § 6321, which states “[i]f any person liable to pay any tax neglects or refuses to pay the same after demand, the amount . . . shall be a lien in favor of the United States upon all property and rights to such property, whether real or personal, belonging to such person.”[67]  The Court found its support that the tax lien attached to the debtor’s entireties interest from Craft, which it said, “concluded that a spouse’s entireties interest was subject to attachment of a statutory tax lien under 26 U.S.C. § 6321 for the spouse’s sole tax obligation” even though analogous Michigan law prevented non-joint creditors from executing on entireties property.[68]  Accordingly, “[a]pplicable federal tax law, as interpreted through Craft, thereby allows for statutory federal tax liens to attach to tenancy by entirety interests of a taxpayer for individual tax debt, regardless of state law limitations on debts held by non-joint creditors.”[69]  As a result, the Court held that the property was not exempt from process by the IRS under federal law.[70] The court did not address the question of how the debtor’s interest in the property should be valued.

Tax liens are not the only vehicle that can potentially pierce the entirety property.  As pointed out in Franke’s original article on this subject, “Congress has unequivocally stated that criminal fines are to be treated in the same fashion as federal tax liabilities.”[71]  In North Carolina property held as tenants by the entirety is treated as tenancy in common property in connection with the enforcement of a judgment under North Carolina’s RICO statutes.[72]

[1] See United States v. Craft, 535 U.S. 274, 122 S. Ct. 1414 (2002).

[2] Id.

[3] Id., at 276, 122 S. Ct.  at 1419.

[4] Id., at 278, 122 S. Ct.  at 1420.

[5] Webster’s, supra note 22, at § 7.04[2].

[6] Id.

[7] Id.

[8] Id.

[9] Id. 

[10] Id.

[11] Id. 

[12] Id. 

[13] Craft, 535 U.S. at 281, 122 S. Ct.  at 1422.

[14] Id., at 828, 122 S. Ct. at 1422.

[15] Webster’s, supra note 22, at § 7.04[2].

[16] Craft, 535 U.S. at 299–300 n.9, 122 S. Ct.  at 1432–33 n.9 (Thomas, J. dissenting)

[17] Neal Nusholtz, Valuing the Use of the Entire Property in Section 7403 Tax Foreclosures, 87 Prac. Tax Strategies 76 (August 2011).

[18] Id.

[19] I.R.S. Notice 2003-60, 2003-2 C.B. 643.

[20] Popky v. United States, 419 F.3d 242, 245 (3d Cir. 2005) (The ruling in this case is based on protection afforded to tenants by the entirety under Pennsylvania law.); United States v. Barr, 617 F.3d 370, 373 (6th Cir. 2010) (The ruling in this case is based on the protection afford to tenants by the entirety under Michigan law.).

[21] Pletz v. United States, 221 F.3d 1114, 1117–18 (9th Cir. 2000) (using actuarial tables).

[22] Nusholtz, supra note 71, at 76.

[23] Id.

[24] Id.

[25] Id.

[26] Id.

[27] Nusholtz, supra note 71, at 76.

[28] 26 U.S.C. § 7403 (2018).

[29] Nusholtz, supra note 71, at 76.

[30] Id.

[31] Id., at 76–77.

[32] United States v. Rogers, 461 U.S. 677, 103 S. Ct. 2132 (1983).

[33] Id., at 687, 103 S. Ct. at 2139.

[34] Id.

[35] Id.

[36] Id., at 684, 103 S. Ct. at 2138.

[37] Id., at 686, 2138.

[38] Id., at 698–99, 103 S. Ct. at 2145.

[39] E.g., United States v. Cardaci, 856 F. 3d 267 (3d Cir. 2016); In re Murray, 900 F.3d. 53 (2d Cir. 2018).

[40] Cardaci, 856 F. 3d at 267.

[41] Id., at 271.

[42] Id., at 274.

[43] Id. (cleaned up).

[44] Id., at 280.

[45] Id.

[46] Id., at 278–79 (cleaned up).

[47] Nusholtz, supra note 71, at 77.

[48] Craft, 535 U.S. at 289, 122 S. Ct. at 1426.

[49] In re Morgan, No. 21-50455, 2021 WL 5498621 (Bankr. M.D.N.C. Nov. 4, 2021).

[50] Id., at *1.

[51] Id.

[52] Id.

[53] Id.

[54] Id.

[55] Id.

[56] Id.

