I need to learn more about asset protection in regards to real estate in PA. I have a small portfolio of single family rentals and I'm moving toward an asset protection plan. I am also in the process of doing estate planning.
I have read that in Pennsylvania, spouses who share ownership of property under "tenants by the entireties" language have asset protection from creditors and that it is a rare state specific protection.
Here’s an article that goes into it:
The article states:
Where property is held by spouses as part of a tenancy by the entireties, the two do not own separate interests in the property; their interests are jointly held. Pennsylvania law provides that an individual’s creditors cannot pursue assets that are jointly owned by that individual and his/her spouse as tenants by the entireties. In other words, property held in this way is generally not available to the creditors of only one of the two spouses.
There are limited exceptions to this rule. The Pennsylvania courts have determined that in order for a creditor to have access to property that is held by the entireties, there must be some action performed by both spouses, i.e., a joint action of sorts. This is true because the very notion of the tenancy is founded upon the principle of unity that exists in the marital relationship. Ultimately, a tenancy by the entireties can be terminated: (1) upon the death of one co-tenant spouse; (2) divorce; (3) a joint conveyance; or (4) through an express or implied agreement.
I'd like to hear from any knowledgeable folks about how this type of protection differs from asset protection provided by taking title in my LLC. I understand that there may be limited protection provided by a single member LLC vs a partnership LLC. But LLC partnerships have higher costs for tax filing and higher rate financing options with worse terms 5 and 7 year balloons.
Ideally, I'd like to take the "tenants by the entireties" route if it affords sufficient protection. Anyone have experience in this area? Thanks in advance.
I am a broker in PA and have never heard of this being a valid way of protecting assets. For those who don't want the expense of transferring properties into an LLC and tax filings, typically I have seen then get the protection they want from an umbrella insurance policy. Clean and simple and depending on your situation and assets could get the best route. If you really want to go down this road I advise that you consult with a very good real estate attorney.
@Garrett M. - so you are looking for highly specialized advice (state specific and legal specific) from a public forum, full of "Holiday Inn experts"? In hope of not having to pay the consultation fee with a local PA asset protection lawyer or thinking that you already have liability protection just because of how the ownership title is held?
Ok, sarcasm/joking aside, here is my 2¢ to be taken with a big grain of salt:
I read the "property held in this way is generally not available to the creditors of only one of the two spouses" as a maybe protection if your wife maxes out her credit cards and they come for collection, the creditor will not be able to touch the rentals, and only her bank accounts and assets individually owned. Assuming you'll be able to make a good case that she used it only to buy purses for herself, with no benefits to you. Basically, attacks from outside (to rentals) liability issues (another example could be if she crashes her car and she or you both get sued).
If "courts have determined that in order for a creditor to have access to property that is held by the entireties, there must be some action performed by both spouses" - I think, with both of you owners of a rental, you'll have no separation and no way to claim "She/I did it, I/she didn't know, I/she had nothing to do with it" in matters of liability issues arisen from the rentals - the inside rentals liability issues (like tenants falling on the stairs because you/wife/both neglected to install/repair a banister) - and be able to remove one of you from the lawsuit (because you both will be sued in such case as owners) and thus claiming "oh, can't collect on the lawsuit award, cause is jointly owned, and only me/she lost".
But before you get caught into the rabbit holes of legal asset protection...do you really need it? Do you have significant equity and/or cash flow? Did you cover all the other aspects of asset protection that are in your reach?
Read this book first - https://www.amazon.com/Every-Landlords-Property-Protection-Guide/dp/1413307000 - before getting into more complicated and expensive measures of protection.
Asset protection is a form of insurance – insurance against litigation. My recommendation would be to apply the "2% rule" - the cost of setting up and maintaining your asset protection should be less than 2% of equity you are trying to protect. Let's say, it costs you 1.5K to get your structures in place (holding LLC or Series-LLC, with or without land trusts, with or without separate operations LLC) and 0.5K per year (for maintaining the LLC properly, bookkeeping, lawyer and CPA, etc.) for a total of 2K. You should have 100K or more in equity to protect before it makes sense to spend that money - compare that with how much you spend in annual insurance for the same property/equity under the same FEAR principle (False Evidence Appearing Real... or what if's).
Since I visited Holiday Inn often, here is an Asset Protection Decision Diagram - to help assess the need for asset protection, and what to implement : https://www.biggerpockets.com/files/user/CosIorg/file/asset-protection-decision-diagram
And an Asset Protection Onion Diagram - what, when and at what cost one should implement in terms of asset protection: https://www.biggerpockets.com/files/user/CosIorg/file/asset-protection-onion-diagram-v2
And how a fully implemented asset protection layout might look. - https://www.biggerpockets.com/files/user/CosIorg/file/asset-protection-structures
Bonus: What is needed for a complete asset protection OR the domains that need to be intersected to find asset protection. - https://www.biggerpockets.com/files/user/CosIorg/file/asset-protection-spectrum-diagram
And if all that didn't get you utterly confused, let me add to it - since AssPro is not cheap, I spent numerous hours researching from multiple sources the whole LLC question and asset protection matter and all the rabbit holes it opens. I gathered all my notes in a 50+ pages document touching on formation and maintenance of LLC and business structures, transferring assets, protection strategies, trusts, anonymity, insurance, levels of protection, etc. including when you should do it, how many properties per LLC, due on sale clause, selecting an attorney, fees, checklists and resource materials + some diagrams to help you in decisional flow: https://www.biggerpockets.com/files/user/CosIorg/file/tritoriam-file.
You still need to consult a specialist.