Codified as Public Chapter 829 and signed by Governor Haslam into law on April 29, 2014, a new form of joint trust is available for transfers to trusts on or after July 1, 2014. Although the trust is not named by the statute, the trust substantially resembles the common law form of property known as tenancy by the entirety. Some practitioners have appropriately referred to this trust as the “marital asset protection trust.” I previously discussed this subject here, albeit briefly.
This statute has been codified as T.C.A. § 35-15-510.
Common law tenancy by the entirety. Before I get into the finer points of the TE Trust, a refresher on how tenancy by the entirety works in general (and its benefits) is appropriate. Tenancy by the entirety is a special form of joint tenancy with a right of survivorship (“JTWROS”) that is only available to married couples.
The old “TTIP” (time, title, interest and possession) requirements for the creation of a joint tenancy also applies to a tenancy by the entirety except that the parties must likewise be married at the time that the property is received. To create a valid tenancy by the entirety interest, the transfer must: (1) be conveyed to the married couple at the same time, (2) by the same instrument of conveyance (i.e., title) such as a deed, (3) the parties must have the same interest in the property such as 50/50, (4) have an equal right to use and possess the entire property (either now or in the future), and (5) must be married at the time of the transfer.
Case law has relaxed some of the foregoing at least with respect to JTWROS (such as equal interests), but this is the classic way to create an interest.
The most commonly seen marital asset held as tenancy by the entirety (“TE”) is the home. In Tennessee, a TE can be created by the simple indication on the deed that the parties are married (… to John Smith and wife, Pocahontas Smith, grantee). (NOTE: This is NOT the rule in Mississippi.)
Although the most common TE property is the home, any property can be held as TE. The issue comes down to a question of intent. That is, did the marital couple intend to own a particular asset as TE.
From a legal perspective, the marital unit owns the entire property. Thus, neither spouse can convey their interest in TE property without the joinder of the other spouse.
Asset protection Advantage. The benefit to TE property over other forms of common law property ownership is an asset protection advantage. Because the marital unit owns the property and neither spouse can convey the property without the other, the individual creditors of a spouse cannot attach TE property. Only joint creditors can reach the TE property. Likewise, upon the death of the first spouse to die, the deceased spouse’s individual creditors cannot reach the TE property. Those creditors have no rights in the property.
However, after the death of a spouse, the surviving spouse’s individual creditors can now reach the property.
The Trust. In comes the Tennessee by the Entirety Joint Revocable Trust:
The Tennessee Tenancy by the Entirety Joint Revocable Trust (“TE Trust”) enables married clients to transfer property to a Joint Trust and declare the property to be held as tenants by the entirety and obtain the asset protection advantages that were formerly unavailable with the use of revocable trusts.
When you consider the TE Trust, keep in mind that although the TE Trust is similar to Tenancy by the Entireties at common law, there are several marked differences. It really is a different animal altogether.
The TE Trust protections extend to property that was conveyed to the trust by the married couple that was previously held by them as TE.
The basic requirements of the trust include:
- The trust can only be created by married spouses and the protection only lasts while they remain married;
- The trust must be revocable by either spouse acting alone or both spouses acting together;
- The property (or its proceeds) must remain in the trust;
- Both spouses must be permissible current beneficiaries while living; and
- The trust instrument, deed, or other instrument of conveyance reference that section as applying to the property and its proceeds.
Practice point. In order to qualify for the protection under the statute, the property must be held as Tenancy by the Entirety before it is conveyed to the trust. Thus, best practices would have the clients combine their assets to the extent they were not previously combined, execute a general assignment declaring the property to be held as tenants by the entireties, and execute deeds to the spouses as Tenants by the Entireties to precede the transfers to the actual trust. This will seldom be practical. Alternatively (or in addition), a declaration that all property is held as TE is more practical. Though certainly inferior and not ideal, it is likely sufficient to make a prima facie case and satisfy the initial burden of proof issue on the trustee.
Although the section uses “or” (point 5 above) all of the above (deeds, assignments, the trust itself) should reference the statute as applying to the property being conveyed and its proceeds.
Creditors of First Spouse to Die. Just like other property held as tenants by the entirety, assets held in the TE Trust will pass free from the creditors of first spouse to die.
Joint Creditors and Creditors of Survivor. Joint creditors and creditors of the survivor may still potentially levy against assets held in the trust, but only “to the extent that the surviving spouse remains a beneficiary of the trust and has the power, excercisable in the individual capacity of the surviving spouse, to vest in the surviving spouse individually title to the property that was immune from the claims of the separate creditors of the decedent under subsection (b).”
Because joint creditors are really creditors with a claim against the first spouse to die and a claim against the survivor, joint creditors do not appear to have any special status under the statute and their claims appear to be controlled by the provision referenced above.
Thus, the section implies (i.e., “to the extent that”) some or all of the trust could convert to an irrevocable spendthrift trust for the benefit of the surviving spouse upon the first spouse’s death.
This trust is not governed by the rules applicable to self-settled investment services trust either. This is an independent statute within the spendthrift section of the trust code.
There appears to be no limitation on using separate shares (one for each spouse) in the TE Trust to cause the share of the first spouse to die to pass to a Credit Shelter and/or QTIP Trust for the benefit of the survivor. In such a trust, the survivor’s portion of the trust would remain revocable.
Also possible (though aggressive), is the possibility of causing the entire TE Trust to become irrevocable upon the death of the first spouse to die. Although this is far from common law tenancies by the entireties, the statute does not preclude such a result; however, such a trust may be a case of “pigs getting fat and hogs getting slaughtered.”
Prior to establishing such a trust, a thorough consideration of the Federal and State Estate and Gift Tax consequences should be considered.
Funding and Preserving Asset Protection Advantages. Care must be taken to ensure that in drafting and upon funding, the intricacies of the statute have been followed in order to get the protections allowed by the statute when it matters.
Recall that property transferred to the trust must already be tenancy by the entireties prior to its transfer to the TE Trust.
Immunity from the claims of separate creditors will be waived if a trustee executes and delivers a financial statement for the trust that fails to disclose the requested identity of property held in trust that is immune from the claims of the separate creditors unless the creditor was put on actual or constructive notice that the asset(s) were in trust by:
- Publicly recorded deed or assignment;
- Written memorandum recorded among the land records or where trust records are regularly kept (e.g., probate court, chancery court or the register of deeds); or
- The Trust instrument, including any schedules, disclosed the asset and were given to the creditor for inspection.
Burden of Proof. In a suit by a creditor, the burden of showing immunity of any particular asset is on the Trustee.
Practitioner Caveat — Divorce. This trust is only appropriate for long-term happily married couples that will remain married long-term. Although the statute attempts to temper any negative effect that the trust could have on the division of assets upon divorce including the property’s status as marital or separate, it goes without saying that such transfer is looking for trouble if there is any possibility of divorce. See T.C.A. § 35-15-510(h).
Public Chapter 829 can be found at: http://state.tn.us/sos/acts/108/pub/pc0829.pdf.