Ah Fall! Halloween candy starts to show up, kids go back to school, the leaves start to change and all the stuff the Maryland General Assembly foisted on us becomes law.
This year nestled among the usual prosaic fare is a real gem: a new code section (Est. & Trusts Art. § 14-116, effective 10/1/13) that opens the door to a new, and very neat, asset protection/estate planning tool. This new provision permits married couples to create marital trusts that are immune from the creditors of either spouse.
The essential mechanism of the statute is simplicity itself – it provides that if one spouse creates a certain kind of an inter vivos trust for the other spouse but retains the right to receive income or principal back if the donee spouse predeceases the donor spouse, the trust is not treated as a self-settled trust as to the original donor spouse.
What does that mean in plain English? Assume a couple where one spouse is in a high risk profile (practicing medicine, law, or engaged in certain business ventures) and the other spouse is deemed to have a low risk profile. The high risk spouse creates an inter vivos QTIP trust for the low risk spouse with spendthrift provisions and funds this trust with non-retirement investment assets. (Nothing mysterious other than the QTIP part: the beneficiary spouse must receive all trust income, no one else can benefit during that spouse’s life, and the trust must continue for the beneficiary spouse’s lifetime.)
Assuming there is no fraudulent conveyance at the trust’s creation, as long as the low risk spouse is living, these assets are not exposed to the high risk spouse’s creditors (because that spouse no longer owns those assets) and are not exposed to the creditors of the low risk spouse (due to the spendthrift clause). However, before the enactment of Est. & Trusts § 14-116, difficulty arose if the low risk spouse predeceased the high risk spouse. If the QTIP trust provides that the income and principal can continue for the benefit of the high risk spouse then if the trust is still seen as self-settled by that spouse, the creditors of that spouse can grab the assets. Est. & Trusts § 14-116 “cures” this flaw.
If one of these marital trusts is great, are two of these trusts even greater? For sure. The problem, however, with each spouse setting up an inter vivos QTIP for the other is that if the trusts are seen as forming a reciprocal arrangement (which, of course, they probably do), then both trusts can be set aside as a sham as if no transfer ever took place. Thus, you need to be careful not to have the trusts look reciprocal. For example, the terms of the two trusts must be different (of course, both have to be QTIPs) and the trusts ought not to be executed close in time to each other.
As with all good planning techniques, one needs to use care to make sure you fit into the new statute and to exercise due diligence to make sure you are not participating in a fraudulent conveyance. Also, this technique should be seen as one tool to use among many in structuring the affairs of your clients. Speaking of “affairs,” keep in mind that an inter vivos QTIP must provide an income stream to the original donee spouse for life so if the couple later becomes divorced those assets continue to benefit the donee spouse regardless of the divorce. With long-term marriages this may not be a consideration (indeed, it may not really tilt a property division one way or the other if, in fact, they would get divorced) but in the third or fourth marriage situation perhaps one might steer the conversation away from using this technique.
In any event, this is a powerful new tool for the estate/asset protection planning professional.