Senate Judiciary reviews amendment to S.3 to preserve creditor protection when spouses transfer tenancy-by-entirety property to trusts

The Senate Judiciary Committee met Feb. 13 to review a proposed amendment to S.3, a bill that would confirm creditor-protection rules for property owned by spouses as tenants by the entirety when that property is transferred into a trust.

The change matters because tenants-by-the-entirety ownership gives married couples protection against a creditor of only one spouse; the amendment aims to preserve that protection when couples transfer property into a trust, and to clarify who may benefit from it. Committee counsel Eric Fitzpatrick summarized the bill and the parties’ negotiated amendment during the committee session.

Eric Fitzpatrick, legislative counsel, told the committee S.3 "provides for some legal consequences for property being transferred to a trust" and that, when property owned as tenants by the entirety is transferred to a trust, "it retains a certain quality ... known as creditor protection." Fitzpatrick said the amendment makes explicit that spouses must remain current beneficiaries of the trust for the protection to apply: either both spouses are beneficiaries of the same trust or each spouse is a current beneficiary of a separate trust that holds the property.

Committee members asked whether creditor protection would pass to trust beneficiaries after the deaths of the spouses. Senator Hashim summarized the concern: "the main question ... if it were to be applied to the estate ... creditor protection doesn't pass also to the beneficiary, right?" Fitzpatrick and other members confirmed the protection is specific to married couples and does not extend to unrelated beneficiaries after the spouses have died.

The draft amendment also includes two clarifications requested during earlier committee discussion. First, it preserves parties’ ability to alter the effect of the protection by contract: the draft says the creditor protection applies "unless otherwise provided in writing by the settlor or settlors who transferred the property to the trust," making clear a mortgage, promissory note or other written contractual obligation can govern over the statutory protection if the settlors so provide. Second, drafters added retroactive language so the protection would apply to property conveyed into a trust before, on, or after the statute’s effective date; the amendment accomplishes that by stating it is "notwithstanding 1 V.S.A. §214," the statutory rule that normally limits retroactive application of legislation.

Committee counsel said the parties who had worked on the amendment viewed these changes as satisfactory. No formal vote was taken; the committee chair said the matter would remain open in case additional witnesses sought to testify and that the committee might vote at a later date.

What remains undecided from the committee record is whether any further drafting changes will be requested by additional witnesses. The committee explicitly left the item open for potential additional testimony and indicated a vote could occur at a later meeting.