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If a married couple transfers their tenants by the entireties (TBE) property to a joint revocable trust, have they forfeited its creditor protection shield? That’s the question at the heart of two recent Florida bankruptcy court rulings that came to opposite conclusions!

In In re Givans the court concluded that TBE property’s creditor protection shield is lost when it’s transferred to a joint trust. And in In re Romagnoli the court came to the opposite conclusion, ruling that TBE property’s creditor protection shield is not lost when it’s transferred to a joint trust. But don’t try looking for direct legal conflicts between these two rulings, the judges essentially talk past each other … which got me thinking about the power of “framing.”

Frame or be Framed

If you think cases are decided solely on the basis of cold hard logic, you’re kidding yourself. Unconscious biases drive much of our decision making (which I’ve reported on as applied to sentencing patterns, bench trials, and settlement negotiations). These biases can play a dominant role in how even the most abstract and non-emotional issues are decided (including how bankruptcy judges should apply Florida’s confoundingly amorphous TBE law).

In my opinion, how the Givans and Romagnoli cases were decided is largely attributable to a single variable: the framing effect, a cognitive bias that leads people (including judges) to react to the same choice in different ways depending on how it’s presented. Framing can be an incredibly powerful advocacy tool (see hereherehere).

Case Study No. 1

In re Givans, 623 B.R. 635 (Bankr. M.D. Fla. Sept. 30, 2020)

In this case the court framed the question as whether the debtor and his wife could “have it both ways.”

  • Frame #1: Should debtors be allowed to “have it both ways”?

In other words, could this couple retain the creditor-protection benefits of TBE property while also reaping the estate planning benefits of putting their property in trust? Well, there’s a reason why we usually say you can’t have it both ways: it strikes most of us as somehow unfair. Not surprisingly, when framed this way the court concluded “no,” debtor can’t have it both ways.

Property held by spouses as TBE possesses six characteristics: (1) unity of possession (joint ownership and control); (2) unity of interest (the interests in the account must be identical); (3) unity of title (the interests must have originated in the same instrument); (4) unity of time (the interests must have commenced simultaneously); (5) survivorship; and (6) unity of marriage (the parties must be married at the time the property became titled in their joint names).

The court concluded the debtor and his wife forfeited the creditor-protection benefits of their TBE property when they transferred this property to their joint trust because a trust can’t be married, so the unity of marriage was lost, which means the property stopped being TBE once it hit the trust.

The Trustee Deed provides the Debtor and [his wife] as Trustee of the Trust own the Property, not as “husband and wife.” Under trust law, a trustee holds only legal title to trust property while equitable title rests with the beneficiary. Once the Debtor and [his wife] transferred the Property to the Trust, they no longer owned the Property in their individual capacity. They held bare legal title as Trustee for the Trust. Because a trust is not a married individual, the Trust cannot own the Property as tenants by the entirety. The unity of marriage does not exist as to the Trust.

In other words, the debtor and his wife can’t have it both ways.

By transferring the Property to the Trust, the Debtor and [his wife] gave up certain legal rights in exchange for others. They lost the benefits tenants by entirety ownership afforded, such as protection of the Property from certain creditors. In exchange, they gained other benefits provided by the Trust, such as circumventing probate proceedings. They could directly transfer the Property to their children without the expense of going through probate. And because of the Trust, their children now have a present equitable interest in the Property as beneficiaries.

Debtor and [his wife] cannot have it both ways. The Property cannot be held by the Trust, subject to the terms of the Trust (which creates an interest for their children), and also be held as tenants by entirety, subject to common law and protected from creditors’ claims. In 2014, they created the Trust and transferred the Property to the Trust. By doing so, they lost ownership status as tenants by the entireties.

Case Study No. 2

In re Romagnoli, — B.R. —, 2021 WL 2762812 (Bankr. S.D. Fla. June 30, 2021)

In this case the court sidestepped the whole can-you-hold-TBE-property-in-trust controversy and instead focused on the one question that really matters in a bankruptcy proceeding: is the property exempt from the claims of creditors? If the answer is no, you’re done, no need to get tangled up in esoteric property law questions.

  • Frame #2: Is TBE property in a joint revocable trust subject to creditor claims, regardless of whether a trust can hold TBE property?

Framed this way, the debtor won. And this time around it was the bankruptcy trustee who got lectured by the judge, not the debtor.

The Trustee expressed frustration that the Debtor has exempt assets worth collectively over $1.4 million that are exempt from the Debtor’s creditors. But those exemptions are statutory and if the Trustee wants to reach these assets, she must reach out to the Florida legislature.

What happened?

