DeSantis Delivers An Estate Tax Savings Gift For Floridians

Taxes

“Behold the Florida SLAT,

Which can now provide that,

If your spouse dies first,

The contributor spouse can be a beneficiary, to make the death less worse.

But will the contributor spouse with a heartfelt shrug,

Be more inclined to pull the beneficiary’s plug?

This and more,

We below explore.”

On May 10th, Governor Ron DeSantis signed a new trust law into effect that includes a provision which will make certain Spousal Limited Access Trusts (“SLATs”) more attractive to Florida residents who form them in the future by allowing the contributing spouse to be a beneficiary of the trust in the event of the death of the beneficiary spouse1. This change, contained in Florida Statute 736.0505(3), as amended, effectively allows for a Florida SLAT to transform into an asset protection trust for the benefit of the contributing spouse following the death of the beneficiary spouse2.

For purposes of this article the spouse who contributes to a SLAT is referred to as the “contributing spouse” and the spouse who is the beneficiary of the SLAT is referred to as the “beneficiary spouse.” Additionally, “asset protection trust jurisdictions” refers to states which permit the formation of self-settled asset protection trusts and is abbreviated throughout the article as “APT jurisdictions.”

Special thanks to the Tax Section of the Florida Bar, and Donna Longhouse, H. French Brown IV, Mark Brown, Brian Malec, Bill Lane Jr., Gerard “JJ” Wehle Jr., Drew Lagrande, and Matthew Schmitzlein for all of their hard work and dedication in bringing this positive change to Florida law and to Brock Exline for his research on this matter.

I will be presenting a free 25-minute webinar on these new laws and SLATs in general on Friday, May 27, 2022 at 4:00 PM EDT. Click here to register: https://register.gotowebinar.com/register/3598368828957648911. After registering, you will receive a confirmation email containing information about joining the webinar.

A SLAT is a trust that is formed and funded by one spouse for the benefit of the other spouse which can be used to shield the trust assets from creditors of both spouses and from federal estate tax.

Two significant advantages of the SLAT are that:

(1) creditors of the contributing spouse are unable to reach into the trust because the contributing spouse is not a beneficiary and,

(2) creditors of the beneficiary spouse are unable to reach into the trust if there is either:

(a) a trustee separate and apart from the beneficiary spouse who has discretion as to if and when distributions will be made to the spouse, or

(b) if the beneficiary spouse serves as trustee, the spouse is limited to receiving what is reasonably needed for health, education, maintenance, and support.

Key design aspects of a SLAT are that the trust can generally be used to pay one-half of the living costs of the married couple on behalf of the beneficiary spouse, the beneficiary spouse can control how the trust assets pass on his or her subsequent death, and trust assets can be kept in a creditor-protected manner and outside of the federal estate tax system.

Notwithstanding the above advantages, many contributing spouses want the right to become beneficiaries of the trust in the event that the beneficiary spouse dies, or under other circumstances.

Under Florida law, creditors can reach into a trust that a settlor/contributor is a beneficiary of to the extent that a trustee has the power to make distributions to the settlor/contributor, regardless of whether those distributions are limited to what is needed for the settlor/contributor’s health education, maintenance, and support. Consequently, Floridians have been inclined to use the laws of APT jurisdictions, such as Nevada, South Dakota, Alaska, and Delaware to create SLATs, because those jurisdiction have laws which permit the contributing spouse to be eligible to receive benefits without having the trust assets become accessible to creditors.3

This is important not only for creditor protection purposes, but also for estate tax purposes. This is due to the fact that if a creditor of the contributing spouse can reach into a trust, then the trust assets will be considered as owned by the contributing spouse for estate tax purposes under the rationale that, if a person sets up an irrevocable trust and can run up debt and benefit from having the trust pay that debt, then the assets of the trust are considered as owned by that person for estate tax purposes.

This new Florida law, which will only apply to trusts that are entered into and funded after June 30, 2022, is far shy of leveling the playing field between Florida and the APT jurisdictions, but is intended to provide one significant advantage that has not been available until now, specifically, allowing the contributing spouse to be added as a beneficiary of the SLAT following the death of the beneficiary spouse.

