House approves bill preserving creditor protection when spouses transfer property into trusts

The Vermont House of Representatives on April 10 approved S.3, an act to allow property owned by spouses as tenants by the entirety to retain creditor-protection when it is transferred into a trust. The measure passed third reading by roll call, 143-1.

The bill aims to preserve the existing creditor-protection benefit that married couples receive when they own real property as tenants by the entirety, even after placing that property in a trust for estate-planning purposes. The member from Brattleboro, reporting for the Judiciary Committee, described the change as preserving spouses’ protections when a trustee holds legal title to the property.

The Judiciary Committee reported S.3 out with a committee vote of 9-0-2. The Ways and Means Committee also reviewed the bill and recommended third reading. The member from Brattleboro summarized the bill by explaining the interplay of trust and property law: settlers, trustees and beneficiaries, and the special status of tenants by the entirety in Vermont. "If you listen carefully, madam speaker, you may be able to get 1 or 2 questions right on the bar exam," the member from Brattleboro said in explaining the background. The member concluded by asking colleagues for their support.

Under current practice, transferring tenancy-by-the-entirety property into a trust can end the protective status because the trustee, not the spouses, becomes the legal owner. S.3 adds a new subsection to the Vermont trust code (14 V.S.A. §505) so that property held by spouses as tenants by the entirety retains creditor protection if the statutory criteria are met. The bill sets out conditions that must be satisfied for the protection to continue, including that both spouses remain beneficiaries of the trust and certain requirements for joint trusts and revocation. The bill also allows spouses to opt out of the protection in writing and makes the protection inapplicable after a divorce.

The sponsor told members the bill applies whether the transfer to a trust occurred before, on, or after the act’s effective date; Section 2 provides the act takes effect on passage. The committee reported testimony in favor from the Vermont Bankers Association (its president), the Office of Legislative Counsel, and the Vermont Bar Association probate and trust law section (chair), according to the member reporting to the chamber.

When the House took the question for third reading, a roll-call vote was requested and conducted. The clerk announced the results: 143 yes, 1 no. The clerk then ordered third reading. After the vote, House leadership conferred and the House recessed until the fall of the gavel at 2:45 p.m.

Votes at a glance S.3 — An act relating to transfer of property to a trust: Third reading approved (roll call) 143 yes, 1 no. Outcome: approved. Committee votes: Judiciary 9-0-2; Ways and Means recommendation recorded.