Trusts: TBE or not TBE
Trusts: TBE or not TBE
Florida favors married couples holding their property as tenants by the entireties (TBE).
Probate is avoided as the property passes to the surviving spouse by operation of law. Further, the tenancy provides creditor protection. In essence, the TBE property belongs to neither individual spouse, but both are collectively seized in the whole property. This indivisible interest cannot be severed by the actions of just one spouse. Because of this legal concept, the creditor of one spouse cannot sever the TBE property to satisfy the debt. Winters v Park, 91 So.2d 651 (Fla. 1956); Beal Bank, infra and Hector Supply, infra.
To avoid probate and take advantage of estate tax exemptions, estate planners have traditionally split the TBE property to fund separate trusts for each spouse which trusts usually provide tax credit shelter and marital trusts upon the death of the grantor spouse. The division of the TBE property between the spouses (held in trust or otherwise) subjects the property held by a spouse to the reach of that spouse=s creditors. With the increase of the federal exemption and portability, single share joint trusts are becoming more popular; however, a creditor of one spouse may be able to reach the entire corpus of a single share joint trust.
A tenancy by the entirety trust (TBE Trust) can provide the married couple with both creditor protection and the various non-tax benefits of a trust. The TBE Trust with disclaimer provisions provides the same estate tax benefits as a complex joint trust or the typical separate trust formats.
A review of the TBE concept, historically and to the present day, together with an analysis of a beneficiary=s interest in a trust supports the use of a TBE Trust.
I. The TBE Property Roots
A. The Beginnings of Jointly Held Property
The holding of property as joint tenants dates back to at least the 13th century. It was a mechanism to avoid the incidents of feudalism. The joint tenants were seized Aper my et pur [email protected] In other words, the tenants held simultaneous ownership of an equal undivided fractional share (Apur [email protected]) of the entire estate (Apur [email protected]). In the 14th century, partition actions developed to sever the joint tenancy and the concept of tenancy in common was born. Persons who hold property as tenants in common hold their respective interests as a separate and distinct estate; i.e., an undivided one-half.
B. The Development of TBE Property - Married Woman could not hold property individually.
Tenancy by the entirety took form in the 14th century and the feudal system also played a role in its development as a married woman could not hold property in her individual name. However, it was not until the 18th century that tenancy by the entirety was actually described as a property interest in the 9th Edition of William Blackstone=s Commentary, where he states :
If an estate in fee be given to a man and his wife, they are neither property joint-tenants, nor tenants in common; for husband and wife being considered as one in law, they cannot take the estate by moieties, but are seized of the entirety, per tout et non per my; the consequences of which is that neither the husband nor wife can dispose of any part without the assent of the other, but the whole must remain to the survivor.
2 William Blackstone, Commentaries on The Laws of England, 179 (9th ed. 1783).
Although a married woman held title to the TBE property, her husband had the right to exclusively control the estate and his creditors had the ability to reach the TBE property subject only to the wife=s right of survivorship.
C. The Modern Concept of TBE - The Rule of Construction and Presumption of Intention.
By statutory and constitutional enactments, married women gained the right to own property in their individual names. In Florida, the right of a married woman to hold separate property slowly progressed. Finally, in 1968, Florida adopted Article 10, Section 5 of the Florida Constitution which abolished all distinctions between married men and women in the holding, control, disposition, or encumbering of property.
Because married women could own property in their individual name, the original reason for the development of tenancy by the entireties, that the wife lacked capacity to hold title, no longer existed. Many jurisdictions faced the issue as to whether the tenancy by entirety concept should still apply. The Florida Supreme Court, in a series of cases, held that the ancient reason for the establishment of estates by the entirety (i.e. the incapacity of the wife to hold property) was no longer the common law basis of the estate by entirety concept. Rather, the common law evolved into a rule of construction based on the presumption of an intent to create TBE property and ownership of the TBE property as a single unit (per tout et non per my). English v. English, 63 So. 822 (Fla. 1913); Hagerty v Hagerty, 52 So. 2d. 432 (Fla. 1957); Bailey v. Smith, 103 So. 833 (Fla. 1925); In re Lyons= Estate, 90 So2d. 39 (Fla. 1956); First Nat=l Bank v. Hector Supply Co., 254 So2d 777(Fla. 1971).
