Effective October 1, 2010, property held by the entirety may be transferred to a trust or trusts and the “same immunity from the claims of (each spouse’s) separate creditors” shall continue to protect the property as if the husband and wife had continued to hold the property or its proceeds as tenants by the entirety” as long as (i) they remain married, (ii) the property or its proceeds remain in the trust or trusts, and (iii) “both the husband and the wife are beneficiaries of the trust.” Est. & Trusts § 14-113 (b).
By its terms, Est. & Trusts § 14-113 (b) purports to permit self-settled asset protection trusts for married couples. Unlike domestic asset protection trusts (DAPTs) elsewhere, the settlor may be sole trustee, the trust need not be irrevocable, and the settlor may retain a non-testamentary general power of appointment. See generally, Richard W. Nenno, Planning with Domestic Asset-Protection Trusts: Part II, 40 Real Prop. Prob. & Tr. J. 477, 512-520 (Fall 2005) for a (slightly out-of-date) summary of DAPTs in the various states where permitted by statute, none of which permit such sweeping unilateral control to be retained by the settler/grantor of the trust.
Assume an example that literally meets all of the requirements of the Maryland statute. Husband (“H”) and Wife (“W”) hold as Tenants by the Entireties (“T/E”) two residences (“Blackacre” and “Whiteacre”) and a brokerage account worth $4 million. They transfer these assets into two revocable trusts: H’s Trust and W’s Trust. H’s Trust holds Blackacre and $2 million of the securities and W’s Trust holds the remainder. Each Trust provides a death payout to the surviving spouse of $10,000 (or something not de minimis). Each spouse is the sole Trustee of his or her respective Trust and each has extensive rights over this separate Trust during life (including, a general power of appointment) and each has extensive powers to appoint at death (subject to the $10,000 payout override). Perhaps these Trusts are backstopped by a marital agreement so as to preclude the assertion of an elective share against the Trusts at death instead of blind reliance onKarsenty v. Schoukroun, 406 Md. 469, 959 A.2d 1147 (2008).
But for Est. & Trusts § 14-113 (b), H & W would have created self-settled trusts which are ineffective as to the settlors’ creditors. Restatement (Second) of Trusts, § 156(1) (“Where a person creates for his own benefit a trust with a provision restraining the voluntary or involuntary transfer of his interests, creditors can reach his interests.”) and § 156(2) (“Where a person creates for his own benefit a trust for support or a discretionary trust … his creditors can reach the maximum amount which the trustee … could pay to him …”).
The treatment afforded T/E is not an exception to the general rule disfavoring self-settled trusts. Instead, the T/E property is seen as owned 100% by both H & W. Thus, the separate creditors of each spouse cannot attach an individual interest because there is deemed to be no individual interest. Such attachment would prejudice the non-debtor spouse. Historically, it was the survivorship interest that was protected, so before women had extensive property rights, and the husband had control of the property during his lifetime, the husband’s creditors could attach the life interest. After the Married Women’s Property Acts in the late 1800′s, however, both the life interest and the survivorship became equally protected in most jurisdictions. See Fred Franke,Asset Protection and Tenants by the Entirety, 34 ACTEC J. 210 (2009).
In Watterson v. Edgerly, 40 Md. App. 230, 388 A.2d 934 (1978), it was held that the transfer by the husband of all of his interest in the T/E property to the wife did not constitute a fraudulent conveyance because the judgment creditor of the husband did not have an attachable interest in the T/E property because of the inseparable unity of ownership. That is not the same as saying that the marriage as an entity makes the transfer. Indeed, there are numerous bankruptcy cases bringing back into the bankruptcy estate Watterson-type pre-petition transfers (ones occurring within two years of the filing of the petition). This is because of the sweeping authority given to the trustee to avoid transfers under U.S.C. § 548(a)(1). The result is that the previously exempt property comes back, not as a T/E exempt interest, but as a one-half tenant in common interest because when it comes back it goes to the bankruptcy estate, not the debtor/spouse as spouse. Dana Yankowitz, I Could Have Exempted It Anyway”: Can a Trustee Avoid a Debtor’s Pre-Petition Transfer of Exempt Property?, 23 Emory Bankr. Dev. J. 217 (2006). It is probable that a bankruptcy court would view the transfers by husband and wife into an Est. & Trusts § 14-113 (b) trust as self-settled. I doubt whether any Maryland court would take an opposite view.
