SC Lawyer, January 2012, #5. Is There a Better Way to Hold Title to Real Estate for Asset Protection Purposes?.

• Author: By Shawn M. Flanagan

South Carolina BAR Journal

2012.

SC Lawyer, January 2012, #5.

Is There a Better Way to Hold Title to Real Estate for Asset Protection Purposes?

South Carolina LawyerJanuary 2012Is There a Better Way to Hold Title to Real Estate for Asset Protection Purposes?By Shawn M. FlanaganOver the past decade, it has become increasingly popular for a married couple to own their home as "joint tenants with rights of survivorship and not as tenants in common" (JTWROS). Lawyers should consider discussing "tenants in common with a right of survivorship" (TICWROS) with their clients as an alternative to JTWROS. The reason for this added advice is that titling a home as TICWROS may afford the owners a level of protection from their creditors not available with JTWROS.

Titling a couple's home as TICWROS may afford the owners a level of protection from their creditors similar to that applicable to tenancy by the entirety (TBTE) in states like North Carolina and Florida. The protection, if it exists, has its origins in Smith v. Cutler, 366 S.C. 546, 623 S.E.2d 644 (2005), and Davis v. Davis, 75 S.E.2d 46, 223 S.C. 182, 75 S.E.2d 46 (1953). Although this article focuses on a married couple's residence, the asset protection afforded by TICWROS (if any) might also extend to other real estate and might apply to unmarried co-owners of property.

Assume for purposes of this article that either your husband-client or your wife-client is engaged in a business or profession which carries a high risk of being sued personally. Assume further that the high risk spouse is not comfortable titling their home solely in the name of the low risk spouse. Also, on the first to die, your clients want title to their home to pass outright to the survivor via a non-probate transfer.

It is important to understand the differences between the various ways to hold real estate.

Tenants by the entirety (TBTE)

According to Davis, tenants by the entirety was abolished in South Carolina in 1895. Presently, close to half the states and Washington, D.C. have some type of TBTE property interest. States that have it include North Carolina and Florida.

In the case of tenancy by the entirety, the property interest of a deceased owner passes automatically on death to the surviving owner. Use of tenancy by the entirety is limited to a husband and wife. Furthermore, neither spouse in a TBTE may unilaterally terminate the TBTE during his or her lifetime. An owner can sell his or her interest onlywith the consent of his or her spouse. In most states recognizing tenancy by the entirety, the creditors of one spouse cannot reach the entireties' property. This was true in South Carolina before 1895.

Tenants in common (TIC)

Only a decade ago, the very large majority of co-ownership of real estate in South Carolina was accomplished via tenancy in common. Upon the death of a TIC owner, his or her property interest is a probate asset and passes either by intestacy or in accordance with the deceased owner's Last Will and Testament. An owner of a property interest titled as TIC is permitted by law to convey his or her interest without the consent of any other owner. There can be more than two owners, and their ownership percentages do not have to be equal. The creditors of one owner can reach that owner's property interest.

Joint tenants with rights of survivorship (JTWROS)

Prior to 2000, the estate of joint tenancy with rights of survivorship (JTWROS) was rarely used in South Carolina because the applicable law was uncertain. An amendment to S.C. Code Section 62-2-804 in 1996 helped in some respects.

In 2000, the legislature created, by statute, the estate of joint tenants with a right of survivorship. See S.C. Code Section 27-7-40. Use of JTWROS is not limited to a husband and wife. It has nevertheless become a popular way for married couples to own their residence. Upon the death of an owner, his or her property interest will pass automatically to the surviving owners outside of probate. An owner of a property interest titled JTWROS can sever the joint tenancy and convey his or her interest without the consent of any other owner. Although there can be more than two owners, each person's ownership percentage has to be equal. The creditors of one spouse can reach that spouse's property interest.

Tenants in common with a right of survivorship (TICWROS)

There are at least two situations when a couple should consider utilizing tenancy in common with a right of survivorship (TICWROS). One, if the couple wants (a) their property held in both names and (b) an automatic non-probate transfer to the survivor on the first death. Two, where one spouse is reluctant to title the home in the sole name of the other spouse. Situations such as these usually result in the couple using JTWROS. The couple should consider using TICWROS instead of JTWROS.

