Update: Click here to read more about the law.
Tennessee is without a doubt one of the leading Trust Law jurisdictions, and Tennessee estate planners have more tools than ever before.
In 2000, Tennessee adopted the Uniform Principal and Income Act which provides certainty and safe harbor to Trustees with respect to trust accounting principles. In 2002, the Uniform Prudent Investor Act did the same with respect to the management of investments.
In 2004, Tennessee adopted the Uniform Trust Code (one of the first five jurisdictions to adopt it). Although the Trust Code did not diverge significantly from the common law, it made Tennessee Trust Law more accessible and cohesive. Among other things, the Trust Code gave Tennessee attorneys innovative methods such as virtual representation, Non-Judicial Settlement Agreements, and judicial and non-judicial trust modifications and terminations to deal with some of Trust Laws most vexing issues.
2007 brought a 360 year rule against perpetuities (which coincidentally I may be able to thank for my job!), self-settled asset protection trusts (innocuously named the Tennessee Investment Services Act), and updates to the now non-uniform Tennessee Uniform Trust Code which allowed beneficiaries to serve as their own trustee without jeopardizing the spendthrift protections granted to them by the trust.
2010 brought further Trust Code updates, but more importantly brought the Tennessee Community Property Trust Act. Read more about Community Property Trusts here.
In 2012, Tennessee retroactively repealed the Tennessee Gift Tax and gradually repealed the Tennessee Inheritance Tax through 2016. Read more here.
Finally, 2013 brought comprehensive reform to the (now ironically named) Tennessee Uniform Trust Code. As is discussed in a previous post, 2013’s reform essentially did three things: (1) enhance asset protection for beneficiaries, (2) protected Trustees by giving them far more discretion, and (3) allowed for directed trusts to allow trusts to segregate the roles of investment and trust administration. Another change enhanced the attractiveness of Tennessee Asset Protection Trusts. Read more here.
The Reveal. So. . . What’s next? It looks like Tennessee Attorneys will have yet another arrow in their estate planning quiver come July 1, 2014: The Tenancy by the Entirety Joint Revocable Trust. Click here for a summary of HB2068/SB1907.
Eight other states have specifically authorized such joint trusts. Click here to read more.
A Tenancy by the Entirety Joint Revocable Trust (“TE Trust”) will be immensely useful. Sure, some clients will be more appropriate for a Community Property Trust to get a double basis step-up, but many and more could use the asset protection advantages of a TE Trust. Generally, whether property is held as tenancy by the entirety is a question of intent and is most often seen with the family home. Now practitioners can take the opportunity to protect their clients (and the surviving spouses most of all) by removing any doubt.
This ain’t your mama’s tenancy by the entirety either. . .
Just like other property held as tenants by the entirety, assets held in the TE Trust will pass free from the creditors of first spouse to die.
What about the creditors of the survivor? One that is familiar with common law tenancy by the entirety would expect that the property would be available to joint creditors and to the creditors of the survivor. However, the law contains a curious provision:
(c) [. . .] To the extent that the surviving spouse remains a beneficiary of the trust and has the power, exercisable in the individual capacity of the surviving spouse, to vest in the surviving spouse individually title to the property that was immune from the claims of the separate creditors of the decedent under subsection (b), the property shall be subject to the claims of the separate creditors of the surviving spouse.
Thus, the law allows some portion of the TE Trust to become irrevocable upon the first death. That portion of the trust would be free even from the creditors of the survivor!
This is no do-it-yourself project either. Care must be taken to ensure that upon funding, the intricacies of the notice requirements in the statute have been followed in order to get the protections allowed by the statute.
Practitioners, update your forms and get ready.
Advisors, keep this in mind for your clients that have any possibility of asset protection issues (i.e., Dr. Soandso).
Additionally, the Bill was amended to allow more small estates to qualify for probate under an abbreviated probate procedure by affidavit–which is significantly cheaper. Currently, only estates less than $25,000 would qualify. Under the amended Bill, that number is increased to $50,000.