Michigan Entireties Trust- Still Waiting, But Is it Needed?

Take-Away: Despite a bill that was proposed a few years ago, we are still waiting for Michigan’s Legislature to adopt a bill that permits spouses to hold tenants-by-the-entireties property in their joint trust. However, it seems some courts still are willing to provide entireties creditor protection to entireties assets held in trust.

Background: In March of 2018 Senator Rick Jones sponsored Senate Bill 905 that would provide tenants-by-the-entireties creditor protection to entireties property that spouses transfer to a joint trust established by those spouses. Despite the strong support of the State Bar’s Probate and Estate Planning Council, that bill, and its successor bill each time there is a new legislative session, have yet to become law. It seems that the Legislature, and special interest groups [read: the Michigan Bankers’ Association] have been preoccupied with the Financial Exploitation Prevention Act, the power of attorney proposed legislation, and all things emanating from the Elder Abuse Task Force, to take up their concerns with the proposed Tenants-By-The-Entireties Trust bill.

Entireties Property: Tenants-by-the-entireties property provides important creditor protection since the entireties property cannot be seized and liquidated to satisfy the creditor claims of only one of the spouses who own the entireties property. It is another story if both spouses are liable to the creditor. A statutory presumption exists that real estate which is owned by spouses is held by them as tenants-by-the-entireties. Both spouse must act together to transfer, partition, encumber, any property that is held as tenants-by-the-entireties. One spouse cannot institute a partition action against the other spouse with regard to severing the entireties owned property.

• Unities: On a technical level, it is said that there are six separate unities that are associated with tenants-by-the-entireties property owned by spouses: (i) unity of possession- there must be joint ownership and control; (ii) unity of interest- neither spouse’s interest is superior to the other spouse; (iii) unity of title- each spouse receives title in the same deed; (iv) unity of time- the spouses’ ownership must be taken at the same time; (v) survivorship- there is a right of survivorship between the two spouses; and (vi) unity of marriage- the spouses must be married at the time that they acquire title to the property.
• Exception: An exception to the general rule that the creditors of one spouse cannot reach tenants-by-the-entireties property was created by the U.S. Supreme Court which held that entireties property is always subject to federal tax liens against one spouse. United States v. Craft, 122 S. Ct. 1414 (2002.) This exception has been extended to criminal fines and forfeitures that arise from federal criminal cases. Consequently, the IRS or other federal agencies, can seize and sell a taxpayer’s interest in entireties property or foreclose on federal tax liens levied against the entireties owned property.

2018 Senate Bill 905: The 2018 Senate bill 905 was sponsored in part, due to the growing popularity of joint trusts established by spouses who use a single joint trust to avoid probate of their assets. Joint trusts established by spouses became even more popular in 2017 in light of the large applicable exclusion amounts for federal estate taxes and the portability of a deceased spouse’s unused applicable exemption amount (DSUEA) where the unlimited federal estate tax marital deduction is used to avoid estate taxes using the joint trust.

• Loss of Creditor Protection: The problem addressed by the proposed bill is that entireties owned property loses its creditor protection when the spouses no longer own the title to the entireties property, i.e. the trustee of the joint trust owns title to the assets held in the trust, not the spouses. Accordingly, the creditor protection afforded spouses by owning property as tenants-by-the-entireties is lost when the entireties asset is transferred from the spouses to their joint trust, even when the spouses act as settlors-trustees-beneficiaries of that joint trust.
• Entireties Personal Property: There was also a companion 2018 bill that would have expanded the types of personal property assets that could be held by spouses as tenants-by-the-entireties. That bill would have amended the 1927 Michigan Statute that limits personal property to be held as tenants-by-the-entireties to only bonds, certificates of stock, mortgages, promissory notes, debentures, and other evidences of indebtedness. [MCL 557.151.] [See also,  Regina Jaeger’s June 2019 Perspectives article, “Pending Legislation: Tenants-by-the-Entireties.”] That bill, too, languishes somewhere in Lansing without adoption.