Hector Supply, addressing a bank account, held that a TBE interest was created in the account so long as the signature card was drafted in a manner consistent with the essential six (6) unities of the TBE estate. This standard was reaffirmed in Beal Bank, SSB v. Almand and Associates, 780 So.2d 45 (Fla. 2001), which pronounced that strong public policy considerations favored the finding of a TBE interest in property - at least with respect to creditors.
Based on these common law standards, the TBE property interest is created by:
1. The intention of the husband and wife to create the tenancy and
2. The establishment of the six (6) essential characteristics associated with TBE property.
II. The Creation of a TBE Trust.
A trust can be drafted to meet the requirements set forth in Hector Supply and Beal Bank.
A. The statement of intent to create TBE Property.
Hector Supply, In re Lyons= Estate, Bailey and Hagerty all involved bank accounts and state that if the intent to create a TBE interest was set forth in the account signature card, the intent to create the TBE interest would be conclusive.
Beal Bank reaffirmed Hector Supply and concluded that if the signature card states the intent to create a TBE interest in the account, this Aends the inquiry as to the form of [email protected] as to the tenancy. Id, at 60.
Beal Bank also cites the 4th DCA holdings in Sheeler v. United States Bank of Seminole, 283 So.2d 566 (Fla 4th DCA 1973) and Morse v. Kohl, Metzger, Spotts, P.A., 725 So. 2d 436 (Fla. 4th DCA 1999), that the signature card designating the account as TBE property was conclusive and could not be challenged by extrinsic evidence.
Therefore, a simple statement in the trust agreement that the settlors intend to create a TBE interest for all property transferred to the trust provides the required intent to create a TBE interest in the trust property.
The TBE Trust must also be consistent with the six (6) essential unities of the TBE estate.
B. The Essential Unities of the TBE Estate.
Tenancy by entirety must have the following six (6) characteristics:
1. Unity of Possession B Both spouses must have joint ownership and control.
2. Unity of Interest B Each spouse must have the same interest in the property.
3. Unity of Title B The interest must have originated in the same instrument.
4. Unity of Time B The interest must have commenced simultaneously in the same instrument.
5. Survivorship B On the death of one spouse, the other spouse becomes the sole owner of the entireties property.
6. Unity of Marriage B The parties must be married.
The unities of interest and survivorship can easily be incorporated into the trust agreement. The unity of marriage is simply an issue of fact. The unities of title, possession and time also can be properly addressed in the trust agreement.
1. The Unity of Title - The Property Interest of Equitable Title.
Some practitioners assert that the division of the TBE property into a legal interest (held by the trustee) and an equitable interest (held by the husband and wife), terminates the tenancy. They argue that the husband and wife no longer hold a unified title to the estate as a whole, and the tenancy by the entirety is destroyed.
AAn estate by the entireties can be created in property capable of being held as an estate by the entireties where a conveyance of transfer is made to husband and wife without expressly specifying how they are to [email protected] Matthews v. McCain, 170 So. 323,325 (Fla. 1936). It is the unity of title in the property interest that is relevant, not the quantity of the property interest. As discussed below, equitable title to trust property is a property interest and, therefore, is subject to TBE ownership.
In In re McEwen=s Estate, 33 A.2d 14 (Pennsylvania Supreme Court 1943), a Pennsylvania trust was established by a married couple with a bank as the trustee. The husband and wife made unequal contributions to the trust of securities. The trust provided for the distribution of the net income to the husband and wife during their joint lives and to the survivor during his or her life. After the death of the surviving spouse, the trustee was required to liquidate the trust and distribute the corpus to the remainder beneficiaries. The spouses held the right to revoke the trust during their joint lives, but upon the death of one spouse the trust became irrevocable.
