Marriage offers many benefits!
From an estate planning and property law standpoint, this too is true! In those jurisdictions that allow it, the most important “property law benefit” of being married is the ability to own property of any kind as “tenancy by the entirety,” or TBE. When a married couple owns property as TBE, such property is protected from creditors’ claims of each spouse, individually (but not from a joint creditor of both spouses). Property owned as TBE avoids probate on death of the first spouse to die. Further, thanks to portability, one of the negative implications of spousal survivorship property—the loss of estate tax exemption as a result of the marital deduction—is neutralized. Here’s how to take advantage of tenancy by the entirety.1
Many married couples with jointly owned property may not have such property titled as a TBE. Instead, they may have taken title to their properties as tenants-in-common or joint tenants with right of survivorship, or in some cases they may have property titled individually or in one spouse’s revocable trust. Now is an opportune time to re-examine the manner in which couples currently hold title to their property and determine whether any changes should be made.
Lifetime Planning; Portability Has Changed Planning
Prior to the introduction of “portability” (or the ability to transfer a deceased spouse’s unused applicable exclusion amount to the surviving spouse),2 it was common for planners to advise married clients to divide jointly owned property and transfer the property into one (or both) spouse’s individual name or revocable trust. The historical reason for giving that advice was to ensure that the estate tax exemption of the first spouse to die wouldn’t be wasted. Thus, planners recommended dividing assets so that so-called “credit shelter” trusts could be funded to fully utilize the estate tax exemption amount of the first spouse to die. Now, with the introduction of portability, it’s possible to transfer any remaining estate tax exemption of the deceased spouse to the surviving spouse by having the deceased spouse’s executor make the portability election. Given the asset protection benefits of TBE ownership, together with the fact that most married couples are more comfortable owning their property together (as opposed to having assets held separately by one spouse or one spouse’s revocable trust), a case could be made for owning your property as TBE. Of course, all other factors should be considered, such as the marital law implications mentioned above.
Avoiding Probate on Simultaneous Death; TBE Trust
On the death of the first spouse to die, TBE property passes to the survivor in the survivor’s individual name. Without any further action, the property would be subject to probate on the survivor’s death. Once the first spouse dies, usually the surviving spouse would subsequently transfer the property into his revocable trust so that it avoids probate. In most situations, this is sufficient; the only situation in which this wouldn’t be feasible is if there’s a simultaneous death, in which case the property would be subject to probate in at least one of the spouse’s estates.
In some jurisdictions, pre-death planning is possible to allow the TBE property to be transferred to one or more revocable trusts and still maintain the benefits of TBE. Under these types of trusts, called “TBE trusts” or “qualified spousal trusts,” the spouses transfer the property to their respective revocable trusts (title is technically severed into two separate undivided shares). The authorizing statute overrides the separate shares and treats them as one share for TBE purposes, thereby retaining the TBE benefits. On the death of the first spouse to die, the shares are reunified in the survivor’s revocable trust. The requirements to maintain TBE status under most of the applicable statutes are somewhat uniform: (1) the spouses must remain married, (2) the trust or trusts are, while both settlors are living, revocable by the respective settlors (or, if the trust is a joint trust, revocable by both settlors, acting together); (3) both spouses are permissible current beneficiaries of the trust or trusts while living; and (4) the trust instrument, deed or other instrument of conveyance must reference this particular statute.
TBE trusts are specifically authorized in Maryland and Virginia.3 TBE trusts haven’t yet been adopted in Washington, D.C. or Florida, although there’s the suggestion that a joint TBE trust may be allowable under Florida law.4 In addition to Maryland and Virginia, seven other states have adopted TBE trust statutes.5
On the death of the first spouse to die, TBE property passes to the survivor. Death destroys the TBE nature of the property; therefore, the TBE asset protection benefits disappear at the first spouse’s death. A properly crafted estate plan, however, can allow the survivor to “disclaim” his interest in the TBE property and allow the decedent’s half of the property to pass into a protected trust for the surviving spouse and/or other family members, such as children, grandchildren and more remote descendants.6 Clients’ plans should be reviewed to determine whether TBE and disclaimers should be part of the testamentary strategy.
“Extra” Marital Benefits
If available in a particular jurisdiction, TBE is a unique form of ownership that can provide certain “extra” marital benefits. Some spouses may already own their property as TBE and not even realize it. TBE, however, isn’t “bullet proof” as the transfer into TBE must still satisfy the applicable state’s fraudulent transfer law and may nevertheless still be reachable by the Internal Revenue Service. TBE can also have the negative effect of converting separate property into marital property (as to this issue, it’s best to consult with a local family law attorney to confirm the implications in your particular jurisdiction). There are opportunities to take advantage of TBE until the first spouse’s death and other opportunities to further protect assets, while still maintaining estate tax benefits for the survivor and other family members.
DISCLAIMER: This material is not intended to constitute a complete analysis of all tax or legal considerations. This material is not intended to provide financial, tax, legal, accounting, or other professional advice. Consult with your professional advisor to obtain counsel based on your individual circumstances.
- This article focuses on the laws of the jurisdictions covered by our firm’s offices, i.e., the “Capital Region” (District of Columbia, Maryland and Virginia) and Florida. Other jurisdictions where our business contacts and friends are located may have similar laws.
- See, e.g., our firm’s prior articles on portability: Portability, Act Now, Estate Planning in 2013 and Portability – Immediate Action Items.
- Md. Est. & Tr. Law Section 14-113; Va. Code Section 55-20.
- See R. Craig Harrison, Trusts: TBE or Not TBE, 87 Fla. Bar J., No. 5 (May 2013).
- The other states are: Delaware, 12 Del. C. § 3334; Illinois, 765 Ill. Con. Stat. § 1005-1c; Indiana, Ind. Code § 30-4-3-35; Missouri, Mo. Rev. Stat. § 456.950 (Missouri only allows for one joint trust, but may be severed into two separate shares); North Carolina, N.C. Gen. Stat. § 39-13.7; Tennessee, Tenn. Code. Ann. § 35-15-510; and Wyoming, Wyo. Stat. Ann. § 4-10-402(c)-(e).
- “Disclaimers” are a way to renounce certain property received upon death. State law and federal transfer tax law work to deem the intended recipient as having predeceased the decedent, thereby allowing property to pass to the next intended recipient without effecting any gift for gift tax or state law purposes.