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Question:

We are elderly married Massachusetts residents, and we own our home tenants by the entirety. We would like to put our home in a revocable shared living trust, so the house can pass from last the survivor to our two adult children as beneficiaries of the trust and avoid probate. (The adult children will sell the house, divide the proceeds equally, and then dissolve the trust.) I am writing my own DIY “Shared Living Trust” document from the NOLO Law Book, Make Your own Living Trust, by David Clifford (16th ed).

His recommendation for those of us in common law states is to transfer tenancy by entirety property or joint tenancy property to tenants in common in equal shares prior to transferring he property to trust. He reasons that this will break the joint tenancy. Then one must prepare a second deed transferring the property from us as tenants in common into the trust. He further claims that if one wants to have the property go to the survivor, consider leaving the property in joint tenancy rather than putting it in our trust.

My questions is whether this maneuver is necessary before moving the house into the trust. There will only be one Schedule (A) of jointly held property containing only the Home and a JTWROS brokerage account. All other financial assets are titled jointly with alternate beneficiaries and will be left out of the trust.

Response:

I don’t see the advantage of first changing ownership from tenants by the entirety to tenants in common. It shouldn’t make any difference in terms of a step-up in basis — in either case you should receive a one-half step-up when the first spouse dies — or in estate tax planning if that’s one of the reasons for creating the trust. We often advise younger couples to put off placing their homes in trust because it can complicate matters a bit if they were to refinance (less of an issue with today’s interest rates), but that’s less likely with older couples. So I’d go ahead and deed the house directly to the trust.

But let’s take a few steps back. Joint tenancy and tenancy in common are two different ways to own real estate. The essential difference is what happens when one owner dies. In a joint tenancy, the property goes to surviving joint owner or owners. With a tenancy in common, the interest of the deceased owner passes to their estate, requiring that the estate be probated. Tenancy by the entirety is a form of joint ownership that’s only available to married couples. It provides creditor protection in that the property cannot be sold to satisfy the debts of one spouse without the cooperation of the other spouse. In addition, while any joint owner may change a joint tenancy to a tenancy in common without the cooperation of the other owner, that’s not the case of property owned as tenants by the entirety.

With that said, the next question is what’s your purpose in creating the trust? Probate will not be necessary when the first spouse passes away in any case. A trust can also prevent the necessity of probating the estate of the second spouse to pass away.

Another purpose of the trust may be to reduce or eliminate the Massachusetts estate tax. Massachusetts is tied with Oregon for having the lowest estate tax threshold in the United States of $1 million. With housing prices here, many estates exceed this level. If the trust is designed for estate tax planning, married couples can protect $2 million from estate taxation. There are currently bills before the Massachusetts legislature to raise the threshold to $2 million or $3 million, but so far the House and Senate have not been able to come to agreement on a tax relief bill.

Depending on how the trust is written, there may be different capital gains tax results for your children. If the trust is not designed for estate tax planning, the house will probably receive a complete step-up in basis upon the death of the surviving spouse, meaning there will be no capital gain or tax when the house is sold. However, if the trust is designed to shelter half the value of the house from estate taxation, then it will receive a one-half step up when the first spouse passes away and another one-half step up when the second spouse passes away. If there has been a change in market value for the home in between the two deaths, this could result in some capital gain and taxes upon the house’s sale. It’s something of a trade off between estate taxes and taxes on capital gains. (It’s a bit too wonky for this post, but it’s possible through the use of QTIP trusts and QTIP elections to obtain different results for Massachusetts and federal tax purposes and optimize the tax savings.)

In either case, however, I don’t see any advantage to the two-step deed process proposed in the book you cite.

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