Asset protection planning is part of estate planning. Tax planning is part of estate planning. Often, however what is good tax planning is not good for asset protection. A recent example is a client who is attempting to reduce their taxable estate by using a estate tax tool called a qualified personal residence trust (“QPRT”). The QPRT is a well-known estate tax reduction technique whereby the taxpayer transfers a residence to a trust and retains use of the residence. After a period of time specified by the trust title to the property passes to the heirs who rent the property back to the former owner and trustmaker.
The technique freezes reduces the value of the residence for estate tax purposes. The asset planning issue is that conveyance of a primary residence to a QPRT probably strips the house of homestead protection in Florida. The Florida Constitution protects homestead owned by a natural person. Courts have protected homesteads owned by living trusts where the debtor is the trustmaker, trustee, and beneficiary. A QPRT involves third party beneficiaries and often third party trustees. I do not think a QPRT can own a homestead in Florida.
Nor can the trustmaker remove a residence from a QPRT and back into his individual name for asset protection purposes. QPRTs must be irrevocable to have their intended tax effect. A trustmaker cannot legally withdraw property from an irrevocable trust. Some QPRT trust agreements will have asset protection provisions, such as prohibiting any creditors from asserting an interest in the trust property. Without asset protection provisions in the document a trustmaker’s creditors could attempt to levy on the interest the trustmaker retains in the property. Also, if the trustmaker tries to contribute money to the QPRT to pay the mortgage a creditor could attack the payment as a fraudulent transfer. If the same residence were owned in the trustmaker’s individual name as his homestead the debtor/trustmaker’s reduction of mortgage principal could not be undone under Florida’s fraudulent transfer laws.
If and when you consult with an estate planning attorney make sure the attorney understands your asset protection concerns. Whether estate tax reduction or asset protection planning is of primary importance depends on the individual situation. Be aware that using asset protection tools may not be optimal estate tax planning, and that estate tax tools sometimes reduce asset protection.
posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida
Page last updated on May 22, 2020