To qualify under amended Florida Statute 736.0505(3), the trust must be one of the following:

1. A trust described in Section 2523(e) of the Internal Revenue Code (a marital deduction trust providing the donee spouse with a life estate and a general power of appointment),4

2. A trust for which the election described in Section 2523(f) of the Internal Revenue Code has been made (a lifetime QTIP

TIP
trust)5

3. An irrevocable trust not otherwise described in subparagraph 1 or 2 in which:

(a) the settlor’s spouse is a qualified beneficiary for the lifetime of the settlor’s spouse (i.e. the settlor’s spouse must be a distributee or permissible distributee of trust income or principal during his or her lifetime)

(b) at no time during the lifetime of the settlor’s spouse is the settlor a qualified beneficiary (i.e., the contributing spouse cannot be a distributee or permissible distributee of trust income or principal during the lifetime of the beneficiary spouse); and

(c) transfers to the trust by the settlor are completed gifts under Section 2511 of the Internal Revenue Code

By way of example, assume that a wealthy individual places $5,000,000 into a SLAT to benefit his spouse and descendants with the goal of shielding the assets from creditors and federal estate tax.

The trust is drafted so that the contributing spouse will receive the income tax bill for the income of the trust, therefore allowing the trust to be “disregarded” for income tax purposes. This will occur automatically if the beneficiary spouse is a trustee of the trust and has powers to make distributions, or the grantor retains the right to replace trust assets with assets of equal value.6

In our example the contributing spouse’s primary concern is that if the beneficiary spouse dies, they would like to be able to become a beneficiary of the trust.

The new Florida statute satisfies this concern and Florida case law and federal estate tax law seem to allow this result.

On the other hand, the contributing spouse may wish to be “addable” back to the trust under other circumstances, such as if:

(a) there is a divorce, ( in which event if the trust was funded from separate assets of the contributing spouse the entire trust might be held to benefit the contributing spouse if it is properly formed in an APT jurisdiction, or, if the trust is funded with assets that would be divided between the spouses as “marital property” because they were acquired from earnings during the marriage or otherwise, then a trust properly formed in an APT jurisdiction could allow for division into two separate trusts, one for the beneficiary spouse and the other for the contributing spouse).

(i) the authors typically use the language “in the highly unlikely event of divorce” in our firm documents, and “in the almost impossible to imagine event of divorce” in our personal estate documents.

(b) if the contributing spouse hits upon hard economic times.

The new Florida statute only works to solve the issue of what happens if the beneficiary spouse predeceases the contributing spouse. It does not grant the contributing spouse the right to be added back to the trust under the circumstances described in either (a) or (b) above.

Another factor in determining whether to use Florida or an APT jurisdiction for establishing a SLAT is the prospect of having a “floating spouse clause.” Such a provision removes the original beneficiary spouse in the case of divorce or death, while a remarriage would add the new spouse as a beneficiary. However, due to the fact that the new SLAT benefit under Florida law is only available if the beneficiary spouse remains a beneficiary for their lifetime, a floating spouse clause which removes the original beneficiary spouse entirely upon divorce may work to forfeit the availability of the new SLAT benefit.

A Florida trust (and also an APT) can include a variation of a floating spouse provision that merely reduces the interest of the original beneficiary spouse in the trust in the case of divorce, and adds the future spouse of the contributing spouse as an additional beneficiary of the trust. This helps to level the playing field for Florida where the contributing spouse knows that he or she can remarry in the event of divorce or upon having substantial financial need and the trust can benefit his or her next spouse (and the spouse after that and the spouse after that) to reduce the overall family expenses.

Nevertheless, if the contributing spouse wants to have his or her ex-spouse eliminated as a beneficiary upon divorce, then it seems that Florida would not be an appropriate situs for the trust and that an APT jurisdiction instead might be desirable.

As with any new law and complicated area there will certainly be mistakes made. The biggest mistakes that we will probably see are as follows:

Mistakes That Will Be Made

1. These trusts will be sitused in Florida and provide that the contributing spouse will be added back in the event of divorce instead of only upon the death of the original beneficiary spouse. Any situation where the settlor/contributing spouse will be a beneficiary before the death of the original beneficiary spouse will make the new SLAT opportunity unavailable.

2. The terms of the SLAT will provide that the contributor’s spouse will not be a beneficiary in the event of divorce or certain other events. The statute requires that the contributor’s spouse must be a beneficiary “for the lifetime of the settlor’s spouse.”

3. A SLAT that provides the trustee with the discretion to reimburse the contributing spouse for taxes paid on the trust income may expose all of the trust assets to federal estate tax and the amount that could be reimbursed to creditor claims. This is because the grantor/contributor cannot be a beneficiary until after the death of the beneficiary spouse, and the IRS may consider the grantor/contributor to be a beneficiary if he or she is able to receive reimbursement for taxes paid on behalf of the trust before the death of the beneficiary spouse.

4. Can the presence of Trust Protectors also cause loss of the availability of the new Florida SLAT benefit? What if a Florida SLAT signed and funded after June 30, 2022 complies with the above rules but also provides the Trust Protectors with the authority to take many actions on behalf of the trust, including removing the beneficiary spouse from being a beneficiary of the trust?