The Supreme Court of Pennsylvania held that the McEwens created a TBE interest in the corpus of the trust when they transferred the securities to the trust upon two (2) separate grounds. First, the McEwens reserved the right to control the disposition of the trust corpus by revocation, termination or modification of the trust during their lifetimes. Upon the revocation of the trust, the trust assets would have vested in the McEwens as tenants by the entirety. Although the trustee held the legal title to the trust property, the trustee held no beneficial interest therein. Second, the court reasoned that the McEwens held an actual property interest in the trust - an equitable ownership in the trust corpus - which was subject to the TBE interest. The Pennsylvania Court noted that the early judicial concept considered a beneficiary as merely holding an in personam right in the trust - a right of action only against the trustee. The beneficiary did not own a property interest in the trust. The modern trend recognizes that the beneficiary has both the right of action against the trustee and an actual property interest in the trust - an equitable ownership in the trust corpus. The McEwens owned this equitable ownership interest as tenants by the entirety.
As in McEwen, Florida recognizes that a beneficiary of a trust owns equitable title in the trust property. Barnett Nat. Bank of Jacksonville, et al v Murrey, 49 So.2d 535 (Fla. 1950) involved a challenge to a trust by the son of the settlor. One issue on appeal was whether the beneficiary son had to renounce his interest in the trust before filing his lawsuit. The trust corpus consisted of corporate stock. The son claimed that he was not required to renounce his interest in the trust because he had no legal title in the trust property ( the corporate stock), but only an equity therein.
The Florida Supreme Court held that the trust vested legal title in the stock to the trustee, but the beneficiary held equitable title in the stock. The court found that the vested equitable title was property, which could be alienated and subject to the claims of the beneficiary=s creditors. Based on this property right, the beneficiary was required to renounce his interest in the trust, prior to filing the action challenging the trust. See also: Miller v Kresser, 34 So.3d 172 (Fla. 4th DCA 2010) [the trustee holds legal title in the trust and the beneficiary the equitable title.]
Like McEwen, Florida also recognizes the TBE property interest in a trust when the husband and wife retains the right to control the disposition of TBE property held by a trust. Passalino v Protective Group Securities, Inc., 886 So.2d 295 (Fla. 4th DCA 2004). In Passalino, the husband and wife sold property they held as tenants by the entirety and transferred the sale proceeds to their attorney=s trust account. The creditor of the husband filed a writ of garnishment against the attorney=s trust account claiming that the transfer of the sale proceeds to the trust account terminated the TBE interest because the couple no longer held the unity of title or possession. The creditor argued that the attorney was in possession of the funds and that he was the only person with the authority to sign on the trust account.
The 4th DCA disagreed and specifically held that the transfer of the TBE property to the trust account did not terminate the unities of title or possession:
Transferring the proceeds of the sale of an entireties property to a trustee for the benefit of the husband and wife does not terminate the unities of title or possession, where the parties clearly intended their property to be held as tenancy by the entireties by exercising beneficial ownership of the property and controlling the property=s disposition. Id, at 297.
Therefore, the transfer of TBE property to a trust does not terminate the unity of title, especially where the husband and wife retain the power to amend, revoke or terminate the trust.
2. The Unity of Possession.
a. The Power to Withdraw from the Trust.
Even though the TBE property interest is non-severable and indivisible, a trust may provide a power in the trustee to remove assets from the trust as agent for the husband and wife without jeopardizing the TBE interest held by the trust. See Haggerty, Hector Supply, Lerner and Beal.
b. The Right to Control, Amend or Revoke the Trust.
The transfer of TBE property to a trust in which one spouse is given the sole power to control the trust property may destroy the unity of possession and terminate the TBE character of the property.
Rawlings v Alverez, 792 So.2d 695 (Fla. 5th DCA 2001); Quaid v Baybook Home of Polk County, LLC et al, 2011 WL 5572605 (M.D. Fla. 2011).
