By James W. Mallonee
We’ve all heard about the new tax changes, but can you use the new changes to your benefit. The first thing in deciding this is to review the new exclusion amounts for estate and gift taxes. The new exclusion amounts have been bumped up to $10 million for each person ($20 million for married couples). Although most U.S. citizens do not possess this size of an estate, it does present some new ideas to consider when dealing with multiple marriages and children from each marriage (but not without some consequences).
One of those consequences can result from the age old sunset rule. Although the current amount of the exclusion is $10 million, congress allowed for a sunset rule in 2026. Should the sunset rule take effect, the $10 million estate tax exclusion will return to $5 million for each person. The other issue to keep in mind is that Florida will not allow the creation of what is commonly referred to as a Self-Settled Spendthrift Trust by virtue of Fla. Stat. 736.0505 which states in pertinent part that a creditor or assignee of a grantor may reach the maximum amount that can be distributed to or for a grantor’s benefit.
What that sentence fundamentally
states is if the grantor of a trust has access or can receive assets from his or her trust, then a creditor can as well. Thus, any trust set up by a grantor to prevent a creditor from reaching into his or her trust must truly be irrevocable and the trustee is prevented from providing any assets to the Grantor.
What about multiple marriages and children from each. Because the exclusion amount for estate tax is so high, Florida citizens can create and fund the equivalent of a credit shelter trust or qualified terminable interest property (QTIP) trust while alive.
The intervivos credit shelter trust is affectionally known as a Spousal Lifetime Access Trust (“SLAT”). Most trusts when trying to protect assets take effect and are funded at the death of one of the spouses. However, a SLAT is funded while the Grantor is alive. It functions exactly like a credit shelter trust with income and principal available to the spouse during their life. The donating spouse (D) essentially gifts into the trust an amount to the Spouse (S) for their life. Since the applicable exclusion gift tax is so high, there is no consequence to D from a taxation standpoint. Any appreciation in the assets donated to the credit shelter trust will not affect D’s gross estate tax calculation nor that of the Spouse or D’s children.
However, this is not without problems should S die before D. In such a case the funds transferred to the children and are no longer accessible to D. This can be fixed if D, from the start, is the recipient of the trust estate in the event of S’s death. But Florida has that pesky Fla. Stat. 736.0505. Once D retains the interest in the trust, it would be subject to creditors. Although not perfect, it can at least be useful for family’s with multiple marriages and children from each marriage. This allows one spouse to make certain that their children will receive something at the death of D or S.
The other alternative is the Intervivos QTIP trust. Once again, a QTIP trust is usually set up in anticipation of the death of one of the spouses where an amount is transferred to a QTIP trust for the surviving spouse and upon his or her death, the remaining principal and interest flows to a third party (generally the children of the grantor). The same technique is used in an Intervivos QTIP trust, but the trust is funded during life and not at death.
In this case the Donor Spouse (D) sets up a trust and gifts an amount to the QTIP portion of the trust for his or her spouse (S). S will have access to the funds as income and principal. The trust also provides should S predecease D, that the remaining principal and income can be directed to him or her as a contingent beneficiary. For this type of trust to work, the gross value of the Intervivos QTIP trust must be included in S’s estate. The downside here is that the appreciation of the assets placed into S’s QTIP trust are included in his or her gross estate for taxation purposes. But this may not matter if the applicable exclusion remains at $10 million. The downside is if the Sunset rule comes into effect, the appreciation in the estate may exceed $5 million and be taxable. The upside of a trust like this is that the property coming to D or to S’s children will be tax free.
As you can see, the increase in the applicable exclusion for both gifts and Federal estate taxes is currently a good thing, even if you don’t have $10 million. It allows you to utilize some trust techniques that otherwise might not have been available because the gift tax exclusion was so low. If you would like to understand more of how these techniques work, seek the attorney of your choice and have that discussion.
James W. Mallonee (Jim Mallonee) is a graduate with a B.A. degree from the University of South Florida and a Master of Science degree from Rollins College in Winter Park, Florida. He obtained his Juris Doctorate from the University of the Pacific, McGeorge School of Law in Sacramento, California. Prior to returning to Florida to practice law, Mr. Mallonee was employed by Intel Corporation for 22 years in such locations as New Jersey, Florida and California.
In addition to being a member of the Florida Bar since 2003, Mr. Mallonee serves on the Charlotte Community Foundation Committee for asset allocation and teaches Business Law at State College of Florida. Mr. Mallonee is also on the Board of Directors for the Military Heritage Museum located in Charlotte County, Florida.
His firm practices law in the following areas: Probate, Wills & Trusts, Guardianships, and Litigation in the areas of Real Estate, Guardianships and Estates. The firm has two locations in Venice and Port Charlotte, Florida.
James W. Mallonee, P.A.
946 Tamiami Trail, #206
Port Charlotte, FL 33953
Facsimile (941) 206-2224
871 Venetia Bay Blvd., #225
Venice, FL 34285