[57] Id.

[58] Id.

[59] Id.

[60] Id., at *2 (citing In re Cordova, 73 F.3d 38, 40 (4th Cir. 1996); Chippenham Hosp., Inc., v. Bondurant, 716 F.2d 1057, 1058 (4th Cir. 1983); In re Knapp, 285 B.R. 176, 179 (Bankr. M.D.N.C. 2002).

[61] Id.

[62] Id., at *3 (quoting 11 U.S.C. § 522(b)(3)(B)) (emphasis in original)

[63] Id. (quoting In re Knapp, 285 B.R. 176, 179 (Bankr. M.D.N.C. 2002).

[64] Id.

[65] Id.

[66] Id.

[67] Id. (quoting 26 U.S.C. § 6321).

[68] Id.

[69] Id.

[70] Id., at *5.

[71] Franke, supra note 40, at 219 (originally citing In re Hutchins, 306 B.R. 82, 91 (Bankr. D. Vt. 2004) (drug trafficking); United States v. Fleet, 498 F.3d 1225 (11th Cir. Fla. 2007) (wire fraud, money laundering, etc.); United States v. Godwin, 446 F. Supp. 2d 425 (E.D.N.C. 2006) (embezzlement from federally insured bank).  Franke stated in footnote 68 that “[i]n Maryland, by contrast, the court has refused to permit the sale of a truck used in drug trafficking when the vehicle was held [as] tenants by the entirety.  This was under the state forfeiture statute and it was pre-Craft.  Maryland v. One 1984 Toyota Truck, 533 A.2d 659 (Md. 1987).”  See also Conrad v. Schlossberg, 555 B.R. 514, 517 (D. Md. 2016) (noting that, after Craft, federal courts should rely on federal law when construing the extent of liens created under federal law” (quoting Hutchins, 306 B.R. at 90)).

[72] N.C. Gen. Stat. § 75D-8(a)(1) (2021).

One commentator has noted, “Courts disagree as to whether a spouse’s conveyance of separate property to a tenancy by the entirety is protected from the claims of non-joint creditors where the conveyance is made to shield the property from those creditors.”[1]  A Bankruptcy Court in Maryland “held that a spouse’s conveyance of separate property to a tenancy by the entirety is protected from the claims of non-joint creditors even where the conveyance is made to shield the property from those creditors.”[2]  “Other authority holds that the rights and remedies of a husband or wife’s creditors may not be obliterated by the simple expedient of erecting a tenancy by the entirety in property that would otherwise be vulnerable to execution.”[3]  “Accordingly, where property is titled as a tenancy by the entirety as part of a fraudulent scheme to avoid creditors, the property may be reached by nonjoint creditors.”[4] This appears to be the rule in a majority of jurisdictions.[5]

In some instances, when one tenant of the entirety property commits a fraudulent transfer, by transferring property into a tenancy by the entirety, then the entirety property can be attached by a creditor.  For example,

[a] 1997 amendment to the Illinois tenancy by the entireties statute[6] was intended as a clarification of the existing statute, and thus operated retroactively to subject entireties property to the claims of one spouse’s creditors where the spouse transferred the property into the tenancy with the sole intent of avoiding the payment of existing debts as they came due.[7]

That statutory amendment, however, did not make the Illinois version of the Fraudulent Transfer Act applicable to transfers into tenancy by the entireties.[8]

The Third Circuit, applying Pennsylvania law, recently held in In re Titus,[9] that when a spouse conveys individual property to a tenancy by the entirety in fraud of creditors, the creditor may nevertheless execute against the property so conveyed.  Unlike in Illinois, this was accomplished under Pennsylvania’s Fraudulent Transfer Act.[10]

Additionally, if a debtor makes payments on a mortgage secured by entirety property while insolvent, the creditor can reach the amount of those payments.  In Wilson v. Todd, a 1940 case out of the Indiana Supreme Court, a husband and wife owned two properties as tenants by the entirety.[11]  The husband extorted $12,000 from another man.[12]  The husband then used $774.38 of the stolen money to pay off a mortgage on one parcel and then used $3,548.16 to pay off another mortgage on the other parcel.[13]  The extorted individual obtained a $12,000 judgment that had not been satisfied.[14]  The wife had no knowledge of the fraudulent acts of her husband at the time the acts were committed, but did have knowledge of them at the time of the commencement of the action.[15]

