The method by which a person holds title to property in Hawaii affects how that property is distributed and taxed upon a person’s passing. Therefore, for estate planning purposes, it is important to know the differences between tenancies and understand the ramifications they may have on an estate plan. The following is a brief explanation of how title to property may be held in Hawaii.
Tenancy in Severalty: This how a single party owns property. The party’s interest is “severed” from others.
Tenancy in Common: Tenancy in Common exists where two or more parties each hold an undivided, specific interest in a property. In addition to natural persons, corporations, partnerships, trusts and estates may hold property as a tenant in common. Each party’s interest is equal to the other tenants unless otherwise specified. Furthermore, every party is entitled to possession of the entire property with the co-tenants. If no tenancy is specified, tenancy in common is the default method of holding title unless otherwise provided by law.
A tenant in common may sell or encumber her interest at any time. The new owner then becomes a tenant in common with the other existing tenants. Also, a party’s interest in the property is subject to the claims of that party’s creditors. Finally, since there is no right of survivorship between tenants in common, each party’s interest will pass to his heirs/devisees as part of his estate.
Joint Tenancy with Rights of Survivorship: Two or more natural persons may hold property as joint tenants with rights of survivorship. This means corporations, partnerships, trusts and estates may not be joint tenants. Each joint tenant holds an equal undivided interest in the property. "Right of survivorship" means that when a joint tenant dies, his interest automatically passes to and is divided equally among the remaining joint tenants. The intent to create a joint tenancy must be specified, otherwise it is assumed that the property is held as tenants in common.
A joint tenant may transfer her interest without the consent of the other joint tenants, but this will sever the joint tenancy with the other joint tenants. Therefore, the holdover joint tenants will continue to hold the property jointly, while the new owner will own the property as tenant in common with the holdover joint tenants.
A creditor of a joint tenant may generally satisfy his claim against the joint tenant's interest in the property.
Tenancy by the entirety: Tenancy by the entirety is only available to married couples, civil union partners and reciprocal beneficiaries. While alive, each person is considered to be the owner of the entire property. This means one party may not unilaterally convey his interest without the consent of the other. In other words, any conveyance document must be signed by both persons. As with joint tenancy, upon the death of one of the parties, the decedent’s interest passes automatically to the surviving party. Another benefit of holding property as tenants by the entirety is that a person’s creditor individually cannot use the property to satisfy individual debts. However, creditors of both parties may do so. As explained in a previous post, Hawaii law now allows a couple’s trusts to own property (as tenants in common) while retaining the tenancy by the entirety creditor protection.
As you can see, how property is held can affect the way it is transferred, distributed and controlled in the future. Therefore, careful thought should be given to the method of ownership of property in Hawaii, especially for estate planning purposes.
HB 2623 amends Hawaii Revised Statutes Section 509-2 and extends Tenancy by the Entirety Creditor Protection to Trusts in Hawaii
Among the many bills that were considered and passed in the 2012 Hawaii legislative session was a law that would allow spouses and reciprocal beneficiaries (RBs) to place real property in a trust AND be extended the creditor protection afforded by holding property as tenants by the entirety. Thus, spouses and RBs may preserve their creditor protection while taking advantage of the benefits of placing their real property into a trust.
For those unfamiliar with the concept of tenancy by the entirety, it is a form of concurrent property ownership. The other types are tenants in common and joint tenancy. Tenancy by the entirety is a form of ownership that is available only to spouses or reciprocal beneficiaries. The main benefit of holding property as tenants by the entirety is that a creditor of an individual spouse or RB cannot attach and sell the real property interest of the debtor spouse. However, this creditor protection is not available against a couple's joint creditors.
In the 2012 legislative session, HB 2623 added a few new subsections to Hawaii Revised Statutes Section 509-2. Prior to this bill passing and being signed into law, two people who held real property as tenants by the entirety and wanted to create separate trusts would need to break the tenancy by the entirety ownership and convey their interests into their respective trusts as tenants in common, thereby losing the creditor protection. However, HB 2623 now states that real property held by spouses or RBs in equal shares as tenants in common in their respective trusts shall be treated as if the real property (or its proceeds) are held as tenants by the entirety.
These new additions to Hawaii Revised Statutes Section 509-2 states that this creditor protection shall continue even after first of the couple passes away. This is also true if a court in any proper jurisdiction holds a trust to be invalid while the couple is still alive. Of course, if spouses divorce or reciprocal beneficiaries terminate their legal relationship, the tenancy by the entirety is severed and the real property will be held as tenants in common.
To gain the creditor protection for real property held in trust, certain requirements must be met and specific language needs to be inserted into the conveyance deed. In general, holding real property in tenancy by the entirety is preferable, but of course, it depends on the situation and as well as future considerations. Consult with an attorney to explore whether this extension of tenancy by the entirety for Hawaii trusts is right for you.
Samuel K.L. Suen is an attorney based in Honolulu, Hawaii specializing in estate planning, probate, conservatorship and guardianship matters.
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