Tenants by the Entirety Protection Available in Trust (Dec 2012)

NEW LAW: TENANTS BY THE ENTIRETY PROTECTION AVAILABLE IN TRUST

By

Ethan R. Okura

Hawaii has a new law which allows married couples or reciprocal beneficiaries who hold real property as tenants by the entirety to transfer their real estate to revocable trusts without losing the tenants by the entirety creditor protection.  In order to take advantage of tenants by the entirety protection (under the old or new law), you must be married or reciprocal beneficiaries. I apologize in advance to those of you who don’t have a reciprocal beneficiary, are unmarried, divorced, or a widow or widower. Governor Abercrombie signed Act 209, which created this new law, on July 3, 2012. The law became effective on July 1, 2012. The law is an amendment to Title 28, Chapter 509 of the Hawaii Revised Statutes governing real property tenancies.

In December of 2009, my father, Sanford K. Okura, wrote an excellent article called Tenants by the Entirety, which explained the pros and cons of holding property as Tenants by the Entirety vs. in Revocable Trust(s). The main benefit of owning as tenants by the entirety is asset protection from lawsuits. Even if a creditor wins a lawsuit against one spouse or reciprocal beneficiary, the property is protected from the creditor. The creditor has to win a lawsuit against both spouses or reciprocal beneficiaries in order to touch the property.

On the other hand, the main advantages of owning property in your revocable trust(s) are 1) avoiding probate when the 2nd spouse or reciprocal beneficiary passes away; 2) avoiding conservatorship if either spouse or reciprocal beneficiary becomes incapacitated; and 3) minimizing estate taxes for married couples with A-B type revocable trust(s).

Prior to the new law passing this summer, if spouses or reciprocal beneficiaries transferred their real property to revocable trusts to get the estate planning benefits, they lost the creditor protection of tenants by the entirety ownership. If spouses or reciprocal beneficiaries kept their property as tenants by the entirety in their own names, they couldn’t enjoy the estate planning benefits provided by revocable trusts. This means that you had to choose between the estate planning benefits of owning property in your revocable trust or the creditor protection benefits of owning property as tenants by the entirety.

Now you can have your cake and eat it too!  With the new law, spouses or reciprocal beneficiaries can transfer tenants by the entirety property to a joint revocable trust or separate revocable trusts and still keep the creditor protection that they had when they owned the property as tenants by the entirety for as long as they stay married or in a registered reciprocal beneficiary relationship.

There are a few other technical requirements that have to be met in the language of the trust(s) and the deed transferring the property to the trust(s) in order to qualify for this creditor protection. Also, anyone who had already transferred their property into their revocable trust before July 1, 2012 must do a new deed to the trust in order to take advantage of the new law.

This tenancy by the entirety protection in revocable trust is probably a good idea for most married couples and reciprocal beneficiaries who already own their home or other real property in trust. This may also be a good idea for couples who kept ownership of their property as tenants by the entirety for creditor protection reasons and therefore haven’t yet transferred their real estate to their revocable trusts.  However, it may not be the best solution for everyone.  If you are old enough to start being concerned about nursing home costs, then I would usually recommend transferring the property to an irrevocable trust and keeping a life estate in the property instead.  Also, if you would like the property to be protected not only during your life (through tenancy by the entirety protection), but also after your death in case your child gets a divorce or has enough assets to be taxed by the estate tax, I would recommend putting your property into a generation skipping trust, for asset protection.

If you think this new law might be something you can take advantage of, please consult with a qualified attorney to determine whether it is appropriate for your situation.




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