Pennsylvania law affords married business owners some valuable options for asset protection which are not broadly available in other jurisdictions across the country.
This protection stems from a joint property ownership concept referred to as “tenancy by the entireties.” Under this Pennsylvania law, property can be jointly owned by and between spouses, and that property is deemed to be held in an estate that is entirely separate and apart from the individual estate of each spouse. Upon the death of one spouse, the ownership of property held in this way will automatically transfer to the remaining living spouse.
Only a small minority of states recognize this form of property ownership. Fortunately, for Pennsylvanians, this protection is available and should be considered when married business owners are setting up or assessing their business ownership structure.
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. This is important for purposes of this article because, as a separately held joint interest, property held by spouses as part of a tenancy by the entireties cannot be accessed by the individual creditors of each of the spouses. 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 I 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.
The law will not afford protections when one spouse fraudulently transfers his or her own individual property to a tenancy by the entireties simply as a means to avoid his or her own individual creditors. Moreover, it is possible, for example, for a creditor of one spouse to obtain a contingent lien against property held by the entireties, where the lien would be contingent upon the debtor-spouse outliving the other spouse and becoming the sole owner of the property. Under these circumstances, however, the debtor-spouse’s creditor has no claim over the property while the other spouse is alive. In fact, while both spouses are living, the creditor has no standing whatsoever to stop the conveyance of the property, even where such a conveyance would prevent the creditor from obtaining a judgment against the debtor-spouse.
If you are a married couple who have decided to go into business together, it is important to be aware of this option – whether you are setting up a new business or making ownership changes to an existing business . As with any business-related decision, you should consider all the relevant circumstances. As you do so, consider that the best way to protect the assets which are owned by both spouses may be to establish the ownership of the business in the name of only one spouse, rather than both. This is true, at least in states like Pennsylvania, where assets held in the name of both spouses cannot be executed upon by creditors for a debt that is only held in the name of one spouse.
Make an informed decision on this issue by getting assistance from a good business attorney in reviewing this and other options available to you as married business owners in Pennsylvania.