Nevertheless, Passalino makes it clear that Rawlings (and therefore, Quaid) is limited to trusts in which only one spouse has the power to control the trust.
In Rawlings, a husband and wife funded an inter vivos trust with marital property. The wife transferred her interest in the property to the trust, on which her husband had sole control over the funds and had authority to amend, modify, or revoke the trust. The husband executed amendments changing the beneficiaries . . . . Although not in issue, in a footnote the district court stated, A There is no dispute that the effect of this transfer to the trustee destroyed any tenancy by the entireties that may have existed in the property pre-transfer. See Hunt v. Covington, 145 Fla. 706, 200 So. 76 (1941); 12 Fla. Jur.2d Cotenancy and Partition 29 (1998)[email protected] So.2d at 696 n. 2. Appellants suggested that Rawlings stands for the proposition that a transfer to a trustee of entireties property in of itself terminates the entireties. We disagree with this interpretation. Rawlings citation to Hunt is instructive. In Hunt, a husband=s conveyance of properties to his wife terminated his interest in the property and, thus, the entireties characteristics of the property. Likewise, in Rawlings the wife=s transfer of marital property to the trust in which her husband maintained sole control and could direct the disposition of property terminated the entire character of the property. In other words, the unities of possession and interest were terminated, because the wife no longer exercised control over the property. (emphasis original) Id, at 297-8.
Thus, when the married couple retains the power to control the trust by direction, revocation, or modification, the unity of possession is not terminated by the transfer of the TBE property to the trust. In order to maintain the unity of possession, the trust should require the consent of both spouses to amend, terminate or revoke the trust. Therefore, the trust agreement and any power of attorney relating to the trust should authorize the Agent to consent to a trust amendment, termination or revocation. '702.2202(1)(b), Florida Statutes; '736.0602(5), Florida Statutes.
3. The Unity of time
The unity of time can be easily met as well. The amendment of a separate trust to a TBE Trust may not meet the unity of time. Instead, a new trust should be formed. Furthermore, it may be prudent to establish the TBE interest prior to transferring the asset into the trust. However, conceptionally, this should not be necessary as the transfers of separate property to a TBE Trust by a spouse is governed by the instrument and intent to create the TBE interest. Hagerty, Supra. Therefore, if the TBE Trust provides that it is the intent for all property transferred to the trust be held as TBE property, it is the trust instrument and transfer that creates the tenancy interest, satisfying the unity of time.
III. Does the Florida Trust Code Prevent a Trust from holding TBE Property?
Having established that under common law, TBE interests can be created in trusts, does the Trust Code abrogate this common law doctrine?
A. The Florida Trust Code is Silent as to the Treatment of TBE Property.
Hector Supply and the other Supreme Court cases addressing continued viability of TBE property in the wake of the statutory and constitutional provisions granting married women the right to own property individually looked to whether the legislation intended to abate or modify the common law TBE doctrine.
The Florida Trust Code does not specifically address tenancy by the entirety property interests in trusts nor does it appear that the Florida Trust Code intended to modify the common law relating to the ownership of TBE property by a trust. In fact, Section 736.0106, Florida Statutes, states that the Acommon law of trusts and principals of equity supplement this code, except to the extent modified by this code or another law of the [email protected]
With that in mind, a few of the other Florida Trust Code provisions must be examined.
B. Section 736.05053(1) and the Duty of a Trustee to Pay the Expenses of the Estate.
Section 736.05053(1), Florida Statutes provides that a trustee of a trust described in Section 733.707(3), Florida Statutes shall pay to the personal representative of a settlor=s estate the amounts that the personal representative certifies in writing are required to pay the expenses of administration and obligations of the settlor=s estate.
