Senate Judiciary reviews bill to preserve spouses’ creditor protection when property is transferred into trusts

The Senate Judiciary Committee on March 18 reviewed Senate Bill 3, which would allow spouses who transfer property they hold as tenants by the entirety into a trust to retain the property’s existing protection from separate creditors, legislative counsel Eric Fitzpatrick said.

"Senate Bill number 3 is an act relating to the transfer of property to a trust," Fitzpatrick told the committee as he walked members through the proposal and the statutory language it would add to Vermont’s trust code. He framed the issue as an intersection of property law and trust law: tenants by the entirety gives married owners a form of creditor protection, while placing property into a trust typically makes the trustee the legal owner.

The bill would add language to the Uniform Trust Code section of 14A V.S.A. so that, when specific conditions are met, property conveyed to a revocable or irrevocable trust by spouses who hold it as tenants by the entirety "shall be immune from the claims of the spouse's separate creditors to the same extent as the property would have been if it had remained held by the spouses as tenants by the entirety," Fitzpatrick said, reading from the draft.

Mark Langan, chair of the probate and trust law section of the Vermont Bar Association, described the bill’s practical effect: "All this statute does is confer the avoidance of probate on tenants by the entirety property." Langan said the drafting committee reviewed statutory approaches from roughly 16 jurisdictions and sought language that preserves creditor protection while allowing couples to avoid probate through trusts.

Committee members and witnesses discussed the bill’s principal criteria. The draft requires, among other things, that the parties be married spouses; that the property be transferred into a trust that is revocable by the spouses while alive or otherwise subject to certain joint controls; and that the spouses be beneficiaries of the trust. Fitzpatrick summarized these prerequisites as the conditions that must be met for the immunity to apply.

The bill also includes a clause allowing spouses to waive the protection in writing or to contractually subordinate creditor rights (for example, at a mortgage closing). Fitzpatrick and Langan said that approach responded to concerns raised by the Vermont Bankers Association and was intended to preserve the ability of lenders and other contractual creditors to secure interests by written agreement.

Committee members asked whether the provision would apply retroactively to trusts or conveyances that predate the statute’s effective date. Fitzpatrick explained the draft uses a retroactivity clause ("notwithstanding 1 V.S.A. §214") so the immunity could apply to transfers that occurred before, on, or after the bill’s effective date, but that the bill excludes judicial proceedings filed before the effective date. Members debated whether the retroactive language should be narrowed to avoid surprising secured creditors; witnesses said existing written security agreements typically remain effective under the bill’s written-waiver language.

Chris Delia, president of the Vermont Bankers Association, told the committee, "we support the bill as best as possible," and indicated the bankers’ concerns had been addressed by the draft’s written-waiver/subordination language.

Discussion vs. decision: the committee’s review was informational. Committee members did not vote on S.3 during the session. The committee chair said the panel would "let this sit for a couple days" and later schedule the bill for a committee vote; no date or formal motion was recorded.

Why it matters: under current law, spouses who hold property as tenants by the entirety have a narrow creditor shield — creditors of only one spouse generally cannot attach the property. Estate planners often use trusts to avoid probate, but transferring tenants-by-the-entirety property into a trust can, under ordinary law, change the legal owner to the trustee and potentially allow separate creditors access. S.3 seeks to reconcile those outcomes so married couples can use trusts for probate planning without losing the tenancy-by-the-entirety creditor protection, provided the draft’s conditions are satisfied.

The committee moved the bill forward for further consideration but took no formal action at this hearing. Members flagged a few technical scenarios—for example, collateralization of trust assets before the statute’s effective date—that could generate litigation and said those permutations were among the reasons the bill’s draft contains the written-waiver and judicial-proceeding limitations.

The committee asked staff to continue refinement and to arrange a future reporter for a committee vote; no vote occurred on March 18.