The action by the extorted individual sought to set aside the prior mortgage liens; that there be an adjudication that said liens stand for the extorted man’s use and benefit; and that those mortgages be foreclosed, the real estate sold, and the proceeds applied on the $12,000.00 claim.[16]  The Indiana Supreme Court concluded that where the husband, without his wife’s knowledge, used money fraudulently obtained to pay their joint debts secured by mortgages on their realty, and wife, after learning of the facts, failed to disavow her husband’s acts, then both retained the benefits of the fraudulent behavior.[17]  The wife ratified her husband’s acts and was estopped from denying knowledge or husband’s authority to act for her concerning the defrauded party’s right to subrogation to the mortgages.[18]  Accordingly, the wife could not defeat the defrauded party’s right to subrogation to the mortgages, even in absence of ratification or estoppel, since she had parted with nothing and would suffer no disadvantage through subrogation.[19]  As a result, the Supreme Court instructed the trial court to enter judgment in favor of the defrauded party.[20]

[1] 41 C.J.S. Husband and Wife § 40.

[2] Id. (citing In re Giles, 222 B.R. 766 (Bankr. D. Md. 1998) (applying Maryland law)).

[3] Id. (citing Roberts & Lloyd, Inc. v. Zyblut, 691 A.2d 635 (D.C. 1997) and Sawada v. Endo, 57 Haw. 608, 561 P.2d 1291 (1977)).

[4] Id. (citing Premier Property Management, Inc. v. Chavez, 191 Ill. 2d 101, 245 Ill. Dec. 394, 728 N.E.2d 476 (2000); Sweeney, Cohn, Stahl & Vaccaro v. Kane, 6 A.D.3d 72, 773 N.Y.S.2d 420 (2d Dep’t 2004).

[5] Martin J. Mahon, Annotation, Validity and Effect of One Spouse’s Conveyance to Other Spouse of Interest in Property Held as Estate Held by the Entireties. 18 A.L.R. 5^th 280 (1994).

[6] 735 Ill. Comp. Stat. 5/12-112 (1998).

[7] John Tingley, et al., Marital Property Law, § 2.4 (Westlaw 2021).

[8] Id.

[9] In re Titus, 916 F.3d 293 (3d Cir. 2019)

[10] Id. 

[11] Wilson v. Todd, 26 N.E.2d 1003, 1004 (Ind. 1940).

[12] Id.

[13] Id.

[14] Id.

[15] Id.

[16] Todd, 26 N.E.2d at 1004

[17] Id., at 1005.

[18] Id.

[19] Id.

[20] Id., at 1006.

Under state law in full bar jurisdictions, a debtor spouse can convey the entirety property to the non-debtor spouse or both spouses can transfer the property to a third-party without committing a fraudulent conveyance.[1]  As a result, as Franke wisely said, “[m]arried individuals with exposure to liability should hold as much of their property as possible by the entireties” and “[o]nce liability against one spouse is triggered, the at-risk spouse may transfer the property to the non-debtor spouse.”[2]

In L&M Gas Co. v. Leggett, a husband conveyed his interest in land owned as tenants by the entirety to his wife for no consideration. ^[3]  At the time of the transfer, there was an outstanding judgment against the husband which constituted a lien on any real property owned by the husband.[4]  The North Carolina Supreme Court upheld the trial court’s dismissal of the creditor’s complaint seeking to enforce a lien against the real property.[5] The court explained its ruling:

The nature of this estate forbids and prevents the sale or disposal of it or any part of it by the husband or wife without the assent of both; the whole must remain to the survivor.  The husband cannot convey, incumber, or at all prejudice, such estate to any greater extent than if it rested in the wife exclusively in her own right.  He has no such estate as he can dispose of to the prejudice of the wife’s estate.  The unity of the husband and wife as one person, and the ownership of the estate by that person, prevents the disposition of it otherwise than jointly.