Entireties Property Held in Joint Trust: Courts seem to struggle, in the absence of a specific enabling statute that permits entireties property to be held in a joint trust, with how to deal with the preeminent creditor protection feature of tenants-by-the-entireties property when one spouse’s creditors come calling. An interesting case is Moyer v. Rosich (In re Rosich, Case No. DG13-06483 Adversary Proceeding No. 15-80203, 582 B.R. 694 , 2018, W.D. Michigan.) In this Chapter 7 Bankruptcy proceeding, wife Carol and her husband John, as co-trustees, conveyed title to a residence from a revocable trust to Carol and John as tenants-by-the-entireties just prior to Carol filing for bankruptcy. John did not file for Chapter 7 Bankruptcy. The bankruptcy trustee challenged that transfer of title from the trust to entireties ownership as a constructive fraudulent transfer, i.e. a transfer within two years of filing for bankruptcy with an intent to frustrate creditors, and the trustee asked the bankruptcy judge to avoid the transfer of title to Carol and her husband John. The judge agreed that the transfer out of the joint trust was void as a fraudulent transfer intended to frustrate creditors, and the judge ordered the return of the residence to the trust. Carol then claimed that the title to the residence, back in the name of the co-trustees, was nonetheless exempt from creditor claims, or claims of the bankruptcy trustee, since the real property was ‘still’ entireties property. While must of the judge’s decision was based on technical bankruptcy rules, the judge while finding the transfer out of the trust was fraudulent, refused to immediately order that the residence be liquidated and the proceeds used to pay bankruptcy expenses and pay Carol’s creditors.

Although the instant case is unusual because it involves a trustee’s suit against a debtor regarding property that is, to some extent, already included within the estate, the debtor in this case has exempted the property (as a practical matter insulating it from most claims) and the debtor’s non-filing husband holds a concurrent interest in the property- an interest that is not within the bankruptcy estate… Given the statutory text, the court is not impressed with the trustee’s argument under Section 551 because the statute only preserves the transfer, it does not otherwise enhance a trustee’s rights in the property transferred… Here, if the transfer is merely preserved (as the statute says) the property will still be held by the entireties, subject to the debtor’s exemption claim. There is no language in section 551 that would permit a trustee to enhance his rights beyond simply asserting the effectiveness of the transfer as against third-parties…The bankruptcy exemption scheme recognizes this nature of entireties property, and authorizes a debtor to claim such property as exempt, as the debtor did, but only to the extent the interest would be exempt from process under applicable non-bankruptcy law…It is conceivable, too, that although Mr. Rosich has not filed a bankruptcy petition, and therefore is not entitled to an exemption, the protection that the property enjoys from the claims of the debtor’s creditors could extend to him as her dependent under section 522(a)(1) and as the other holder of the indivisible interest in the property…. Given the court’s concern that this proceeding to some extent circumvents the debtor’s exemptions, and given that the trustee’s timely objection to the debtor’s exemption claim was resolved with a court order, there may be equitable reasons, including collateral or judicial estoppel, that justify the court’s hesitation to enter a money judgement against her [Carol.] As to Mr. Rosich, the court has no similar compunction based on section 522 because, as noted a above, he is not a debtor and has no right to an exemption under section 522. And, although section 522 may, to some extent, protect a debtor’s non-filing dependents indirectly, it does not protect them from the claims of their own creditors. Certainly the indivisible nature of entireties property complicates the analysis, but the court does not read section 522 as giving a non-filing spouse that much leverage, especially where, as here, the court has determined that the spouse is the initial transferee of a fraudulent transfer.

Ultimately a money judgment was entered against John, as a transferee in a fraudulent transfer. However, the bankruptcy judge in the decision seems to imply that entireties property does not lose that classification merely because it is placed in a revocable joint trust.

Entireties Property Trusts in Other States: Illinois adopted its version of an entireties joint trust in 2011. [765 ILCS 1005/1c.] Missouri has also adopted a similar enabling statute, keeping the entireties creditor protection even after title to the property is transferred to the spouses’ joint trust. [MO Rev. Stat. Section 456.950.]

