Creditor-Protection Gets a Boost

Due to recent changes in our state law, Hawai‘i is one of a handful of states that affords creditor-protection to those who hold “Tenants by the Entirety” property. Tenants by the Entirety is a method by which married couples have equal interest in a property and hold the title together. Each owns the undivided whole of the property. In order for one spouse to modify his or her interest in the property in any way, the consent of both spouses is required. One of the benefits of Tenants by the Entirety is that it protects property from creditors. A home held as Tenants by the Entirety may only be reached by creditors of joint debts of both the husband and wife. In the event of an individual debt of (or judgment against) a husband or wife, the property may not be partitioned, sold or encumbered without the permission of both spouses — in essence, protecting the property from a forced sale.

This type of property ownership can cause uncertainty for married couples. Prior to July of this year, couples that wanted to transfer their real estate to a revocable inter-vivos trust (or living trust) would lose the creditor-protection associated with Tenants by the Entirety. Having to choose between the two plans always had a proposed risk — there was never a perfect solution.

Effective July of this year, Congress amended Section 509-2, Hawaii Revised Statues. This law allows couples to hold their real estate in their living trust, as well as maintain creditor-protection. To be effective, the real estate needs to be held as Tenants by the Entirety first and then transferred into the trust.

In order to be eligible to hold real estate as Tenants by the Entirety, you must be a legally married couple, which includes civil unions (effective January of this year) or reciprocal beneficiaries. A valid reciprocal beneficiary relationship must include the following:

  • each of the parties be at least eighteen years old
  • neither of the parties be married nor a party to another reciprocal beneficiary relationship
  • the parties be legally prohibited from marrying one another under chapter 572
  • consent of either party to the reciprocal beneficiary relationship has not been obtained by force, duress, or fraud
  • each of the parties sign a declaration of reciprocal beneficiary relationship as provided in Section 572C-5

If you do not have an estate plan or it has been a while since you last visited with your estate-planning attorney, this would be a great time to create or update your estate plan in order to fully optimize these new laws.