In Re Quaid, 2011 US Dist Lexis 132299, (D. Ct. M.D. FL Nov 15, 2011) the United States District court reversed the decision of the bankruptcy court, Judge Briskman. Debto’s spouse had set up a trust. Funds were later transferred from a tenants by the entireties account to the trust. Non-debtor spouse died. The district court held that the trust was not a self-settled trust and the spendthrift clause shielded the asset from the bankruptcy trustee. The deceased spouse had the right to withdraw funds and revoke the trust, so the debtor was not the settlor, so the spendthrift clause controlled.

So what really happened here? We know that husband and wife can own property as tenancy by the entireties. This means that a creditor of one spouse cannot reach or split the asset held as tenants by the entireties. But the tenancy ends upon death or divorce. So if one spouse passes away, the surviving spouse becomes the 100% owner of the asset which is now subject to that person’s creditors.

In Quaid, Mr. and Mrs. Quaid transferred over $300,000 from a tenancy by the entireties bank account into a trust. Only one party had control of the trust, causing a loss of tenancy by the entireties protection, the court observed. Tommie, the wife, had set up the trust originally and was the only person who could withdraw or revoke funds. Upon her death, the debtor and his son became co-trustees. A $3,000,000 judgment was entered against the surviving spouse, Mr. Quaid. If he had been the sole owner of the funds, the assets would have been subject to his creditors. Since the funds were not in a self-settled trust, the district court held that the bankruptcy trustee could not reach these funds. The court reviewed Florida law and discussed the characteristics to determine whether or not a trust is self-settled.

Note there was no discussion of a fraudulent transfer issue, but under Florida law cannot fraudulently transfer property held as tenants by the entireties.