Florida’s law permits property to be held by the spouses in a joint trust. The protection of entireties property was recently ‘tested’ in two federal bankruptcy courts, with surprisingly different results.

• In re Givans, 623 B.R. 635 (Bankr. M.D. Fla., September 30, 2020): In this bankruptcy proceeding the bankruptcy judge held that the spouses forfeited the creditor-protection benefits of their entireties property when they transferred their entireties property to their joint trust,  because ‘a trust cannot be married’, so the unity of marriage was lost, which meant that the property stopped being entireties property once it was retitled in the name of the trust. The judge noted:

Once the debtor (and his wife) transferred the property to the trust, they no longer owned the property in their individual capacity. They held bare legal title as trustee for the trust. Because the trust is not a married individual, the trust cannot own the property as tenants by the entirety. The unity of marriage does not exist as to the trust….By transferring the property to the trust, the debtor (and his wife) gave up certain legal rights in exchange for others. They lost the benefits of tenants by entirety ownership afforded, such as protection of the property from certain creditors. In exchange, they gained other benefits provided by the trust, such as circumventing probate proceedings. Debtor (and his wife) cannot have it both ways. The property cannot be held by the trust, subject to the terms of the trust (which creates an interest for their children) and also be held as tenants by entirety, subject to common law and protected from creditor claims. In 2014, they created the trust and transferred the property to the trust. By doing so, they lost ownership status as tenants by the entireties.

Thus, this decision reflects the long-standing concern with regard to titling entireties property in a joint trust- the loss of creditor protection.

• In re Romagnoli- B. R., 2021 WL 2762812 (Bankr. S.D. Fla. June 30, 2021): In this bankruptcy proceeding the bankruptcy judge reached the opposite conclusion, primarily by avoiding the whole question of whether entireties property can be held in a joint trust, instead by focusing on whether the property is exempt from creditor claims regardless of the technical titleholder. The husband had filed for bankruptcy, but not his wife; both were trustees of their joint trust which had held entireties assets: The bankruptcy judge noted:

The trustee expressed frustration that the debtor has exempt assets worth collectively over $1.4 million that are exempt from the debtor’s creditors. But those exemptions are statutory and if the trustee wants to reach these assets, she must reach out to the Florida legislature…. The bankruptcy trustee succeeds only to the title and rights in the property that the debtor possessed… To the extent that the [entireties] property is, in fact, held in the joint trust, because it was contributed as entireties and not community property, the debtor and his wife could only jointly remove the stock from the joint trust. Thus, even if the trustee could exercise the power of a co-trustee under the joint trust, the trustee has not cited to any case that suggests that 11 U.S.C. 363(f) gives the trustee, acting with the authority of a co-trustee of a trust, the authority to bypass the provisions of the joint trust agreement in seeking to sell property in the joint trust…. Assuming the [entireties] property is in the joint trust, if not in the joint trust,  it would be entireties property not subject to the claims of the debtor’s creditors. In sum, there is no theory under which the [bankruptcy] trustee can reach the assets of the joint trust.

The judge in this case seems to conclude that because entireties owned property requires the consent of both spouses, if the entireties property is retitled in the name of a joint trust, where both spouses act as co-trustees and their trust instrument provides that neither spouse, acting alone as a co-trustee, can transfer or encumber the title to the trust-owned property, that required consent of both trustee-spouses  replicates one of the unities normally associated with tenants-by-the-entireties assets, and as such, it will continue to be treated as entireties property even when held in a joint spousal trust.

Conclusion: Since the courts, especially bankruptcy courts, seem to struggle with the rights of non-filing spouses, in entireties property, even when held in trust, there continues to be a lot of confusion when entireties owned property is transferred to a joint trust. Hence the desire for Michigan to adopt  joint entireties trust legislation making it clear, from a Michigan property law perspective, that the asset does not lose its entireties classification merely because the spouses agree to transfer title to their joint trust with the desire to avoid probate over that asset. And, so we wait, and wait,  for the Michigan Legislature to act.