New [section] 736.0505(3) assures tax/asset protection of inter Vivos QTIP trusts.

AuthorNelson, Barry A.
PositionReal Property, Probate and Trust Law

Effective July 1, 2010, new F.S. [section] 736.0505(3) allows married couples to take advantage more easily of one another's estate tax exemptions and, at the same time, to enhance asset protection planning. (1) Before enactment of the new statutory provision, it was unclear whether assets contributed to an inter vivos QTIP trust by one spouse that pass in trust for the benefit of the initial donor upon the death of the donor's spouse would be subject to the claims of the donor spouse's creditors, and, therefore, includible in the donor spouse's estate under I.R.C. [section] 2041. (2) The new statute clarifies the asset protection and estate tax benefits of inter vivos QTIP trust planning. As described below, inter vivos QTIP trust planning can be enhanced if trusts are created by both the husband and wife, but only if the two trusts are not reciprocal. (3)

Example

The following example illustrates this technique: Bob and Judy, both attorneys, have been married for 28 years and have four children. Bob and Judy have accumulated a net worth of approximately $13.5 million, of which $3.5 million is equity in their Florida homestead, and $10 million is invested in a joint brokerage account (titled "tenants by the entirety"). Assuming estate taxes are reinstated and the estate tax exemption amount stays at $3.5 million (its 2009 level), Bob and Judy are significantly underutilizing their estate tax exemption amounts. Exhibit 1 shows estate taxes due upon the death of Bob and Judy and the amount of their assets that would be protected from their creditors during their joint lifetimes (assuming they remain married to one another) and upon the death of the first spouse. All jointly held assets pass outright by operation of law to the surviving spouse.

Understanding that Bob and Judy's current estate plan fails to take advantage of the estate tax exemption amount of the first spouse to die, their CPA suggests that Judy's assets be retitled so Bob has $5 million in his revocable trust (thereby avoiding probate and taking advantage of his estate tax exemption if he dies first), and Judy has $5 million in her revocable trust. Each of their revocable trusts directs that an estate tax-exempt gift of the greatest amount that can pass free of estate tax be used to create a trust for the surviving spouse; this trust is intended to pass free of estate tax upon the death of the surviving spouse.

Bob and Judy's desire is to maintain access to all family wealth until the survivor of them passes away, but they do not mind having a portion of the funds held in trust for the surviving spouse, as long as the surviving spouse can serve as a co-trustee or as sole trustee during his or her lifetime, and as long as distributions can be made to the surviving spouse based upon an ascertainable standard (such as for his or her health, maintenance, and support).

Bob and Judy want to confirm their CPA's recommendation, so they consult with their estate planning attorney, Lauren, whose practice combines estate planning with asset protection advice. Lauren explains that converting $10 million of their assets from tenants by the entirety by dividing those assets equally between their respective revocable trusts changes the character of the assets from those that are protected from potential creditors (as long as the debt was not a joint debt of Bob and Judy, and both were living and married to one another), and subjects the entire $10 million to claims of their creditors because assets in a revocable trust are unprotected. (4)

Exhibit 2 shows estate taxes due upon the death of Bob and Judy and the amount of the assets that would be protected from their creditors during their joint lifetimes and upon the death of the first spouse, assuming they follow their CPA's suggestion. Bob and Judy ask for alternatives that would allow each of them to take advantage of their estate tax exemptions while at the same time not subjecting their assets to exposure to the claims of future creditors.

F.S. [section] 763.0505(3) to the Rescue

The new statute provides as follows:

(3) Subject to the provisions of s. 726.105 [This is a reference to Florida's fraudulent...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT