Are There Asset Protections for Married Couples in Maryland?
Estate planning is not just about avoiding taxes. It also is about having a structure in place that minimizes threats to your assets from unforeseen creditors. There are some simple techniques that can minimize one’s risk against unforeseen attacks through lawsuits or other reversals of fortune. One is simply how the property is held. We usually don’t give it much thought, but retirement plans are protected by virtue of either the federal or the state statutes. Another fairly common way of holding property that’s protected, is for married couples to hold property as tenants by the entirety.
Many states do not have the strong rules that Maryland has regarding tenants by the entirety. Maryland, however, is a very good state for married couples to be holding their property jointly as tenants by the entirety. The idea is that a creditor of one spouse alone cannot force the sale of that property. There is a case in Maryland that illustrates this point perfectly. That case (Watterson) involved a husband with a judgment lien against him. He and his wife held real estate as tenants by the entirety. He transferred the real estate to his wife and his wife then constructed a Will with provisions leaving property in trust for the benefit of her husband but with a spendthrift clause. A spendthrift clause is a device that keeps the creditors of the beneficiary from being able to pierce the trust and grab the property. What happened in the Watterson case was that 61 days after the transfer from the husband to the wife, the wife died and the Will kicked in with the spendthrift provisions. The court held that the creditor of the husband had no interest in that property. What this meant was that the husband as beneficiary could live in the house without fear of losing the house to his creditors. That’s a fairly dramatic case but it illustrates a fundamental point. If a married couple holds their property as tenants by the entirety in Maryland, that property is immune from the creditors of just one of the spouses. It’s not immune, of course, from the creditors of both spouses.
We think of tenants by the entirety in terms of real estate but actually Maryland also recognizes that holding for intangible property. So a stock account can be held tenants by the entirety and would have the same protection.
It is important to know that once there actually is a creditor, or the facts are such that is very likely that there is going to be a creditor soon, that is too late to do the planning. Maryland, as with other states, has a fraudulent conveyance act that essentially says that a debtor cannot gratuitously transfer their property to someone else as a way of avoiding their debts and avoiding the creditor from getting their assets. So when we talk about tenants by the entirety property (or, for that matter, retirement plan), you cannot be moving assets into that solution after a creditor comes on the scene. It is planning that must be done early before there is any issue as to risk.
Very recently Maryland has developed over several years a statute that permits a trust to hold property and still have the same immunity from the creditors of one spouse as the tenants by the entirety would have. This tenants by the entirety immunity trust is a creature statute and you must follow the rules to make sure that you have constructed it properly. These trusts are very popular with second marriages where the couple ultimately wants to have the house, for example, split between the two families at the second death. By using the tenants by the entirety trust, you are increasing the asset protection on that residence during the period that both spouses (and to a large extent one of the spouses) is still alive.
Click here to see articles on the substantive law of estates & trusts in Maryland.