As a consequence, neither the interest of the husband, nor that of the wife, can be sold under execution so as to pass away title during their joint lives or as against the survivor after the death of one of them.  Indeed, it seems that the estate is not that of the husband or the wife; it belongs to that third person recognized by the law,—the husband And the wife.  It requires the co-operation of both to dispose of it effectually.[6]

Although this is the rule in many jurisdictions, it is not the rule in all jurisdictions.[7]  For example, in Corbin v. Litke, the court held that the transfer of entirety property by husband to his wife at a time when there was an action pending against him which resulted in a final judgement against him was a fraudulent transfer under New York law. ^[8]

Bankruptcy law places an important limitation on a couple’s ability to transfer entirety property within two years of the filing of a bankruptcy petition.  A majority of federal circuits have held that a trustee can avoid a debtor’s prepetition transfer of property, even though that property would have been exempt from the debtor’s creditors if that property had been owned by the debtor when the petition was filed.[9]

One of the leading cases in this area is In re Wickstrom.[10]  In that case, the debtor and his spouse conveyed real property which they owned as tenants by the entirety to their parents and their son.[11]  A few weeks before the transfer the debtor was informed that a collection action was about to be instituted against him.[12]  The debtor filed for bankruptcy three months after the entireties property was transferred.[13]  The court held that the trustee could avoid the transfer, even though the entireties properties would not have been part of the debtor’s estate if he had retained ownership of the property at the time he filed his bankruptcy petition.[14]  This is the majority view which, “includes the Fourth, Sixth, Ninth, Tenth Circuits and lower courts in the First, Second, and Eleventh Circuits. . . . The minority includes some lower courts in the First, Second, and Eleventh Circuits.”[15]

It is well settled that when a husband and wife voluntarily sell property owned as tenants by the entirety, the proceeds of the sale become personal property, held as tenants in common.[16]  What then constitutes a voluntary sale?  Where the state appropriates land pursuant to a power of eminent domain, the transfer is involuntary, and the compensation paid by the state has the same status as the real property held by husband and wife by the entirety.[17]  However, in some states, a forced sale at a foreclosure is deemed to be “voluntary,” and any surplus proceeds are held as tenants in common.[18]    In other states, the surplus proceeds of a foreclosure sale retain their status as entireties property.[19]  There is also a split of authority as to whether a sale by a bankruptcy court destroys the tenancy.  In some jurisdictions the proceeds left over after a sale by the bankruptcy court retain their status as entirety property.[20]  In other jurisdictions, such proceeds are deemed to held as tenants in common.[21]

[1] Franke, supra note 40, at 219 (citing Martin J. McMahon, Annotation, Validity and Effect of One Spouse’s Conveyance to Other Spouse of Interest in Property Held as Estate by the Entireties, 18 A.L.R. 23, § 8 (5th ed. 1994)).

[2] Id. (citing Watterson v. Edgerly, 388 A.2d 934 (Md. 1978).  For non-spousal transfer in case concerning an automobile tort and transfer of entirety property to the spouses’ children, see Sawada v. Endo, 561 P.2d 1291 (Haw. 1977).

[3] L&M Gas Co. v. Leggett, 161 S.E.2d 23, 24–25 (N.C. 1968).

[4] Id., at 25–26.

[5] Id., at 28.

[6] Id., at 26 (cleaned up).

[7] Martin J. Mahon, Annotation, Validity and Effect of One Spouse’s Conveyance to Other Spouse of Interest in Property Held as Estate Held by the Entireties, 18 A.L.R. 5^th 230 (1994).

[8] Corbin v. Litke, 431 N.Y.S.2d 800 (N.Y. Spec. Term 1980).

[9] Alyssa Pompei, “No Harm, Still Foul”: Unharmed Creditors and Avoidance of a Debtor’s Prepetition Transfer of Exemptible Property, 89 St. John’s Law Rev. 967 (2015); J.H. Cooper, Annotation, Adoption, Rejection, and Use of “No Harm, No Foul” Rule or “Diminution of Estate” Doctrine Associated with Bankcruptcy Avoidance Proceedings, 35 A.L.R. Fed. 3d Art. 5 (2018).

[10] In re Wickstrom, 113 B.R. 339 (W.D. Mich. 1990).

[11] Id., at 341.

[12] Id.

[13] Id., at 342.

[14] Id., at 352.

[15] Dana Yankowitz, Comment, “I Could Have Exempted It Anyway”: Can a Trustee Avoid a Debtor’s Prepetition Transfer of Exemptible Property?, 23 Emory Bankr. Dev. J. 217, 227 n.54 (2006).

[16] Shores v. Rabon, 112 S.E.2d 556 (N.C. 1960).

[17] E.g., Highway Commission v. Myers, 154 S.E.2d 87, 90 (N.C. 1967).

[18] Michael A. D.Sabatino, Annotation, Proceeds or Derivatives of Real Property Held by Entirety, 22 A.L.R. 4^th 459 (1983).

[19] Id.

