I recently received the following question:
I’m moving to a state which does not recognize Tenants by the Entirety. However, my husband and I have a Tenants by the Entirety account already open. What do I need to do?
For married couples, the most common joint ownership types are Joint Tenants with Rights of Survivorship and Joint Tenants by the Entirety. For both of these, when one tenant dies, the deceased is simply removed from the title and the surviving tenant maintains full control.
However, there is a subtle difference between the two accounts.
Joint Tenants by the Entirety means that both tenants own 100% of the assets. If John and Sue own the account together, there is no 50% owned by him and 50% owned by her. Sue owns 100% and John owns 100%. This fact creates the creditor protection that Tenants by the Entirety affords. If John’s creditors want to lay claims to his assets, they can’t touch the Tenants by the Entirety account because that would be stealing assets which are 100% owned by Sue.
Joint Tenants with Rights of Survivorship, on the other hand, simply means that both John and Sue own part of the assets and, if one were to die, the other will seamlessly inherit the decedent’s share. Because the assets are not 100% Sue’s, when John’s creditor’s come, they can lay claims to John’s share of the assets. No creditor protection.
Joint Tenants by the Entirety, sometimes abbreviated TBE, is usually the preferred account type if it is available for two healthy spouses. The creditor protection is nice. And it has the will substitute of seamless inheritance built in.
However, not all states acknowledge Tenants by the Entirety accounts. Some states simply do not recognize the account titling.
Instead, these states treat a Tenants by the Entirety account they encounter as a Joint Tenants with Rights of Survivorship, sometimes abbreviated JTWROS.
If you happen to move from a TBE state to one that does not recognize the title, although you do not need to open a new account, the account will lose the unique creditor protection of Tenants by the Entirety as your new state will no longer recognize the Entirety account title. Instead, the state will treat the account as though it were a Joint Tenants with Rights of Survivorship account.
That being said, if you plan on staying in a state which does not recognize TBE for a long time, you may benefit from converting your account after all.
Tenants by the Entirety, as one of its weird rules, is that the surviving tenant “inherits” the asset outright because it always was their asset. However, because of this rule, it means that you cannot put a designated beneficiary plan, also called a Transfer on Death instruction or TOD.
Meanwhile, you can put a designated beneficiary plan on a Joint Tenants with Rights of Survivorship. For this reason, if you are planning on remaining in a state which does not recognize TBE, you may as well convert your account to a JTWROS with a Designated Beneficiary Plan that names your heirs or trust directly. This will streamline your estate by avoiding probate in the event that both tenants die.
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