In 2011, the Missouri legislature codified what is termed the “qualified spousal trust” (“QST”). A QST is a valuable tool for married couples seeking creditor protection, probate avoidance, and estate tax planning. Now that the fiscal cliff has been averted and there is certainty surrounding the estate tax, it is time to consider a QST.
Husband and wife have long held property jointly as tenants by the entireties. Property so held is deemed owned by the marital unit and cannot be attacked by a creditor of one spouse. In order to go after joint assets, the creditor would need a judgment against both spouses. As a result, jointly owned assets of high risk professionals (e.g. doctors or business owners) or anyone else with creditor exposure are protected from creditors of an individual spouse.
Use of Separate Trusts
The desire for assets to remain in joint name caused issues for estate planning practitioners that sought to take advantage of each spouse’s estate tax exemption amount. Without allocating assets between spouses, it was difficult to use each exemption amount, which limited the amount shielded from estate tax. Separate trusts were often used to ensure each exemption amount was used, which unnecessarily exposed assets that would otherwise be held jointly to creditor claims against one spouse.
Use of Joint Trusts
To avoid creditor exposure, married couples with an estimated estate well below the single estate tax exemption amount could establish a joint trust. The obvious drawback to a joint trust is that the estate tax exemption amount and estate values at time of death were not predictable. Therefore, the use of a joint trust carried with it an unpalatable exposure to estate tax.
The American Taxpayer Relief Act set the estate tax exemption amount at $5,000,000, indexed for inflation ($5,250,000 for 2013). This certainty and the continuation of portability allow a married couple to shield $10,500,000 from estate tax in 2013. With fewer families exposed to estate taxes due to the higher exemption amount, asset protection has become a more important focus of estate planning.
Prior to the QST, it was unclear whether a joint trust provided the same degree of asset protection as property held as tenants by the entireties. A QST provides the same protection afforded to property held as tenants by the entireties. A key requirement is that property must be held as tenants by the entireties prior to transfer to a QST. A QST is also flexible enough to provide the surviving spouse creditor protection for one-half of the tenants by the entireties property. So a QST can be tailored based on the needs of the couple.
Best of All Worlds
Now that the estate tax exemption amount and portability have been made “permanent,” the use of a QST is a tool that should be considered by married couples who have creditor concerns. A QST can provide asset protection from your individual creditors, avoid probate, and provide for estate tax planning at the same time. Now is the time to review your current plan to ensure that all of your goals and expectations are being met.
IRS Circular 230 Notice
Internal Revenue Service regulations state that only a formal opinion that meets specific requirements can be used to avoid tax penalties. Any tax advice in this communication is not intended or written to be used, and cannot be used by a taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer, because it does not meet the requirements of a formal opinion.