Committee backs S.3 to preserve tenancy‑by‑the‑entirety creditor protection when spouses transfer property to trusts

Patrick Hopps of Legislative Council briefed the committee on S.3 on April 8, explaining that the bill would preserve creditor protection that tenants by the entirety currently enjoy when married couples transfer property into a trust.

Hopps summarized the legal background: a trust creates three roles — settlor (who places property in trust), trustee (the legal owner who manages the trust), and beneficiary (who receives distributions). "One important point about the trustee for purposes of this discussion is that when the property goes into the trust, the trustee becomes the legal owner of the property," Hopps said, and that change in ownership typically removes the tenancy‑by‑the‑entirety creditor protection. The bill would preserve that protection for qualifying transfers.

Under the bill as presented, creditor protection continues to apply if: spouses own the property as tenants by the entirety; the property is conveyed into a trust; both spouses are beneficiaries or current beneficiaries; and the settlors do not provide otherwise in writing. The bill also includes standard exceptions — for example, if the marriage is dissolved, the tenancy‑by‑the‑entirety protection no longer applies — and it contains a retroactivity clause that would apply the rule to trusts and transfers executed before the bill’s effective date if they meet the statutory criteria.

A committee member moved to report the bill favorably; the clerk called the roll. The committee reported S.3 favorably by roll call (yes: 10; no: 0; absent: 1). The clerk read affirmative votes for Representative Brannigan, Representative Burkhart, Representative Felvis, Representative Higley, Representative Holcomb, Representative Kimball, Representative Maslin, Representative Odey, Representative Wozlak and Representative Canfield. No opposing votes were recorded in the transcript.

Supporters and testifiers earlier in the bill’s path included the Vermont Bar Association and bank representatives; the reporter said those groups were generally in agreement that the bill clarifies existing law and resolves ambiguity for estate‑planning clients. The bill was described in committee as optional for settlors (the settlors can provide in writing that the protection should not apply). With the favorable report, S.3 moves forward for further consideration by the full body.