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Tenants by Entireties Property in a Living Trust
Prior to a judgment being entered against him a judgment debtor owned financial accounts jointly with his wife. He and his wife created a joint living trust for estate planning purposes. They transferred title of the financial account to their joint trust. Property owned jointly by the debtor and his wife is exempt from the judgment against the husband/debtor because the property is deemed to be owned as “tenants by entireties.” The issue is whether the same financial account is tenants by entireties property after it was titled in a joint living trust.
I don’t think the financial account is protected from creditors after transfer to the joint living trust. Homestead property owned by a living trust is still deemed protected homestead according to case law in Florida. The issues in a living trust ownership of homestead are different from trust ownership of marital property. The terms of a typical joint living trust destroy entireties ownership. A typical joint living trust document creates separate shares of ownership for husband and wife, and it divides all assets equally between the separate shares. The separate shares are designed to maximize estate tax savings. Once the living trust document divides a financial account into separate shares there can no longer be qualifying entireties ownership.
There are living trust documents which state that notwithstanding anything else in the trust the married grantors intend to retain tenants by entireties ownership of joint property put into the trust. I know of no court case interpreting the effectiveness of this type of savings clause. I don’t think conveying joint property to a joint trust is effective asset protection. There are other ways to use a living trust for estate planning purposes and also retain tenants by entireties protection. This is one example of the conflict between the goals of asset protection and estate tax planning. Effective asset protection planning preserves both goals.
posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida
January 3, 2008 in Florida Protections | Permalink
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Comments
great blog jonathan- here is a tricky one for you-
Jane Doe has a living trust and attempts to buy a parcel of vacant land in FL using a bank loan in the name of the trust. The bank does not want to lend to the trust, but will lend to Jane. She goes ahead with the transaction personally. Shortly therafter, she quit-claims the deed to the parcel to the trust, but does not inform the bank (presumably violating due on sale clause) and the trust begins making the payments.
The terms of the trust dicate that upon Jane's death, the trust assets are to be divided and distributed to two beneficiary trusts, one for each of Jane's children, Jack Doe and Jill Doe.
One of Jane's children (Jack Doe) becomes trustee of Jane's trust and fails to distribute the assets. A year or two later, Jack Doe dies. The terms of Jane's trust were that if either Jack or Jill were to die, any remaining assets were to instantly pass to their children (Jane's grandchildren) per stripes. The terms of Jack and Jill's beneficiary trusts were similar. Before Jack dies, he appoints his son Jim Doe as trustee of Jane's still extant (but not supposed to be) trust.
I am Jim Doe- and I am now trying to unwind this mess.
The parcel is worth maybe $30K at auction and the loan balance is $95K. Jane's trust had assets enough to pay the balance, but not after the instant distributions to Jim Doe and his brother and/or their Aunt Jill, either directly or to the beneficiary trusts and then to Jim and kin. There are no interested buyers of the parcel after a year of marketing.
Questions: can the bank obtain a deficiancy judgement against Jane's trust, Jane's estate (never opened), Jack's beneficiary trust, Jack's estate (never opened), Jill's beneficiary trust, or Jim personally?
If the answer is either no or not easily, wouldnt the best move for Jim be letting the bank foreclose on the parcel and walking away ?
When Jane deeded the land to her (then living) trust, did the trust assume the loan to the extent that a deficiancy judgement could be awarded against it ? When Jane died, did her then irrevocable trust become immune from Jane's creditors ?
Jim has some funds remaining to perhaps settle with the bank, but what would the bank's legal position be?
Posted by: Brave Captain of Industry | Jan 10, 2008 12:05:44 PM
Mike:
It is possible to fund the trust with only $2M and get the estate tax result you are looking for, but the IRS will deny basis step up for 1/2 of the trust. See PLR 200210051.
Posted by: Paul | Jan 7, 2008 3:37:59 PM
A husband and wife can shelter $2,000,000 from estate taxes using a trust. My question is this, If they have an A/B trust, does it have to be funded with $4,000,000 so that 1/2 is each partners, or can it be funded with $2,000,000 and shelter that amount thru the trust at the first Spouse's death? In other words, all the $2,000,000 goes into the irrevocable trust at the first death and $0 into the non irrevocable trust section?
Posted by: Mike | Jan 6, 2008 10:34:10 AM