Section 733.707(3), Florida Statutes states that any portion of a trust to which a grantor decedent, at the time of the decedent=s death, has a right to amend, revoke, withdraw or appoint, either alone or in conjunction with any other person, is liable for the expenses of the administration and obligations of the decedent=s estate to the extent the decedent=s estate is insufficient to pay them as provided in section 733.607(2), Florida Statutes.
These provisions seem to expose the entire trust corpus of a TBE trust to a deceased spouse=s estate administrative expenses and creditor claims. However, Section 733.707(3)(d), Florida Statutes precludes exempt property from the reach of the probate estate. Therefore, it does not appear that the statute is intended to turn an exempt asset such as a TBE property into a non-exempt asset.
Nevertheless, the trust drafter should avoid language directing the trustee to pay the estate administrative expenses or creditors of the first spouse to die. This could be deemed a waiver of the statutory exception or assent by both spouses for the payment of such claims. Morey v. Everbank, 93 So. 3d 482 (Fla. 1st DCA 2012).
C. Section 736.0505(1) - The Liability of a Settlor to His or Her Creditors.
Florida does not exempt self settled trusts from the reach of the Settlor=s creditors. Section 736.0505(1)(a), Florida Statutes provides that assets of a self settled trust are subject to the claims of creditors to the extent the property would not be otherwise exempt by law if owned directly by the settlor.
Section 736.0103(16), Florida Statutes defines a settlor to mean a person who creates or contributes property to a trust. If more than one person creates or contributes property to a trust, each person is a settlor of the proportion attributable to that person=s contribution except to the extent another person has the power to revoke or withdraw that portion. This definition is simply a restatement of the generally accepted common law of trusts. Rawlings, Supra at 696. Because the husband and wife are considered Aone in [email protected] and hold the property as a single moiety, together they are the [email protected] of the TBE Trust. Since the TBE property held by the trust would be exempt if owned by them directly, the TBE Trust property remains exempt from the creditors of either the husband or the wife. Based on the above, the Florida Trust Code does not expressly or by implication abrogate the common law to prevent a trust from holding TBE property with its creditor claim protection.
IV. The Surviving Spouse of a TBE Trust can Disclaim his or her TBE interest to a Tax Credit Shelter Trust.
Based on the current federal estate tax exemption of $5.0M (plus indexing) for each spouse and portability, a married couple can transfer $10M+ of TBE property first to the surviving spouse, then their children free of federal estate tax consequences. No separate trust is needed. Nevertheless, the estate tax picture is always unpredictable. To protect the married couple from future estate tax changes, the TBE Trust can provide the surviving spouse with the right to disclaim all or part of the deceased spouse=s estate tax imputed 2 interest in the TBE Trust property. The TBE Trust could provide that the disclaimed interest be allocated to a tax credit shelter trust so that the disclaimed interest will not be part of the surviving spouse=s estate, and continue creditor protection on the disclaimed portion. Further, probate continues to be avoided.
A married couple can transfer TBE property to a trust which provides the couple with both the benefits of a trust and creditor protection. If federal (or other) estate taxes need to be addressed, the surviving spouse can be provided with a right to disclaim his or her interest in the TBE Trust to be allocated to a tax credit shelter trust. With the estate tax exemption permanently set at $5M (plus indexing) and the portability option, the TBE Trust is certainly a viable estate planning tool for a married couple.
R. CRAIG HARRISON is a shareholder in the firm of Lyons, Beaudry & Harrison, P.A. located in Sarasota. He is Board Certified in Wills, Trusts and Estates and is a graduate of the University of Michigan (B.A. 1980) and the University of Detroit (J.D. 1983). He is a member of the Probate and Trust Litigation Committee of the Florida Bar and the author of AHomestead B The Post-Death Spousal Disclaimer: A Cure for a Constitutionally Prohibitive [email protected] published in the Florida Bar Journal.
Special thanks and recognition are given to Bruce Marger for his review and greatly appreciated input.
This column is submitted on behalf of the Real Property, Probate and Trust Section, William F. Belcher, chair, and Kristen Lynch and David Brittain, editors.