Marital real estate transfers and creditor protection.

A Revocable or "living trust" is created during your lifetime, has a trustee, and owns property that you have transferred to it during your lifetime. While you are living, the trustee (who may be you) is responsible for managing the property for your benefit. Upon your death, the trustee is directed to either distribute the trust property to your beneficiaries, or to continue to hold it and manage it for the benefit of your beneficiaries.

These trusts do not help you avoid estate taxes because your power to revoke or amend causes them to continue to be includable in your estate. Additionally, they do not offer any asset protection from creditors.

A common error in estate planning occurs when married couples transfer jointly owned real estate into a revocable trust. Here in North Carolina, unless a deed states otherwise, married couples own real estate as Tenants by the Entirety. A Tenancy by Entirety provides one of the strongest forms of creditor protection. A creditor must have a valid claim against both husband and wife prior to placing a lien on the real estate.  Moreover, neither spouse can sell, give away, nor otherwise transfer his or her one half interest in the property without the consent of the other spouse.

Unfortunately, transferring real estate into a revocable trust forfeits the Tenancy by Entirety protection so that a creditor with a valid claim against one spouse could attach a lien against that spouse’s one half interest in the real estate. For couples concerned about protecting their primary residence from creditors, the loss of creditor protection causes some couples to leave the primary residence outside of the trust, and upon the death of the first spouse, the surviving spouse transfers the home into the trust. This planning approach involves the risk that both spouses could die simultaneously.  If a tax planning strategy is the goal, waiting to transfer the real estate into trust after the first spouse’s death could result in the entire real estate being includable in the surviving spouse’s taxable estate, thus defeating the total estate tax exemption at the death of the surviving spouse.

This is to say that if creditor protection is your primary purpose for transferring martial property, then a revocable trust is not the best option. However, it is a good strategy for avoiding probate, incapacity or disability, and offers creditor protection for your beneficiaries when the assets remain in trust.