Maybe being married is okay, even with debts

Capital Bank asked the Taney County Sheriff to sell Rocky’s, a popular Italian restaurant in Branson, to satisfy a judgment awarded by an Arkansas court against the owner of the restaurant. Judge Orr stopped the sheriff’s sale, because the restaurant land and building were owned by Mr. and Mrs. Charles Barnes, while the Arkansas court’s judgment was against only Mr. Barnes. The Missouri Court of Appeals affirmed Judge Orr’s ruling in an opinion dated February 2, 2009.

I had a great lunch at Rocky’s on February 3, so I’m glad that a bank didn’t take over the restaurant.

In Missouri and several other states, a married couple can own property as though they were one person, in a form of ownership called “tenancy by the entirety.” In Missouri, a tenancy by the entirety is presumed to have been created when a deed to a married couple uses the words “husband and wife” after their names, if they are in fact married.  A deed is a written document, signed by the grantor(s), which is evidence of the intent of the grantor to convey property to the grantee(s).

The holding of the Barnes case does not break new ground, but it explains why careful lenders usually insist that a personal guaranty and deed of trust (mortgage) be signed by each spouse, otherwise the collateral may not be reachable. Generally, the tenancy by the entirety form of ownership will stop even the IRS from seizing the property of a married couple for taxes owed only by one spouse.

From the borrower’s point of view, holding real estate as tenants by the entirety can be a good idea. A limited liability company (LLC) or corporation is created as an operating entity for a small business,which leases real estate from the husband and wife. The husband and wife are protected from personal liability for business debts that they have not personally guaranteed. The lease income is not subject to self-employment tax.

An additional question is whether the LLC membership interests or corporate shares should be held by both husband and wife, as tenants by the entireties or whether each should own half or whether some other form of ownership is desirable. Answering this question requires careful analysis by a lawyer, estate planner and tax advisor working together.