Tenancy By Entireties Trust Under New Delaware Law

Tenancy by entireties is an effective, simple, and economical asset protection tool for a married Florida debtor where only one of the married spouses has creditor issues. The primary problem with entireties protection is that its effectiveness lasts only so long as the debtor is married to the same spouse. In the event of a divorce or the sudden death of the non-debtor spouse the remaining debtor spouse could find all his formerly entireties property exposed to creditors.

I have seen severance of entireties by death or divorce expose a debtor to garnishment and levy without warning by a pre-existing judgment creditor who somehow discovered that the debtor spouse’s assets had become exposed by the end of his marriage.

The Delaware legislature enacted this year a law providing for a “tenancy by entireties trust.” 12 Del. C. Section 3334.  Delaware law, like Florida law, recognizes a tenancy by entireties creditor exemption for both real property and personal property (cash, stocks etc.). The tenancy by entireties trust is designed to preserve the exemption in the event the marriage ends by divorce or death. The law applies to revocable living trusts typically used in estate planning where the married couple is the trustmaker and lifetime beneficiary of the trust. A married couple contributing entireties assets to the Delaware trust may continue to withdraw trust income and principal for their living expenses. Simply stated, the Delaware statute says that if you contribute property to the TET, which property is exempt entireties property at time of contribution, the property in the TET retains its entireties character for the lifetimes of both spouses. If the asset is entireties going in, it is always entireties even if there is a death or divorce.

One issue is whether a Florida court would apply the Delaware TET law in a Florida collection involving a Florida debtor. Because this law is so new, there are no cases on this issue, and it may be many years before this issue is litigated in Florida or any other state. I think the debtor’s position would be strongest if the debtor maintains some Delaware TET property in Delaware financial institutions. The more property is located in Delaware, the more the TET becomes anchored in Delaware law.