Dean Mead’s Tax Department handles tax planning issues for businesses and individuals. The attorneys in our department have extensive experience in a full range of…
Section 736.0505, Florida Statutes, provides that a settlor’s creditors may reach the assets of a trust created by the settlor for his or her own benefit, a so called “self-settled” trust. New Section 736.0505(3), however, allows married couples to create irrevocable qualified terminable interest property (“QTIP”) trusts to achieve their asset protection, estate planning and tax objectives. Here is how it works. A spouse (“donor”) creates and funds an irrevocable QTIP trust (“trust”) for the other spouse (“beneficiary”). The trust pays all income to the beneficiary for life and, if desired, principal (so long as there is no legal separation or dissolution of marriage) for the beneficiary’s health, maintenance and support. The trust can also include the power of an independent Trustee to make more liberal distributions or to terminate the trust in favor of the beneficiary, but this may not be desired if one of the reasons for creating the trust is to control the ultimate disposition of the trust assets. Upon the beneficiary’s death, the beneficiary can be granted a non-taxable power to appoint the property to or for the benefit of certain beneficiaries, including the donor. If the power is granted, the beneficiary will typically appoint the property to another trust (“shelter trust”) for the donor, if living. If the power is not granted or is not exercised, the trust property passes to the shelter trust automatically if the donor is living, otherwise to the donor’s and beneficiary’s descendants consistent with the donor’s and beneficiary’s estate planning objectives.
Effective use of this planning strategy accomplishes the following asset protection and estate tax planning objectives:
(1) the donor funds the trust gift tax free (assuming the appropriate tax elections are made), thereby reducing the size of the donor’s taxable estate;
(2) the trust assets are subject to estate tax in the beneficiary’s estate, thereby allowing the beneficiary to use the beneficiary’s estate tax exemption to shelter the assets from estate tax;
(3) the assets of both the trust and the shelter trust are exempt from the claims of creditors of either or both the donor and the beneficiary (i.e., said trusts are not considered “self-settled” trusts); and
(4) the donor does not lose control of the ultimate disposition of the trust property upon the beneficiary’s death.
An excellent article was recently published in The Florida Bar Journal summarizing this strategy in more detail.