The Best of Both Worlds

When setting up a trust-based estate plan, married couples* in Hawaii have always had to decide what to do about their real property that was held in the special tenancy known as “Tenancy by the Entirety,” or “T-by-E” for short. That was because T-by-E property enjoys special protections, including protection from either spouse’s individual creditors. So if a couple owns property in this manner, and just one of them gets sued or incurs a debt, the creditor cannot place a lien on the T-by-E property, or force it to be sold to pay the debt. There are other special properties of T-by-E ownership as well, and together these properties generally make T-by-E the preferred form of property ownership for most married (or civil union) couples. In fact, in Hawaii, ALL kinds of property – even personal property – can be held as a Tenancy by the Entirety.

But in order to put such property into a trust, and gain all of the benefits that trust planning provides (avoidance of probate, privacy, planning to use both spouse’s tax exemptions fully, providing a smooth transition in the event of death or incapacity), the owners had to give up the benefits conferred by the “T-by-E” tenancy. So couples owning T-by-E property have always had to choose between keeping their property in T-by-E (and risking a probate if they should die at the same time, or if the survivor should die before transferring the property into his or her trust, or creating a ‘Transfer on Death Deed’), and putting it into their trust(s) and losing the special benefits of T-by-E ownership.

But now they no longer have to make such a choice. And if you are in this situation, and previously set up a trust but elected not to put your home or other T-by-E property into your trust (or separate trusts), it’s time to reconsider that choice.

Why the change? Because this summer, our State Legislature passed a new law, which allows T-by-E property to be placed into the owners’ joint revocable trust (or, if they have separate trusts, 50% into each spouse’s or parther’s trust), and KEEP all of the protections afforded by the T-by-E form of ownership. To get the benefit of this new law, certain formalities must be complied with. If you put your property into a trust before July 2012, then you will have to transfer it BACK to your names as a “Tenancy by the Entirety,” and then put it back into the trust, to regain the protections of T-by-E. (But that’s not difficult; both deeds can  be prepared at the same time.) It may be necessary to change the name of your trust, and there is certain language that must be included in the deed in order for the new law to apply.

So, if you have a trust, or have been thinking about getting one, and also own real property here in Hawaii (or in one of the other states that recognizes the T-by-E form of ownership), it is definitely worth looking into this new law that allows you to now have “the best of both worlds.”

*This article also applies to civil union partners (who enjoy all of the legal rights of married couples in Hawaii), and those in “reciprocal beneficiary” relationships.

Hawaii Asset-Protection Trusts, Rev. 2.0

Well, despite having royally screwed it up the first time, it seems the state legislature has finally put together asset-protection trust legislation for Hawaii that is not altogether horrible. Although not quite in the league of Nevada, Alaska or South Dakota, Hawaii’s new domestic asset protection trust will no doubt be appealing to many who would like to have some home-grown protection for their local real property, and perhaps for other assets as well.

The new, improved “Permitted Transfers in Trust Act,” effective July 1, 2011, provides a welcome alternative for Hawaii residents, and non-resident owners of Hawaii real property, who are looking to shelter some of their assets from future creditors. Unlike the prior version of the law (which had much in common with many “1.0” versions of software, i.e., lots of bugs), the new law allows real estate to be put into a Hawaii asset-protection trust; eliminates the requirement that the trust property comprise no more than 25% of the settlor’s net worth; and – most significantly – repeals the 1% tax imposed on transfers into these trusts, which had rendered the prior law “dead on arrival”.

The new law allows the creation of an irrevocable trust, the corpus of which will, after two years, be protected from all new claims against the settlor except for  specified exceptions: alimony or child support; property division on divorce, IF the transfer into trust was made during the marriage or in some cases, within 30 days prior to it; personal injury or property damage claims arising from acts that occurred before the transfer into trust; debts secured (expressly or impliedly, not exactly sure how that will be interpreted) by trust property; and tax liabilities.

The settlor may retain significant powers and rights, including the power to veto distributions, to serve as investment advisor, to replace a trustee or advisor, a testamentary limited power of appointment, the right to all income (or to a unitrust amount not to exceed 5% annually), and the right to distributions in the discretion of the trustee, without losing the desired creditor protection.

Even if creditor protection is not required or desired, a trust that conforms to the statute may be of perpetual duration – thus, obtaining all of the benefits of a trust structure for multiple generations (i.e., a dynasty trust).  Specific allowance is made for the necessary provisions of a QPRT or GRAT, so that those types of trusts can also take advantage of the benefits conferred by the new statute. And, property held by a married couple as ‘tenants by the entirety’ will not lose the benefits of that tenancy when it is put into one of these trusts.

If you are concerned about the vulnerability of your property – including what we all hold so dear, that “little piece of Hawaii” that is our home or our living, in the form of business or rental property – to potential, future claims of creditors, OR if you would like to create a permanent legacy for your family in the form of a dynasty trust, that can carry the benefits of your hard work or good fortune through many generations, you might want to consider setting up a Hawaii asset-protection trust.   It is never too soon to get that two-year ‘statute of limitations’ running!

You can’t fix the roof when it’s raining…

… and you can’t do much to protect your assets from creditors after you’re already in financial trouble. But just like the fellow who never thought about his leaky roof when the sun was shining, many of us never consider our potential vulnerability when things are hunky-dory.  With a little planning during sunny times, though, your assets can be made much less vulnerable to judgments resulting from unanticipated lawsuits, downturns in the market leaving you “upside down” in real estate investments (and thus subject to deficiency judgments), or unexpected medical bills.

There are some viable asset protection mechanisms available, but the key is to take steps to protect your assets when you are not in, or even anticipating, any financial trouble.  If you are already in trouble with the tax man, falling behind in your payments, or have just been involved in a car accident, it’s probably TOO LATE to obtain any substantial protection.  Any attempt to shift ownership or control of assets at that point can probably be set aside by a creditor as a “fraudulent transfer”.  In most states, it is safest to take asset protection steps at least