This guide helps to explain a new and dramatic shift in the landscape of asset protection in North Carolina, whereby real property held by tenancy by the entireties can now be transferred to a trust without losing its creditor protection advantages.
ASSET PROTECTION IN TENANCY BY THE ENTIRETIES
On January 1, 2015, a new law went into effect in North Carolina dramatically changing the landscape of asset protection for real property. There are numerous ways for spouses to hold title to their property, and one of the most common is to hold title as "Tenancy by the Entireties." Tenancy by the entireties establishes a joint tenancy in the property with rights of survivorship, but also adds a wrinkle of asset protection that prohibits creditors of one spouse to reach the property owned by both spouses. In other words, so long as both spouses hold title as tenants by the entireties, the property is off limits to creditors who could only execute against one spouse but not the other. This is a valuable tool for asset protection, and the North Carolina legislature has now expanded its function.
THE NUTS AND BOLTS OF THE NEW LAW
North Carolina General Statutes Sec. 39-13.7 gives husbands and wives tenancy by the entirety protection in property conveyed to certain trusts. The law provides that any real property held by a husband and wife as tenancy by the entireties and conveyed to their joint revocable or irrevocable trust, or to their separate revocable or irrevocable trusts, shall have the same immunity from the claims of the spouses' separate creditors as would exist if the spouses had continued to hold the property as tenancy by the entireties, so long as (i) the spouses remain husband and wife, (ii) the real property continues to be held in the trust or trusts, and (iii) the spouses remain the beneficial owners of the real property. Under this new law, spouses can enjoy the control they want by keeping property in trust while adding the creditor protection they once had to sacrifice.
HOW THE ADVANTAGES WORK
Traditional tenants by the entirety property automatically passes to the survivor upon the death of the first spouse; however, holding the property in a trust is more flexible. For example, the tenancy by the entireties trust could convert to an irrevocable trust for the benefit of the survivor, with the remainder to pass to children after the survivor's death. This structure would provide better asset protection for the survivor as well as better protection to the children if the survivor remarries. After the death of the first spouse to die, the property will continue to be exempt from the claims of the decedent's separate creditors (note, however, that to the extent the survivor may withdraw the trust assets, the property will be subject to the claims of the survivor's separate creditors). Furthermore, the trust-maker may retain control over the property's disposition after the death of the second spouse to die, including providing for heirs that might otherwise be dispossessed.
WHAT THE FUTURE OF THE LAW MAY HOLD
As of now, North Carolina allows this structure with respect to real property. However, further changes appear on the horizon. North Carolina General Statutes Sec. 39-13.6 (defining tenancy by the entireties) and 13.7 (allowing tenancy by the entireties property to be placed in trust) may be expanded to include personal property as well as real property. This would signal a dramatic shift and expansion in the area of asset protection. The attorneys at Strauss & Associates are staying ahead of the curve on this quickly changing landscape, and are ready and available to assist you in reviewing your asset portfolio to determine if utilization of a tenancy by the entireties trust is right for you.
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