Taxation & Estate Planning

Tenancy By The Entirety and Living Trusts

By Joel A. Schoenmeyer

In Illinois, most married couples take title to real estate as tenants by the entirety. This is a form of joint tenancy available only to married couples, but with some added advantages. The biggest advantage is creditor protection: for the most part, an individual's creditors cannot foreclose upon property owned by the individual in tenancy by the entirety.

The above benefit creates a bit of a dilemma when it comes to estate planning. If a husband and wife set up living trusts, it's typical to split the ownership of their primary residence. That's done by having the husband and wife sign two deeds:

1. Deed transferring one-half of residence to wife as trustee of her living trust

2. Deed transferring one-half of residence to husband as trustee of his living trust

The problem is that these transfers destroy the tenancy by the entirety arrangement. Instead the trusts own the real estate as tenants in common, with no creditor protection. This caused particular problems where one spouse was in a line of work (for example, an MD) requiring creditor protection. The clients and their attorney would have to choose: do we fund the living trusts (and risk creditor problems down the line), or do we keep the tenancy by the entirety ownership (and risk the possibility of needing a probate)?

Enter Public Act 96-1145, which will become effective on January 1, 2011, and which adds language to the Joint Tenancy Act allowing for tenancy by the entirety between a husband and a wife's living trusts. Note that this protection isn't automatic -- the attorney drafting the deeds will have to be clear that the trusts will hold the property as tenants by the entirety.

Full post as published by Death and Taxes Blog on September 14, 2010 (boomark / email).