[20] E.g., In re Ginn, 186 B.R. 898 (D. Md. 1995).

[21] E.g., In re Anderson, 132 B.R. 657, 660 (Bankr. M.D. Fla. 1991).

Under the law of many states, the transfer of entirety property into a trust terminates the tenancy.[1]  In recent years Delaware, Hawaii, Illinois, Indiana, Maryland, Missouri, North Carolina, Tennessee, Virginia, and Wyoming have enacted statutes which allow entirety property to be held in a qualified spousal trust.[2]

[1] In re Givans, 623 B.R. 635 (Bankr. M.D. Fla. 2020) (concluding that the debtor and his wife forfeited the creditor-protection benefits of their TBE property when they transferred the property to their joint trust because the property stopped being TBE once it entered the trust and the unity of marriage was lost).

[2] Robert E. Kirkland, Tenancy by the Entirety States and Qualified Spousal Trusts (March 19, 2020), https://www.actec.org/resources/tenancy-by-the-entirety-states-and-qualified-spousal-trusts/.

As explained earlier, in a tenancy by the entirety property, each spouse owns the entire property.  As such, this form of ownership is seen as a way to protect the property from creditors of any individual spouse and to ensure the easy transition of the property to the surviving spouse upon the co-tenant’s death.[1]  The fact that each spouse owns 100% of the asset makes it difficult for a creditor of just one owner to force a partition of the property to satisfy a debt.[2]  As a result, creditors will generally ask both spouses to sign any loan documentation to ensure a joint obligation.[3]

Each state has its own rules about tenancy by the entirety property, which means that from the asset protection standpoint, it’s important to understand each state’s peculiar rules.[4]  Only about half of all states and the District of Columbia allow this type of ownership for property owned by married couples.[5]  Jurisdictions that allow both real and personal property to be held as tenancy by the entireties include Alaska, Arkansas, Delaware, District of Columbia, Florida, Hawaii, Maryland, Massachusetts, Mississippi, Missouri, New Jersey, Oklahoma, Pennsylvania, Rhode Island, Tennessee, Vermont, Virginia, and Wyoming.[6]  States that permit spouses to hold real estate but not personal property in this configuration include Illinois, Indiana, Kentucky, Michigan, New York, North Carolina, and Oregon.[7]  Jurisdictions that do not recognize or have abolished tenancy by the entireties include Alabama, Arizona, California, Colorado, Connecticut, Georgia, Idaho, Iowa, Kansas, Louisiana, Maine, Minnesota, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Dakota, Ohio, South Carolina, South Dakota, Texas Utah, Washington, West Virginia, and Wisconsin.[8]

Tenancy by the entirety is a traditional form of property ownership.  If the tenancy by the entirety is recognized in the state where the property is located, then it will be valid in other states, no matter where the owners of the property reside.[9]  Couples wishing to rely on this form of property ownership should make sure they pay their federal taxes.[10]  Couples in some states need to make sure that any mortgages on the entirety property are not allowed to go into default.[11]  Couples should also recognize that the protections afforded by the tenancy expire upon the divorce or upon the death of one of the spouses.[12]  If a couple is willing to accept these risks and limitations, then tenancy by the entirety is a good choice as an asset protection device.

[1] Samuel D. Hodge, Jr., Everything You Wanted to Know about Owning Property in A Tenancy by the Entireties but Were too Afraid to Ask, 49 Real Est. L.J. 6, 11 (Summer 2020).

[2] Id., at 14–15.

[3] Id., at 15.

[4] Generally, the situs of the property controls the law to be applied regarding its status as entirety property.  Restatement (Second) of Conflict of Laws § 222 (Am. L. Inst. 1971)

[5] Hodge, supra note 171, at 17.

[6] Id., at 18.

[7] Id.

[8] Id.

[9] See supra note 174.

[10] See supra Section III.

[11] See supra notes 142–56 and accompanying text.

[12] See supra Section II.

Asset Protection Variations Among Jurisdictions Recognizing Tenancy by the Entirety[1]

[1] The following table originated in Franke’s original article and has been updated and supplemented with contributions from Duncan E. Osborne, et al., Asset Protection: Domestic and International Law and Tactics, Thomson Reuters (2021) and Robert E. Kirkland, Tenancy by the Entirety States and Qualified Spousal Trusts (March 19, 2020), https://www.actec.org/resources/tenancy-by-the-entirety-states-and-qualified-spousal-trusts/.