Tenancy By the Entireties Property: Bankruptcy, Probate and Collection Issues

Michigan remains one of only few states that continue to recognize the ability of a husband and wife together to own property as tenants by the entireties.  In fact, if persons  are husband and wife and are married at the time they took title to a parcel of real property, it is presumed that they took title as tenants by the entireties (or by the entireties), unless the deed of conveyance indicates some other intent.  Most married couples in Michigan own their homes in such fashion.

A tenancy by the entireties is a legal fiction where the husband and wife are deemed to be one unit, and neither of them, alone, while married, can convey out or encumber (mortgage) the property by themselves.  It typically only applies to ownership of real property (land) with very limited exceptions.  Another feature is that no singular creditor of the husband, or of the wife, can reach entireties property to collect on a debt and, except for federal tax liens, it is only subject to claims of joint creditors of the parties.  Consequently, it has been the law of the state of Michigan for over half a century that you cannot place property into entireties ownership to avoid claims of your singular creditors, as this may constitute fraud if not done for fair consideration (monetary value), as it places the property outside of their reach.

Title to property held as tenants by the entireties automatically vests in the survivor by operation of law.  Thus, other than being able to shield your property from singular creditors of the husband or the wife, it is also a good initial estate planning device, as no probate is necessary to transfer title to such property (typically the marital home) to the spouse on the death of the first party.   After the first person (usually the husband) is gone, the survivor, who is now the sole title holder, can generally avoid probate by executing a so-called Lady Bird Deed, making it joint with her/his children, or perhaps placing the property into a Trust, making the Trust the owner and naming herself or himself as Trustee and sole present beneficiary, as well as naming a successor Trustee and beneficiaries.  (Note that depending how this is done, the value of the property, the relationship to the grantees, and the like, such conveyance may have income or gift tax implications and/or may result in uncapping of real estate taxes, among other things).

The interest one holds in property held as tenants by the entirety becomes property of the estate in a bankruptcy case filed by the husband or wife, or both.  It is subject to claiming the property as exempt (property you get to keep in whole or in part) by the debtor(s), under the state or federal exemptions, as well as administration (including possible sale) by a duly appointed Trustee.  If one claims the traditional state exemptions, the property can only be sold to satisfy joint claims of the husband and wife.  If there are no joint claims in existence (this is determined by the Trustee sending out a so-called “Trickett” Notice), the property claimed as exempt is exempt.  If the federal exemptions or non-traditional bankruptcy specific state exemptions are claimed, the property can still be sold to satisfy any type of claim, although the debtor(s) will typically receive a significant monetary payment from the proceeds after the Trustee first pays off any duly recorded and unavoidable mortgages, liens and expenses of sale.

If only one of the parties files bankruptcy, then only their undivided “half-interest” becomes property of the bankruptcy estate.  If the non-filing party opposes any sale, then the Trustee has to file a lawsuit against them (called an adversary proceeding) and the Bankruptcy Court has to then engage in a balancing test to determine if the detriment to the non-bankrupt party outweighs the benefit to the bankruptcy estate in having the entire property sold.  (If a sale is allowed, the non-bankrupt party would receive half of the sales proceeds and the bankrupt or debtor his/her allowed exemption amount).

In light of the recent U.S. Supreme Court decision allowing gay marriage, it is unknown if a same sex couple could own property by the entireties.  This author thinks not, as such historical common law concept of entireties ownership, bolstered by existing statutes and numerous cases, always refers to property owned by a husband and wife (not by people who are married).  Now, if one person in such a union were to declare that they are to be deemed the husband and the other person the wife, in the body of the deed or in a separate Affidavit, then this might be possible.  However, because of the continuation of “dower” rights of the “wife” (a topic for another day), each person in such a union may want to be the wife (the male form of dower, called “curtesy,” was eliminated by the state of Michigan in the 1950’s).   We will leave these issues for the Michigan Courts or legislature to figure out. However, should you have a question about ownership of real property, need a deed prepared, or have other legal needs, please contact the law firm of Damon, Ver Merris, Boyko & Witte, PLC.  We are here to help. – Larry A. Ver Merris