In the case of TICWROS, upon the death of an owner, his or her property interest passes automatically to the surviving owners outside of probate. An owner of a property interest titled TICWROS can convey his or her interest only with the consent of the other owner. There can be more than two owners, and their ownership percentages do not have to be equal. Although it is not definitive, the creditors of one spouse should arguably not be allowed to reach property titled in both names as TICWROS.

Real estate owned by a husband and wife as tenancy by the entirety enjoys some protection from creditors in most states. The S.C. Supreme Court in Smith v. Cutler said the following about tenancy by the entirety (TBTE) and tenancy in common with a right of survivorship (TICWROS):

The Court created the estate of tenancy in common with a right of survivorship because South Carolina did not permit husband and wife to hold property as tenants by the entirety. 33 S.C. at 549, 623 S.E.2d at 646. Since "tenants in common with a right of survivorship" (TICWROS) in South Carolina was meant to replace tenancy by the entirety (TBTE), should these two estates enjoy the same protection from creditors?

In reaching its decision in Smith v. Cutler, the Court relied on Davis v. Davis>, 223 S.C. 182, 75 S.E.2d 46 (1953). According to Davis, South Carolina recognized tenancy by the entirety prior to the Constitution of 1895. The Court described a pre-1895 South Carolina tenancy by the entirety as follows: "neither [owner] can alien so as to bind the other, and the survivor takes the whole." Davis, 223 S.C. at 194, 75 S.E.2d at 52. Also, "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."

Id. at 197, 75 S.E.2d at 53. Based on Davis, prior to the Constitution of 1895, a South Carolina tenancy by the entirety enjoyed the same protection from creditors enjoyed by a tenancy by the entirety today in North Carolina and Florida.

"Where a right of survivorship is attached to a tenancy in common, it is indestructible except by the voluntary action of all the tenants in common." 86 C.J.S., Tenancy In Common 5.

In Smith v. Cutler, the Court ruled that (a) TICWROS is an estate that is not subject to partition; (b) TICWROS creates a tenancy in common with an indestructible right of survivorship; and (c) a TICWROS is not capable of being defeated by the unilateral act of one joint tenant. "[A] tenancy in common with a right of survivorship cannot be defeated by the act of one tenant absent the agreement of the other tenant." 366 S.C. at 551, 623 S.E.2d at 647.

Since TICWROS was created to replace tenants by the entirety and the S.C. Supreme Court in Smith v. Cutler refused to allow partition, TICWROS arguably enjoys the same protection from creditors as the estate of tenancy by the entirety.

The S.C. Supreme Court in Smith v. Cutler tells us exactly what language to include in the granting clause and habendum clause of a deed to create a TICWROS:

We hold that the use of the phrase "for and during their joint lives and upon the death of either of them, then to the survivor of them" indicates an intention of the parties to share a tenancy in common for life, with cross remainders for life, with remainder in fee to the ultimate survivor. [Emphasis added.]

Id.366 S.C. at 551, 623 S.E.2d at 647. The language in quotation marks was the subject of the Smith v. Cutler case. It should not, however, be the exclusive way to create a TICWROS.

Case study

Your married clients are Becky (age 47) and Bill Kirkconnell (age 48). Becky is an OB-GYN physician ("high risk spouse"), and Bill is a college professor ("low risk spouse"). While working with your clients, you find out that they have an interest in asset protection planning. Their home is worth $2,500,000 and has a small mortgage outstanding. Assume there is no pending, threatened or expected legal action against either client and the fraudulent transfer law in South Carolina (S.C. Code Ann. 27-23-10) has no application in this case. A very common planning tool would be to have Becky deed to Bill any and all interest she owns in their $2.5 million residence. In this case, however, Becky does not want to deed her entire interest over to Bill.

Even if Becky were comfortable deeding her entire interest to Bill, it may be better to title the property in both names as tenants in common with a right of survivorship (TICWROS). In other words, making use of TICWROS may actually provide more protection than titling the home solely in Bill's name. Although it is true that Becky's occupation is the more risky of the two, Bill might run into difficulties of his own (financial or otherwise). Bill could unilaterally decide to act in a manner that Becky could not stop absent a court order. Bill's actions (whether voluntary or accidental) could prove detrimental to Becky's interest in the home. For example, Bill could be the cause of a terrible car accident in his commute to and from the University every day. Bill might not always remain loyal to Becky-for example, he might have an affair with one of his students. Bill might deed the house to a religious cult he gets involved in. Bill might develop a substance abuse or gambling addiction. Everything is fine right now, but does Becky really want to give Bill that much control over her beautiful home that she worked so hard to buy and furnish?

