An article in this month’s Florida Bar Journal has an interesting article about an asset protection tool for taxable estates written by well-known tax attorneys Barry Nelson and Richard Gans. The tool involves a husband’s and wife’s matching irrevocable lifetime QTIP trusts. It’s a complicated too, and I can offer only a layman’s summary; for a full understanding you’ll need to read the article.
Husband and wife owning assets as tenants by entireties is effective asset protection against the debts of either spouse. The T by E plan, however, creates estate tax problems in planning for taxable estates (for purposes of discussion, assume a $3.5m tax credit per spouse). Upon the first death the TE property automatically passes to the surviving spouse under the marital tax deduction, but the couple does not get to apply the deceased’s spouse’s tax credit. If the couple owns less than $3.5m of assets the estate is still not taxable, but if combined assets exceed the tax credit cover then the T by E planning results in possible estate tax when the second spouse’s dies with only one tax credit available to apply to all marital assets.
A QTIP trust is an irrevocable trust for a spouse. When the beneficiary spouse dies the property passes to the children. The QTIP trust is usually established upon the first death so that the decedent’s share of marital assets is held in the trust for the surviving spouse during his lifetime. These trusts are protected from the surviving spouse’s creditors.
The Bar Journal article suggests both spouses creating QTIP trusts for each other while they are alive. During their lifetimes the QTIP trusts protect the assets from creditors by a spendthrift clause. Upon the first death, the decedent’s beneficial interest in the QTIP established for his/her benefit by the survivor, in this plan, would pass to an estate tax-exempt and asset protected trust for the survivor to the extent of the estate tax credit. Each spouse would get the benefit of their full estate tax credit and all assets are protected from creditors before and after death by virtue of the spendthrift trust.
The authors explained that until this year this plan would not be effective asset protection because the survivor spouse would become the beneficiary of a QTIP trust he/she had established. Spendthrift protection does not apply to the beneficiary of a trust which the beneficiary also settled originally- a self-settled trust. However, effective July, 2010, a new Florida statute provides that QTIP trusts are not considered self-settled trusts. The authors argue that the new statute makes the matching QTIP trust plan a rare combination of effective estate planning and lifetime asset protection.