A caller described his asset protection plan designed by his financial planner. The caller had created a “grantor retained annuity trust” which he funded with about $500,000 within two years of being sued. The trust had been accumulating income, but the trust document named the grantor/debtor as the sole lifetime beneficiary. Income paid to the grantor from the trust would be in the form of an annuity for his lifetime. All annuities, in whatever form, are exempt from creditors in Florida. The caller’s estate was below the level susceptible to estate tax.
I told the caller I believe creditors could successfully attack the creation of the GRAT as a fraudulent conversion. One of the main indicators of fraudulent transfer or conversion is the debtor/transferor’s retention of control or enjoyment of the money. By naming himself as the sole beneficiary of the GRAT this debtor had the exclusive right to benefit from trust income. Secondly, because the debtor’s estate was not subject to estate tax at current levels (plus reasonable appreciation and expected increases in the estate tax exemptions) there did not seem to be a strong estate tax justification for the trust. GRAT planning is an effective “estate freeze” tool for people with taxable estates and appreciating assets; that was not the case here. An estate tax annuity is an effective asset protection tool for people who can demonstrate a clear tax advantage and motivation.