Assume that Becky and Bill want the greatest protection for the least amount of money and hassle. Some clients want to keep things as simple as possible. They are not interested in techniques that are costly or complex or just plain scary. You can forget about trying to convince them of the efficacy of deeding their home to a Trustee of an irrevocable trust (e.g., a domestic asset protection trust, an offshore trust, a qualified personal residence trust, etc.). There are practical problems associated with placing a residence (a personal asset) in an LLC (a business legal entity), including qualification for a non-commercial mortgage and tax exemptions.

Although Becky and Bill would like to engage in some asset protection planning, they are not "worried to death" about being sued. Their fear of lawsuits and creditors can be characterized as being "medium" level. They have the maximum amount of automobile liability insurance their carrier sells and a $3 million umbrella policy. Becky has a lot of medical malpractice insurance, and the South Carolina Noneconomic Damage Awards Act of 2005 (effective July 1, 2005) has made her feel less anxious about a lawsuit. They understand, however, that insurance is not the answer to all of their problems-even if the amount of insurance appears sufficient, there is always the issue of whether a particular claim is covered.

Possible recommendation to clients

Becky and Bill might want to title their home in both names as tenants in common with a right of survivorship. In accordance with Smith v. Cutler, 366 S.C. 546, 623 S.E.2d 644 (2005), the deed would be to Becky and Bill "for and during their joint lives and upon the death of either of them, then to the survivor of them, his or her heirs and assigns forever in fee simple..." See Exhibit A for the first page of a sample deed with the requisite language.

The disadvantage of using tenancy in common with a right of survivorship (TICWROS) is a loss of some flexibility. A co-owner of property titled either as tenants in common (TIC) or as joint tenants with right of survivorship (JTWROS) can deed his/her interest to anyone he/she wants during his/her lifetime. In the case of TICWROS, a co-owner cannot act unilaterally-each owner must obtain the other co-owner's consent and signature to deal with the property.

One alternative to TICWROS would be to hold the property as tenants in common (TIC) in disproportionate percentages. For example, Bill could own a 99 percent interest in the residence and Becky could own one percent. Becky's ownership percentage would make it difficult (but not impossible) for Bill to act unilaterally with regard to the property. As a practical matter, to sell, lease, subdivide or mortgage the property, Bill would have to get Becky's consent. If Becky found herself in trouble with her creditors, then Bill could simply purchase Becky's one percent interest for full and adequate consideration. A fractional interest discount might apply, lowering the fair market value of the one percent percent. Assume the purchase price for the one percent interest would be paid to Becky's creditors. Becky and Bill would only lose one percent of the value instead of 50 percent. This 99 percent/one percent TIC form of ownership would protect most of the property from Becky's creditors (not Bill's creditors) and still allow Becky a legal say in what happens to the property. Note that disproportionate percentages should also work in conjunction with TICWROS. Also note the "right of first refusal" procedure in partition actions per S.C. Code Ann. 15-61-25.

South Carolina is not the only state with law similar to Smith v. Cutler. Other states which have recognized the estate of tenancy in common with an indestructible right of survivorship (or something similar) include Alabama, Georgia, Minnesota, Nebraska, New Hampshire, Oregon and Wisconsin. Caveat: Unlike most states that recognize tenancy by the entireties, Oregon law permits the creditor of one spouse to execute on that spouse's interest in property held as a tenancy by the entirety.

Even if TICWROS provides some protection from creditors, it will not help against an IRS claim for back taxes. The Supreme Court in United States v. Craft, 535 U.S. 274, 122 S.Ct. 1414, 152 L.Ed.2d 437 (2002), held that a federal tax lien involving Don Craft (the husband) attached to Michigan property owned by Don Craft and his wife as tenants by the entirety. The Supreme Court held that where federal taxes are owed by one spouse, and the spouse has property owned as tenants by the entireties with a spouse who had no delinquent tax liabilities, the IRS may attach the entireties property to collect the tax debt under 26 U.S.C. 6321.

Conclusion

A good argument can be made that the personal residence of a married couple titled as "tenants in common with a right of survivorship" deserves the same level of protection from creditors afforded to a tenancy by the entirety. For asset protection reasons, couples should consider holding title as "tenants in common with a right of survivorship" in lieu of "joint tenants with rights of survivorship."

Shawn Flanagan is a trust and estates attorney in Womble Carlyle's Charleston office.