"Merry Christmas!" boomed Mike, as he and Betty greeted their attorney upon entering the office. They stamped snow from their boots and gratefully accepted steaming cups of coffee. "Snow’s pretty," commented Betty, "but it’s a pain."

Their attorney nodded agreement. "I appreciate your perseverance in coming to the office."

"Need to get this done," replied Mike. "Been promising Betty I’d do this for years."

The trio settled around the conference table for a continuation of their estate planning discussion. After going over general tax planning two meetings ago, and planning for IRAs in November, they had agreed to return for a discussion of planning for homes. Mike and Betty’s house is worth about three-quarters of a million dollars. Their entire estate is valued at approximately $2 million, and, without tax planning, the survivor’s estate would pay over $100,000 in estate taxes.

Their attorney had advocated a combination of trust planning using two living trusts, and IRA planning using strategic beneficiary designations, to avoid the tax while providing maximum flexibility. "So," says Mike, after reflectively savoring a sip of piping hot java, "what do we do with this house?"

"Houses are unique," replies their attorney. "A house is not just an asset; it’s where you sleep at night. A financial planner classically would call it ‘shelter,’ not an investment. People think about their houses differently than they would about a CD or mutual fund with the same value. That’s especially true of ‘depression babies,’ folks that grew up during the Great Depression and saw friends and family lose their homes."

Betty nods. "My folks lost their home twice during the Depression, and it’s always been important to me to have the house secure."

"Basic trust planning doesn’t always make sense with houses," says their attorney. "The classic tax avoidance strategy would be to transfer the house to one or the other of your two trusts, or half to each trust. The problem with that approach is that you lose judgment protection.

"In Maryland, property owned by spouses as ‘tenants by the entirety’ is exempt from the claims of the creditors of either spouse. Your house technically is not owned by either of you, or even by both of you. It is owned by the marital unity, ‘the two shall be one flesh,’ as the saying goes.

"If you put that property in a trust, it’s not clear in Maryland whether you keep or lose that protection. Some of my clients are reluctant to take that chance, however slight. Others aren’t worried, and put the property in one or the other trust."

"What happens if you leave it alone," Mike queries.

Their attorney replies, "If you leave the house in joint names, it will be owned by the two of you during life and the survivor when the first of you dies. The survivor would have no spouse to create the creditor protection, so there would be no reason then not to put the house in the trust of the survivor.

"The problem then is losing the full benefit of the tax avoidance available in the estate of the first to die. You said your estate is worth $2.0 million. Remember from our October meeting that you can each shelter $1.0 million from Maryland estate tax by holding assets in trust for the survivor at the death of the first to die. So, if we fully fund two trusts, we can eliminate the entire tax.

"If you keep the house out of the trusts, then you might end up putting less than the full amount of the first spouse’s exemption in the trust of the first spouse to die. For example, if you split the remaining $1.25 million equally, the trusts would each hold just over six hundred thousand dollars. When the first spouse died, the house would become part of the survivor’s estate, and that estate would be worth nearly $1.3 million, the sum of the house value and the other assets in the survivor’s trust.

"The tax on $1.3 million would be nearly $52,000. So, that’s the cost of judgment protection for you. A $52,000 tax bill for your kids."

"That’s an expensive insurance policy," observes Mike. "We live simple lives and don’t do risky things, so I think we could probably put the house in one of the trusts."

Betty looks uncomfortable. "We need to think about this," she says. Mike nods, knowing her concerns on this topic. The meeting ends as Mike and Betty promise to get back to their attorney shortly with a decision on the overall contours of their planning.