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Senate Judiciary hears bill to preserve tenancy-by-the-entirety protections when spouses place property in trusts
Summary
Senate Bill S.3 would allow spouses who place property they own as tenants by the entirety into certain trusts to retain creditor-protection and to avoid probate; testimony clarified the bill’s scope, eligibility conditions and limits, and committee members raised creditor and policy questions.
Legislative counsel and probate and trust section witnesses told the Senate Judiciary Committee on Feb. 7 that S.3 would preserve the creditor-protection feature of tenancy by the entirety when spouses transfer that property into a trust so long as both spouses remain current beneficiaries of the joint or respective trusts. "This is about a, transfer of a particular type of property into a trust," Eric of the Office of Legislative Council said, explaining that the proposal addresses the intersection of tenancy-by-the-entirety ownership and trust ownership.
Witnesses described the principal goal as preserving two estate-planning benefits simultaneously: the creditor protection historically accorded to tenants by the entirety and the ability to avoid probate administration by holding property in a trust. As one witness summarized, tenancy by the entirety operates so that spouses each hold an undivided interest in property, which creates creditor protection for the non‑tortfeasor spouse; the bill seeks to maintain that protection if the spouses place the property into a trust and remain beneficiaries during their lifetimes.
Committee members pressed on policy consequences and limits. Senators asked whether the bill would shield beneficiary interests from creditors of the settlors and whether protection would continue after the death of a spouse. Witnesses and drafting counsel clarified limits in the draft: the spouses must be current beneficiaries of the trust (joint or separate trusts) to retain protection, the protection ends upon dissolution of marriage, and the tenancy-by-the-entirety protection does not expand existing mortgage or contractual rights. The committee heard that similar statutes exist in other states and that the bill was intended mainly to allow spouses in high-liability occupations to avoid probate without losing tenancy-by-the-entirety protections during their lifetimes.
The hearing included detailed questions about mortgage due-on-sale clauses and federal law (Garn-St. Germain) that can limit lenders’ ability to call loans upon property transfers to heirs or family. No committee vote was taken; sponsors and witnesses said they would refine drafting and consider clarifying language about retroactivity and lender protections raised by the Vermont Bankers Association.
Ending: Committee members signaled interest but requested clarifications and possible draft revisions on retroactivity and the bill’s interaction with existing mortgage and contract law; no formal action was taken at the hearing.