If the IRS can show that the Trust Protectors are bound by a fiduciary duty to remove the beneficiary spouse, then the requirement that at no time during the lifetime of the settlor’s spouse is the settlor a beneficiary may not be satisfied due to the fact that the contributing spouse would benefit from the trust after the removal of the beneficiary spouse which would cause inclusion of the trust assets in the estate of the contributing spouse. This will be a turn off for many contributors wishing to form a Florida SLAT.

5. Relationship issues – “He unplugs me, he unplugs me not”

Due to the requirement that the beneficiary spouse must first die in order for the contributing spouse to become a beneficiary, many beneficiary spouses may rightfully ask themselves whether their plugs will be pulled earlier rather than later in order for the contributing spouse to become a beneficiary of the trust and then shack up with their new significant other.

Time will tell what other nooks and crannies may develop or may be found to apply with respect to this new statute, which will help many Floridians.

Unlike the Florida Community Property Trust Act, which indicates that a Florida Community Property Trust need only have a Florida resident as trustee to qualify as a Florida Community Property Trust, the new SLAT legislation does not include such language. It is therefore safest to have the grantor/contributing spouse be a resident of Florida, have at least one trustee in Florida and for the trust to be administered in Florida to qualify for this new opportunity under Florida law.

Individuals who are married to spouses with a short life expectancy may wish to establish these trusts in order to have the equivalent of an asset protection trust without having to go to an APT jurisdiction. Florida SLATs that would otherwise be protected under 736.0505 have a better chance of holding up than an APT jurisdiction sitused trust for Floridians, given that Florida law now expressly condones this and may not condone an APT jurisdiction sitused trust if the circumstances would be such that protecting the trust from creditors would be against the public policy of Florida.

Additional Background on Florida Trust Law Useful for Understanding

The general case law and Uniform Trust Code law in Florida is that assets attributable to contributions to a trust made by a beneficiary of the trust can be reached by creditors to the extent that the trustee has the power to make distributions to such contributor.

When the beneficiary is not a contributor to the trust then a trustee can normally only attach the maximum amount that the beneficiary has the individual right to compel the Trustee to pay to him or her.

For example, in the Eleventh Circuit Court of Appeal decision of In re Brown (303 F.3d 1261) on August 28, 2002, Mrs. Brown contributed assets from an inheritance into a trust that paid her 7% of the value of the trust assets each year, with the remainder interest to pass to charity.

The trust was what is known as a Charitable Remainder Unitrust.

Mrs. Brown filed bankruptcy and the court found that her creditors could reach the 7% annual payment, but not the remainder interest. The court also noted that Mrs. Brown failed to claim that the 7% payment right could be protected as an exempt annuity payment under Florida Statute Section 222.14, so she lost the ability to make that argument from a procedural standpoint.7

If Mrs. Brown had not been the contributor to this trust and the trustee had the power to pay the 7% unitrust amount to the trustee’s choice of Mrs. Brown or any other trust established for the benefit of Mrs. Brown, then the creditor would probably not have had any ability to reach into the trust, and the trustee could have made the payments to a separate trust that could have been designed to not be accessible to Mrs. Brown’s creditors.

The Florida Trust Code generally indicates that a trust established by a “settlor” will be accessible to creditors of the settlor to the extent that the settlor may receive benefits, but the statute is clearly intended to only apply to the extent that the settlor has made a contribution of assets to the trust. Some lawyers erroneously assume that when a person sets up a trust that will be funded by his or her parents or others, he is nevertheless the “settlor” and will be treated as having contributed the assets.

Now we’ve told you about it,

What should your clients or parents do?

Well what would you do,

If your client or mother asked you?

It may depend,

On if their spouse is a true friend,

And how they think things will come out in the end,

If the marriage is a ruse,

Contact Dr. Suess (Esquire).8

For another great article on SLATs, check out Martin Shenkman’s “Spousal Lifetime Access Trusts (SLATs): Easy Ways To Destroy Your Trust Plan?” Which can be found here: https://www.forbes.com/sites/martinshenkman/2021/12/11/spousal-lifetime-access-trusts-slats-easy-ways-to-destroy-your-trust-plan/?sh=63be08267305. Please don’t tell Marty I said this was a good article.

Products You May Like

Articles You May Like

Ask Larry: In What Month Does Social Security Consider Me To Be 62?
Inflation and recession fears are squeezing some industries more than others
What you need to know about staked ether, the token at the center of crypto’s liquidity crisis
‘The system is rusty’: Qantas CEO defends industry as airlines cancel thousands of flights
Make $228 An Hour In Your Spare Time