12-Oct-21
Michigan Entireties Trust: We’re Waiting, and Were Waiting, and…
Take-Away: A couple of years ago the Probate and Estate Planning Section of the Michigan Bar proposed a bill to allow spouses to transfer their tenants-by-the-entireties property to a trust where the property would continue to be classified as tenants-by-the-entireties, even though title was nominally held in the trust. We are still waiting for that legislation after 4 years.
Background: Tenants-by-the-entireties is a unique form of property ownership between spouses. Each spouse owns the undivided whole of such property. Under the entireties concept, spouses take and hold the property not as separate individuals, but as a unit, each together holding the entire property. Therefore, neither spouse individually is deemed to own a part of the entireties property, but both are deemed to own the entire estate or property.
Spousal Consent: Accordingly, neither spouse can dispose of any part of the property held in tenancy-by-the-entireties without the consent or joinder of the other spouse. Which is why banks often demand that a borrower’s spouse join in the loan so that the spouse’s entireties property can be seized to satisfy a loan in default.
Survivorship: Another characteristic of tenants-by-the-entireties ownership is a right of survivorship. Upon the death of one spouse, the surviving spouse is entitled to the whole of the entireties-owned property.
Creditors: A unique aspect of tenants-by-the-entireties is that the creditors of an individual spouse cannot attach the interest of such spouse in assets held as tenants-by-the-entireties. If both spouses are indebted to a creditor, then tenancy-by-the-entireties assets may be attached by their creditor.
Trusts: For married couples with taxable estates who are also sensitive to maintaining creditor protection, the choice between funding revocable trusts and maintaining tenancy-by-the-entireties status creates an estate planning tension. If the married couple divides the tenancy-by-the-entireties property between spouse’s estate planning trusts, the divided property no longer enjoys tenancy-by-the-entireties protection from the creditors of one spouse. The same risk or result exists if the spouses transfer their entireties property to a joint trust. That risk is mitigated, however, in a handful of tenants-by-the-entireties states, but not [yet, if ever?] Michigan.
Entireties Trusts: A few tenants-by-the-entireties common law states permit spouses to transfer their entireties property into a joint revocable trust while retaining the characteristics of tenancy-by-the-entireties for the trust-held property.
Eleven States: In 2001, Virginia was the first state to adopt a statute that expressly provided that tenancy-by-the-entireties property could be transferred to a revocable trust and retain the creditor protection aspect of tenants-by-the-entirety property. It was later followed by Delaware in 2010 with its statute, and comparable statutes enacted in Maryland, Indiana, Illinois, Missouri, Hawaii and Wyoming all between 2010 and 2013. Tennessee, North Carolina, and Arkansas later adopted their statutes in that permit revocable joint trusts to hold tenancy-by-the-entirety property.
State Statute Differences: Unfortunately most of these state statutes all are somewhat different from each other. One example is that while all 11 state statute seem to permit the entireties trust to be split into separate shares while both spouses are living, their entireties trust statutes differ as to the effect when one spouse dies. For example, Illinois’ statute specifically disallows such a division of the decedent’s share under the trust unless both spouses agree to the division. The Arkansas and Missouri statutes expressly allow for such a division of one spouse’s share on death. Eight other states appear to allow the division of the decedent spouse’s share by implication.
Example: If such a division of a deceased spouse’s share under the entireties trust is permitted, it presents a non-tax planning opportunity for the surviving spouse. Assume that the decedent’s separate share may be further divided on his or her death. The deceased spouse’s share could create a bypass or credit shelter subtrust (with a spendthrift provision) and a QTIP marital subtrust share (with a spendthrift provision) for the surviving spouse. Both subtrusts can be sheltered from the surviving spouse’s creditors, whereas with regular tenants-by-the-entirety property, all of such assets would remain exposed to the surviving spouse’s creditors. In Maryland, its statute specifically precludes this result.
Double Creditor Protection: Thus the advantage that an entireties joint trust has over traditional tenancy-by-the-entireties assets is that upon the death of the first spouse to die, any assets that flow into the credit shelter subtrust or the QTIP marital subtrust that includes a valid spendthrift clause will not be subject to the surviving spouse’s creditors, thus potentially cutting the surviving spouse’s creditor exposure in half.
Status in Michigan: Apparently the Michigan Bankers Association has some technical ‘problems’ with the proposed Michigan Tenants-By-The-Entireties Trust legislation. One would surmise that it has to do with the inability to attach entireties property when one spouse is a debtor to the bank. Or, the problem might be the perceived ability, at least under some entireties trusts in other states, to shelter at least one-half of the entireties trust’s assets to creditor claims after the death of one spouse. Whatever the reasons for the MBA’s opposition to the bill, currently it is the primary opposition that keeps the bill from moving forward in Michigan’s Legislature.
A Final Word on Rights of the IRS: The IRS is given super-creditor status with regard to tenants-by-the-entireties property when one spouse owes back taxes or penalties. Federal tax liens attach to a taxpayer’s interest in property held as tenants-by-the-entireties with their spouse, nothwithstanding state laws to the contrary. [United States v. Craft, 535 U.S. 274 (2002); United States v. Gerard, 2018 WL 181606 (District Court Indiana) (2018.)] Still up in the air is the method used by the IRS to value one spouse’s interest in the tenants-by-the-entireties property if the IRS asserts its recovery lien. Most federal courts have allowed the IRS to attach one half of the entireties property, but a few courts have applied actuarial tables to determine the taxpayer’s interest in the entireties property that is subject to attachment.
Conclusion: For several years now we have been waiting, and waiting, for Michigan to join 11 other states to enact a statute that permits spouses to use a joint trust without forfeiting the creditor protection afforded to them by tenants-by-the-entireties property. Let’s hope that the pending bill soon becomes law and spouses concerned about their exposure to creditor claims, e.g. physicians, lawyers, accountants, business owners, etc. can use trusts to avoid probate while still enjoying the protection of tenants-by-the-entireties property.