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Thursday, March 29, 2012

Impact of Tenancy by the Entirety when One Spouse Dies before Divorce is Finalized

One of the most complicated and often most contentious aspects of a divorce is the division of marital property. This is particularly true when the divorcing couple jointly owns a house of considerable value. If one party keeps the house, the other party must be fairly compensated. In many cases, liquidating several hundred thousand dollars’ worth of assets to buy out the other party’s share of the house can be a challenging task.

In one recent New York divorce case, a childless couple ending a 25 year marriage entered into a comprehensive written stipulation of settlement that detailed how all of the marital assets would be divided between the two parties. This included their house, which was owned jointly by the couple as Tenants by the Entirety (the designation for ownership of real estate by a married couple). The husband was to receive the house in exchange for $265,000 which would be paid to the wife from the husband’s separate assets. This represented approximately half the total value of the house.

Since the deed hadn’t been prepared at that time and the husband needed a few weeks to acquire the $265,000 necessary for this transaction, the judge issued an order that the proposed divorce settlement must be submitted to the court for signature within 60 days. This time period gave both parties time to prepare the deed and acquire the necessary money to complete the transaction. It also meant that the divorce was not yet finalized.

Five weeks later, before the deed was signed, funds were exchanged, and the divorce agreement was submitted to the judge for signature, the husband unexpectedly died. This left the wife as the sole surviving Tenant by the Entirety. By law, she became the sole owner of the house.

A furious battle ensued between the wife and the husband’s heirs over who should legally own the house. Since the divorce had not yet been finalized, she was legally the sole owner of the house by the doctrine of Tenancy by the Entirety. However, she had entered into a legally binding contract which stated she would relinquish her stake in the house in exchange for $265,000 – half of the monetary value she would receive if she was allowed to keep the house.

By law, a Tenancy by the Entirety can only be broken in one of three ways:

  • By a judgment of divorce
  • By a deed
  • By a written instrument clearly stating that the parties were breaking the entirety as of that moment

None of these actions had been completed prior to the husband’s death, so both parties still legally had ownership of the house according to Tenancy by the Entirety. As a result, the court ruled that the wife became the sole owner of the house once her husband died. However, the court also ruled that the wife and the husband’s estate were bound by the contractual obligations agreed to in the stipulation of settlement executed in preparation for the divorce. Therefore, the wife must sell the house to the husband’s heirs in exchange for the $265,000 agreed upon in the divorce agreement.

This case is currently pending an appeal by the wife, who is still fighting for her right to maintain ownership of the house due to the doctrine of Tenancy by Entirety. There is strong case law precedent from the New York Court of Appeals supporting her argument, so it is possible that she may still end up with her unexpected windfall. However, as with all cases brought before our legal system, there are no guaranteed outcomes.

It is clear that the judge’s ruling upheld the spirit of the divorce settlement agreed upon by both parties. However, the letter of the law may still enable the wife to benefit in ways that she never imagined possible before her husband died a matter of weeks prior to their divorce being finalized.


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