If you’re a trust law geek (and who isn’t!), “how” the court worked through the interplay between federal bankruptcy law and state trust/property law is way more interesting than the ultimate conclusion. So here goes.

We start from the premise that bankruptcy creditors are only entitled to whatever property rights debtors have — no more or less. Same goes for whatever interests a debtor has in trust.

Where the debtor’s interest is in a trust, the trustee acquires only those interests that the debtor had in the trust. See In re Raborn, 470 F.3d 1319, 1323 (11th Cir. 2006) (“[T]he [bankruptcy] trustee succeeds only to the title and rights in the property that the debtor possessed.”)

In this case the debtor had only three possible interests in the trust: as co-settlor, as co-trustee, or as beneficiary.

As a co-settlor of a joint revocable trust, under F.S. 736.0602 the debtor could only remove those assets of the trust he had individually contributed. Since the TBE property was owned jointly by the debtor and his wife (and thus jointly contributed to the trust), debtor couldn’t pull this asset out unilaterally, which means his creditors couldn’t unilaterally do so either.

To the extent that the [TBE property] is, in fact, held in the [Joint] Trust, because it was contributed as TBE and not community property, the Debtor and his Wife could only jointly remove the stock from the [Joint] Trust.

Result: Creditors stepping into the shoes of the debtor as a co-settlor of the joint revocable trust can’t unilaterally extract jointly contributed property, such as TBE property, to satisfy their claims. Strike one for creditors.

As a co-trustee, under the terms of the trust agreement the debtor could only sell or otherwise dispose of trust property, including the TBE property, with the consent of the other co-trustee, i.e., the debtor’s wife (the trust agreement in Givans had an identical provision). Which means the debtor’s creditors, stepping into his shoes as a co-trustee, could also only sell or otherwise dispose of this property with wife’s consent as co-trustee.

Thus, even if the Trustee could exercise the power of a co-trustee under the [Joint] Trust, the Trustee has not cited to any case that suggests that 11 U.S.C. § 363(f) gives the Trustee, acting with the authority of a co-trustee of a trust, the authority to bypass the provisions of the [Joint] Trust Agreement in seeking to sell property in the [Joint] Trust.

Result: Creditors stepping into the shoes of the debtor as a co-trustee can’t unilaterally sell or otherwise dispose of TBE property from the debtor’s joint revocable trust if the trust agreement requires the other co-trustee’s consent. Strike two for creditors.

As a beneficiary of a revocable trust, the debtor’s property interests in the trust are subject to creditor claims to the same extent they would have been if not in the trust. If the TBE property was creditor protected before it went into the trust, it stays creditor protected after in went into the trust. Here’s how the court explained this final nail in the coffin for the creditor’s claim against the TBE property:

[A]s the Trustee acknowledged in her objection, the ability of the Trustee to reach the Debtor’s beneficial interest is limited by applicable nonbankruptcy law. Fla. Stat. § 736.0505 states that “(1) whether or not the terms of a trust contain a spend thrift provision, the following rules apply: (a) The property of a revocable trust is subject to the claims of the settlor’s creditors during the settlor’s lifetime to the extent the property would not otherwise be exempt by law if owned directly by the settlor.”

… Assuming the [TBE property] is in the [Joint] Trust, if not in the [Joint] Trust it would be TBE property not subject to the claims of the Debtor’s creditors unless the creditors were joint creditors.

In sum, there is no theory under which the Trustee can reach the assets of the [Joint] Trust.

Result: Creditors stepping into the shoes of the debtor as a beneficiary of his joint revocable trust can’t assert claims against trust property if this same property would have been shielded if owned by the debtor directly, as is the case for TBE property when both spouses aren’t joint debtors. Strike three for creditors, debtor wins!

What’s the take away?

First, no estate planning client wants to be a test case. No matter what your personal opinion may be on the pros and cons of joint trusts (and there are really smart people who think these trusts are a good idea), if you’re working with a married couple you need to think long and hard before advising them to transfer their TBE property to one of these trusts in light of the conflicting messages coming out of the Givans and Romagnoli cases. Some states have eliminated this uncertainty by statute. See, e.g., MO Rev Stat § 456.950 and 765 ILCS 1005/1c. Florida hasn’t gone that route. In the absence of that kind of legislation, why risk it?

Second, as trusts and estates litigators we view the world through the lens of Florida property law. Framing a TBE-in-joint-trust case in those terms proved fatal for the debtor’s exemption argument in the Givans case. By contrast, one would expect most bankruptcy judges to view the world through the lens of the U.S. Bankruptcy Code. Framing a TBE-in-joint-trust case in those terms was a winning strategy for the debtor’s exemption argument in the Romagnoli case. Two cases … same operative facts … opposite results. Behold the power of framing!