Many of you have heard about the benefits of owning real estate in a limited liability company (LLC) to provide protection from liability arising out of your ownership of the real property.  See my June 2009 newsletter for further discussion.  This is pretty standard advice that you will hear from most advisors, including me.  However there is one area where the decision to re-title real estate into an LLC is not so clear: real estate owned by husband and wife, particularly where one of them is in an occupation that is exposed to professional liability.

In North Carolina real estate owned by husband and wife as tenants by the entireties is protected from each spouse’s individual creditors.  This means that if one spouse has a judgment entered against them individually, the judgment creditor cannot enforce the judgment against any real estate as long as the real estate is owned by husband and wife as tenants by the entireties.  This can be important, for example, where one spouse is a doctor and subject to potential malpractice liability.

If real estate is re-titled into an LLC as per the typical advice, then the husband and wife will lose this special protection which only applies to real property; their ownership interest in the LLC will be subject to their individual creditors.  Some of you may be thinking….but doesn’t owning an LLC interest provide some protection against collection from creditors?  Yes it does…but not nearly the protection afforded by the special tenancy by the entireties rule.  Now I am not saying that a husband and wife should never use an LLC for real estate; many of my married clients do.  My point is simply that there are some circumstances where re-titling real estate into an LLC may not be the best choice.  You’ll need to consider the decision on a case-by-case basis.

A few imporant qualifications to note….

1.  This special rule only applies to real estate owned by husband and wife as tenants by the entireties; that is the default type of joint ownership for a husband and wife in NC, but the real estate can also be titled as “tenants in common” which does not afford the special protection.  You need to check your deed to be sure.  Also, if one spouse owned the property before marriage then it is not in tenants by the entireties unless it is re-titled after the marriage.

2.  I am only speaking about NC law.  If you have property in another state, the discussion above is irrelevent for that property, though there may be similar laws which apply in the other state.

3.  The IRS takes the position that it is not bound by this special exception, so it may enforce an individual claim against any property owned by husband and wife.

4.  The protection only applies to individual claims; if both husband and wife are liable for a claim the protection is not applicable.

If you are married and considering an LLC for real estate, make sure you ask about the tenancy by the entireties rule.