Law News and Tips

Spouses and Trusts

Fred Vilbig - Tuesday, April 12, 2016

Most married couples own their property, whether real estate, bank accounts, investments (other than retirement accounts), or just about anything else, as “joint tenants.” The full terminology for that is “joint tenants with right of survivorship.” What this means is that when one owner dies, his or her interest in that property passes to the survivor automatically without the need for probate.

In other blog articles I’ve written, I’ve discussed why joint ownership can be a bad thing. With a bank account (where federal law applies), either joint owner can (and yes, they have) cash out the entire account and hightail it for the hills. With other assets (where state law applies), neither joint owner can do anything without the other joint owner joining with them. In addition, if either joint owner gets sued, that account or piece of property can be taken to collect the debt.

In the case of a married couple, things are a little different. When a married couple owns property jointly, it is treated as “tenancy by the entirety” (“TBE”) property. What that means is that the TBE property cannot be taken to collect a debt against one of the spouses, but not the other. This law is a way to protect marriages and families. Marital property could only be taken to collect the joint debt of a married couple, but not the separate debts of married individuals. That’s why a mortgage company always requires both spouses to sign off on the mortgage and loan.

Until 2011, property held by a husband and wife in a joint trust lost that TBE protection. Although it didn’t seem to make sense, if a husband and wife transferred their TBE assets into a joint trust, the transferred assets lost the TBE protection. Go figure. We planned around that with nonprobate transfer options, but it was not really a good solution.

In 2011, the Missouri legislature fixed this oddity. They created what are called “Qualified Spousal Trusts” (“QSTs”). A QST is a joint trust (and it doesn’t matter when it was created) between a husband and wife. The trust must provide either that: (i) the trust assets are held and administered in one trust for the benefit of both spouses, the trust can be revoked by either or both spouses during life, and each spouse has the right to receive trust distributions; or (ii) the trust assets are held and administered in separate shares of a single trust for the separate spouses, with each share revocable by either spouse individually with respect to his or her share, and each spouse has the right to receive income from their separate share. Although this is kind of complicated, it’s a great idea.

The one quirk in Missouri law for QST’s was that to obtain TBE protection in a QST, the property had to be transferred into the trust as TBE property. What that meant was that assets transferred into a QST as separate property did not receive TBE protection.

It’s funny how many non-TBE assets people receive: direct deposit paycheck; pension payments; Social Security payments; and IRA distributions, just to name a few. When non-TBE assets were mixed with TBE assets, it looked like the QST protections were lost, although I never saw those cases. Still, it was a potential problem.

The way we got around this dilemma was that we had spouses keep their joint checking accounts out of the QST. We have the spouses designate their joint checking account as the recipient of all of their non-TBE payments. And then we had the clients put a transfer-on-death beneficiary designation on their checking account so that on the death of the second of them to die, the checking account would automatically rollover into the QST it was kind of an involve strategy, but it worked.

We all kind of figured that the legislature would get around to resolving this odd situation, and over time, they did. Beginning in 2015 married couples could transfer non-TBE assets (whether real estate, bank accounts, or investments) into a QST and still receive TBE protection. This really simplifies the process for married couples with a joint trust. I like when we can simplify things for clients.

Things are tough enough without adding extra administrative layers. It was nice of our legislators to make life a little easier.


 

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