On April 17, 2002, the U.S. Supreme Court decided U.S. v. Craft holding that the Internal Revenue Service (IRS) can use a husband and wife’s personal residence, or other property that is owned via tenancy by the entirety, to satisfy the tax liability of one spouse to the extent of such spouse’s separate interest in the property. This case will certainly have an impact on estate and asset protection planning for married couples.
In U.S. v. Craft, the property at issue was located in Grand Rapids, Michigan, owned as tenancy by the entirety by Mr. and Mrs. Craft. Mr. Craft had failed to pay federal income taxes for a number of years and the IRS placed a tax lien on the property. Mrs. Craft had filed individual tax returns during that same time period. When Mr. and Mrs. Craft attempted to sell the property a few years later, the IRS would not release the tax lien unless it received half of the property’s net sale proceeds to apply to the husband’s delinquent taxes.
The Craft case worked its way to the Federal Sixth Circuit Court of Appeals. The Sixth Circuit ruled that the tax lien did not attach to the property and, therefore, was invalid and could not be enforced because, under Michigan state law, Mr. Craft had no separate interest in the property held as tenancy by the entireties.
Tenancy by the entireties is a special form of property ownership that can only exist between married persons. It has been Michigan law for many years that a married couple owning property as tenancy by the entirety has no property interest separable from the other spouse. As a result, married couples previous to the Craft case were successful in taking the position that the IRS could not enforce a tax lien on entireties property to satisfy a tax debt owed by only one of them because the property could not be divided.
The U.S. Supreme Court overturned Craft, holding that each spouse has a severable interest in the title to the entireties’ property in situations where there are federal tax liabilities. As a result, the IRS can place a tax lien on tenancy by the entirety property for the tax debt of one spouse and will be able to collect any delinquent taxes owed by a spouse from such spouse’s separate interest in the property.
The Craft ruling deals with federal tax obligations. Whether Craft applies to other types of debts remains to be seen. Certainly, married couples will need to revisit how their property is owned when reviewing their estate plans. Also, married couples will need to evaluate how their property is owned for asset protection purposes.
Should you have any questions regarding this article or any other questions regarding estate and asset protection planning, please call Michael J. Roberts of our Detroit office.