When married couples own real estate in North Carolina as husband and wife, such ownership is called Tenancy by Entirety ownership. Tenancy by Entirety ownership provides protection from creditors so that a creditor must have a valid claim against both the husband and wife before the creditor can place a lien on the real estate. If the creditor only has a claim against the husband, for example, then the creditor cannot attach a lien against the real estate. Tenancy by entirety ownership can protect all real estate within North Carolina, no matter how many properties are owned by the married couple.
Transferring the real estate into a trust forfeits the Tenancy by Entirety protection so that if a creditor has a valid claim against the husband, the creditor could then attach a lien against the real estate within the trust and could stake a claim over the husband’s one-half interest of the real estate within the trust. For married couples who transfer real estate into a trust, I recommend looking into umbrella insurance to cover any unexpected lawsuits that could arise. For most people the likelihood of any creditor problems is miniscule, however.
Because of the loss of creditor protection, some married couples opt to leave the house outside of the trust until one spouse dies, at which time the remaining spouse can put the house into the trust. The downside to that approach is the risk that both spouses could die at the same time or one spouse may forget to put the house into the trust after the first death. Also, if a revocable trust is set up for estate-tax avoidance, it is sometimes crucial that the real estate be put into the trust before either spouse dies for estate tax purposes. If you wait until after a spouse dies to put the real estate in the trust, then the entire real estate could be included in the surviving spouse’s taxable estate, which could result in additional estate taxes imposed if the survivor’s estate then exceeds the total estate tax exemption that exists at the death of the surviving spouse.
Ultimately, it is a very beneficial thing to have the real estate in the trust to pass to your final beneficiaries because: 1) it avoids probate and achieves the other objectives of setting up a revocable trust, including disability protection, estate tax avoidance, special needs protection, and privacy; and 2) the trust provides great creditor protection for your final beneficiaries as it is a shield from any of your beneficiaries’ creditors as long as it is held within the trust. For these reasons, the majority of my clients proceed in placing their real estate into their revocable trust.
Mortgage and Insurance Issues
A mortgage or line of credit on real estate does not hinder the owner from transferring the property into trust. There are federal rules that protect a homeowner’s right to transfer real estate into a revocable trust regardless of any mortgage or line of credit on the house without any danger of accelerating (calling) the loan. Generally homeowner’s insurance does not need to be reissued when moving real estate into a trust as long as you remain trustee of the trust. It is not a bad idea to contact your insurance carrier to see if anything additional needs to be done after putting it in the trust.