If the Maryland statute is seen as reversing the prohibition against settlors sidestepping creditors with self-settled trusts, it would permit sweeping DAPTs that would offer great creditor protection. In the above example, this protection would follow Blackacre and the husband’s one-half interest in the brokerage account regardless of whether the wife had any further interest in that property. If H & W had severed the T/E property to accomplish this same result, of course, they would no longer have the T/E “immunity.” What will a court decide the “same immunity” means under facts similar to those of the example? How enthused will a court be to interpret the statute in a way, to paraphrase Senior Circuit Court Judge Hainsworth in Robbins, 826 F.2d 293 (C.A. 4th 1987), so that the settlors/debtors “can have one’s cake and eat it too”?
The pivotal question is whether Est. & Trusts § 14-113 (b) reverses the long-standing rule against denying creditors the absolute right to attach assets controlled by a settlor/debtor. In Maryland, “the cardinal rule of construction of a statute is to discover and carry out the real legislative intention.” Maryland Medical Service, Inc. v. Carver, 238 Md. 466, 477, 209 A.2d 582, 588 (1965). Obviously, one begins to construe a statute based “on the tacit theory that the Legislature is presumed to have meant what it said and said what it meant.” Witte v. Azarian, 369 Md. 518, 525, 801 A.2d 160, 165 (2002). But where the statute alters the common law, it is interpreted very narrowly. Id. at 369 Md. 533 and 801 A.2d 169. Lutz v. State, 167 Md. 12, 172 A. 354, 355-6 (1934): ‘”As a rule of exposition, statutes are to be construed in reference to the principles of the common law. For it is not presumed that the legislature intended to make any innovation upon the common law, further than the case absolutely required. The law rather infers that the act did not intend to make any alteration other than which is specified, and besides what has been plainly pronounced.”‘ (court quoting from another case which, in turn, quoted from a Treatise.) In short, the common law “will not be repealed by implication.” Suter v. Stuckey, 402 Md. 211, 232, 935 A.2d 731, 743 (2007); also, Brown v. State, 359 Md. 180, 189, 753 A.2d 84, 88 (2000) (The Court may be required to look beyond the literal meaning of a statute and “may consider the consequences resulting from one meaning rather than another, and adopt the construction which avoids an illogical or unreasonable result, or one which is consistent with common sense.”).
It is probable that a court will try to determine the legislative intent. Kaczorowski v. City of Baltimore, 309 Md. 505, 525 A.2d 628 (1987). As with most Maryland legislation, there is not extensive, accessible legislative history spelling out exactly the intent of the Legislature. It appears, however, to have been presented as a way of remedying the unfairness that would occur when spouses change the ownership of their T/E property by transferring it into their trusts for estate planning and probate avoidance purposes. One might speculate that the Legislature did not understand this Bill as creating a super DAPT available to married couples with property in Maryland.
An obvious interpretation of the statute would be that T/E protection survives the transfer into a trust or trusts to the extent that the interests of the spouses mimic their pre-transfer interests. It would be rare indeed if the revocable trust terms actually mimicked the T/E ownership attributes. Many trusts, for example, may continue the property in trust for the benefit of the surviving spouse over his or her lifetime, then provide for it to go to a remainderman without giving the surviving spouse a general power to direct (or redirect) that asset. Such an arrangement, without a power of appointment held by the surviving spouse in the property, would not mimic T/E ownership.
Until these important issues are resolved, one should be cautious in using this technique for clients where asset protection is a serious concern. For the high risk client who is concerned about asset protection (for example, a lawyer, a doctor, a corporate executive with Sarbanes-Oxley exposure), the technique of leaving the T/E property intact and relying on a disclaimer for the estate planning should continue to be considered. On the other hand, for married couples with low risk profiles who want to create revocable trusts regardless of the asset protection exposure (for disability planning or simply to avoid probate at the second death) using an Est. & Trusts § 14-113 (b) trust may prove to be a benefit.
