Stuart A. Rader, Esq.
A recently enacted provision of the Florida Trust Code provides for an innovative asset protection planning technique using irrevocable trusts creating lifetime interests for spouses.  Generally, current Florida law does not allow a grantor to create a trust for the grantor's benefit that is insulated from the claims of the grantor's creditors. Florida deems these self settled asset protection trusts as contrary to public policy. Fla. Stat. 736.0505(1), states that a creditor of a trust grantor "may reach the maximum amount that can be distributed to or for" the grantor's benefit.

The new law creates a limited exception to this rule at Fla. Stat. 736.0505(3).  It provides that in absence of a fraudulent conveyance at the time of funding, if a grantor creates an irrevocable trust:  (a) for a spouse's sole benefit for the remainder of his or her life; and (b) that retains a contingent life interest in trust for the grantor's sole benefit after the spouse's death; then the trust property will be shielded from the claims of the creditors of the spouse and the grantor.  

The following example illustrates this technique under this new statute. Wilma, a 55 year old surgeon and Harry a 58 year old school teacher have been married for 10 years. Wilma has children from a prior marriage. Harry has no children. Wilma visits her estate planning attorney and expresses the following goals:

1. Minimize estate taxation upon Harry's and her death;
2. Protect assets from potential future creditors (especially since she currently has no medical malpractice insurance);
3. Financially provide for Harry if she predeceases him; and
4. Smooth post death administration for her children.

Wilma's attorney advises her that a new Florida statute creates an asset protection planning and transfer of wealth opportunity for individuals in high liability risk occupations such as surgeons and it is worth considering when there is a low risk of a subsequent divorce.  He explains that:

1. The new law requires a specific type of irrevocable called the lifetime qualified terminable interest property trust ("QTIP");
2. This lifetime QTIP is defined at section 2523 of the Internal Revenue Code and generally provides that all income from the trust must be distributed to a spouse; and
3. The use of the QTIP can supplement more traditional asset protection techniques, such as family limited partnerships, life insurance, annuities, and qualified plans.

The attorney then handed Wilma an outline stating the QTIP requirements that is Attached as Exhibit "A".  After Wilma reads the outline, she asks the attorney to state in plain English, how the QTIP provides asset protection.

In response, the attorney states that so long as there is no fraud upon creation, that the assets in the QTIP for Harry's benefit for the remainder of his life and the continuing trust for the benefit of Wilma if she survives Harry will be insulated from the claims of: Harry's creditors; and Wilma's creditors. The reason is that Fla. Stat. 736.0505(3) explicitly states that the trust for the grantor who survives the spouse is deemed to be funded by the spouse and not the grantor. Therefore, it is not a prohibited self settled asset protection trust and provides asset protection to the grantor.  

Wilma then asked her attorney, what is fraud upon creation?  He responds that a transfer to a trust is a fraudulent conveyance in Florida if the grantor transferred assets to the trust with intent to hinder, delay, or defraud a creditor. A creditor includes a judgment creditor, general creditor, and any party seeking relief in a pending lawsuit, or a party that has threatened a lawsuit.  He stated that as long as there are no pending or threatened lawsuits, outstanding judgments, or claims against her at the time of creating and funding the QTIP, there is limited or no risk of fraud.

Wilma then stated that she was interested in pursing such a trust, that Harry and she are happily married, and her children and grandchildren consider Harry a part of the family.  She stated that in addition to income, she wanted Harry to have the right to principal for his health, support, and maintenance. Further, she provided her attorney the following summary of assets:

                                                   Wilma            Harry
                                                $   500,000   
Pension                                      2,000,000           200,000
Portfolio and cash                      1,500,000           100,000
Medical Practice Interest            1,000,000           N/A
Total                                          5,000,000          300,000

The attorney told Wilma that a major risk factor is divorce.  Wilma advised that she understood the risk and indicated that divorce was a very remote possibility. Then the attorney recommended that she transfer $1 million of her portfolio assets into a newly created QTIP for Harry for life with a reserved life interest in trust for her if she survives Harry.  He then stated that her homestead worth $500,000 and her pension worth $2 million were currently protected from the claims of creditors. The funding and creating of the QTIP would add an additional $1 million to the asset protected portion of Wilma's estate.     This results in 70% of her assets ($3.5 million) being protected from creditors. She thanked him for his advice and recommendation and then asked him to prepare an engagement letter for the preparation of the QTIP.

This article is not intended as legal advice and not written to be used, and cannot be used, for the purpose of avoiding tax-related penalties.  Each person's individual estate tax planning is unique and should be performed with a competent legal and tax adviser.

__QTIP Requirements. Sections 2523(e) and (f) of the Internal Revenue Code provides that a lifetime transfer in trust for a spouse will qualify for the unlimited gift tax marital deduction under QTIP if:

1. The spouse beneficiary ("spouse") is a United States citizen;
2. The spouse has a lifetime right to all of the income from the gift;
3. All income is payable to the spouse at least annually;
4. No one (including the spouse) has a power to appoint the principal or income, other than to the spouse at his or her death;
5. The spouse has the power to compel the Trustee to make the trust property productive or income producing;, and
6. The grantor elects to use the QTIP election on a timely filed gift tax return.

Common Additional Provisions.  In addition to the QTIP requirements, these trusts frequently include many of the following provisions:

1. Principal may be invaded for the spouse's health, education, support, and maintenance;
2. A continuing trust for the benefit of the grantor if he or she survives the spouse providing for discretionary distributions of income and principal for the grantor's health, education, support, and maintenance;
3. A further continuing trust for the benefit of descendants; and
4. The selection of an independent trustee with the grantor retaining the right to replace the trustee for any reason with another independent trustee.

Estate Tax Benefits of QTIP. QTIPs have been used for many years to take advantage of estate tax benefits, especially when one spouse has significantly more assets than the other.  There are several estate tax benefits of a QTIP. The major estate tax benefits are:

1. The QTIP will be included in the spouse's estate (this frequently allows the spouse to fully use his or her estate tax exemption); and
2. If the grantor survives the spouse, generally the continuing trust for the grantor will not be included in the grantor's federal gross estate.