In July of 2010 the Florida Legislature made asset protection planning a whole lot easier for married couples in Florida. Florida Statute section 736.0505(3) clarifies a previously unresolved issue: Whether assets contributed by one spouse (“settlor”) to an inter vivos QTIP trust for the benefit of the other spouse (“beneficiary”) are protected from claims of creditors in the event that the beneficiary predeceases the settlor and assets held in trust revert to the settlor.
Section 736.0505(3)(b) states that in the event the beneficiary predeceases the settlor, assets contributed to the trust shall “be deemed to have been contributed by the settlor’s spouse and not by the settlor.” This provision effectively mandates that an inter vivos QTIP trust is not to be considered a self-settled trust for purposes of asset protection planning, in the event that the beneficiary predeceases the settlor.
Rather, when the beneficiary of a inter vivos QTIP trust predeceases the settlor, the trust assets can be disposed according to the testamentary power of the beneficiary, or the trust can be structured so that the trust corpus will be converted into an asset-protected spendthrift trust in favor of the settlor.
One interesting aspect to this asset protection planning device is the significant estate tax advantages it creates for married couples. While married couples can achieve a certain degree of protection from creditors by holding assets as tenants by the entirety, the tenants by the entirety mechanism gets very unfavorable estate tax treatment. The alternative available prior to the enactment of Florida Statute section 736.0505(3) was the creation of revocable trusts, which created significant estate tax advantages but exposed marital assets to the claims of future creditors.
Section 736.0505(3) combines the asset protection component of holding assets as tenants by the entirety with the estate tax advantages of revocable trusts, making the inter vivos QTIP trust an extremely attractive tool in the arsenal of married couples with unprotected assets. As is the case with all asset protection planning tools, laws regarding fraudulent conveyances apply to the creation of QTIP trusts, so it is wise to make use of this planning strategy before it is needed. Moreover, QTIP trusts cannot be reciprocal between spouses. See 26 C.F.R. §25.2523 (f)(1)(f), Ex. 11. To that end, Arizona has enacted statutes that characterize certain spousal trusts as non-reciprocal. See, e.g., Arizona Revised Statute §14-10505(E).
In addition, while section 736.0505(3) resolves both estate tax and asset protection issues for married couples, it leaves some questions unanswered. Such questions include how inter vivos QTIP trusts will be treated in the event of divorce. Nonetheless, section 736.0505(3) is an effective and desirable asset protection tool because it (i) reduces estate taxes, (ii) protects trust assets from claims of future creditors of either spouse, and (iii) allows the trust settlor to control the distribution of trust assets.
Many people who cratee a Revocable Living Trust fail to understand what happens to the trust after they are gone (for more information about types of trusts, see Let’s Talk Trusts). One of the most common misconceptions is what happens to a Revocable Living Trust after the trustmaker or trustor, or the person who crateed and funded the trust, dies. A lot of successor trustees believe, that as long as the trust is fully funded, all that they need to do is collect an inheritance check, pay some taxes, and that is it. However, it really does not take a lot of common sense to figure out that there needs to be more than that, since you are closing and cleaning up the financial affairs of a person’s entire life.a0 (For more on trustee’s duties, See Duties of A Trustee).