New Florida trust laws taking effect this summer are raising the temperature in what is already a boiling estate planning scene. With Federal Estate and Gift Tax Exemption for U.S. Citizens and U.S. Residents at Historic Levels[1] (until its scheduled decrease in 2026) (the “Exemption Amount”), recent amendments to Florida’s trust laws, which take effect July 1, 2022, reflect Florida’s continued desire to be an attractive jurisdiction in matters of trust law. For example, Florida increased its already long perpetuity period (i.e. the length of time a trust can exist) from 360 years to 1,000 years.[2] Another more notable change includes the expanded benefits of Spousal Lifetime Access Trusts (“SLATs”) in Florida, the benefits of which are discussed below.

SLATs are advantageous estate planning tools that allow married couples to transfer their wealth while allowing each spouse indirect access to the transferred wealth. SLAT planning is also an effective way to utilize the remaining exemption amount of one or both spouses – the idea being that one spouse (the “donating spouse”) creates an irrevocable trust and transfers certain assets to this trust to be held for the primary benefit of the other spouse (the “Beneficiary Spouse”) for the life of the Beneficiary Spouse. The benefits of such planning may include, but are not limited to, protection from creditors under state law and the removal of such assets from the gross assets of the donor spouse and recipient spouse for purposes of federal estate tax. Since the transfer by the donor spouse is designed to be a full gift for federal gift tax purposes, the transferred assets are intended to be removed from the taxable estate of the donor spouse and any appreciation of the -this, from the time of the initial donation, will also be exempt from inheritance tax, even on the death of the Beneficiary Spouse. Although the Donor Spouse is not a beneficiary of SLAT, he can presumably benefit indirectly from SLAT as long as the Beneficiary Spouse is alive and the Donor Spouse and the Beneficiary Spouse remain married.

Like any advanced estate planning technique, SLATs are not without risk. Typically, the primary concern for clients is losing the perquisites of these irrevocable transfers to SLAT in the event of divorce or the death of the beneficiary spouse. However, Florida’s latest SLAT legislation mitigates the risks associated with this latest occurrence.

Prior to its amendment, Florida statute section 736.0505 provided that if a donor spouse became a beneficiary of the SLAT after the death of the beneficiary spouse, or, alternatively, if the beneficiary spouse had the power to designate the assets of the trust as a supplementary trust for the benefit of the donor spouse, the assets of the trust were then available to the creditors of the donor spouse. A creditor’s ability to access these assets in trust under state law is problematic for federal estate and gift tax purposes because it frustrates the primary benefits of SLAT planning, which is protection against the inclusion of trust assets in the donor spouse’s gross estate.[3]

Florida’s recent amendment to Section 736.0505(3) of Florida law significantly changes the landscape of SLAT planning for Florida trusts.[4] With the amended status, the Donor Spouse can become a beneficiary of the SLAT in the event of the death of the Beneficiary Spouse without these assets being subject to claims by the creditors of the Donor Spouse. This change is key to resolving customer concerns regarding the loss of indirect access to irrevocable transfers due to the death of the beneficiary spouse.

However, SLATs must be carefully drafted in order to benefit from this additional creditor protection. Applicable only to SLATs created after June 30, 2022, these trusts must meet the following three (3) criteria:

1. The beneficiary spouse must be an eligible beneficiary for the rest of their life;
2. The donor spouse cannot be a qualified beneficiary of the SLAT[5] until after the death of the Beneficiary Spouse; and,
3. The transfer from the donating spouse to SLAT must be a “full gift” pursuant to Section 2511 of the Internal Revenue Code.

Florida’s recent passage of this SLAT-friendly legislation is not only a positive change from Florida’s already competitive trust law, but also amplifies the current opportunities for married couples looking to capitalize on the current exemption amount before it decreases in 2026.

[1] $12,060,000 per individual; $24,120,000 per married couple.

[2] See Section 689.225(2)(g), as added pursuant to SB 1368, 2022 Leg., Reg. Sess. (Florida 2022).

[3] In tax ruling 76-103, the IRS found that if the assets of the trust are subject to claims by creditors of the donor spouse under state law, the original transfer to the trust was not a Completed gift and therefore the assets are still considered included in the Gross Spouse Estate.

[4] Note that Florida statute section 736.0505(3) already provides creditor protection for two other categories of trusts in which assets are contributed by the donor spouse: i) spousal deduction trusts; and (ii) Qualifying Interim Interest Trusts (or “QTIP Trusts”).

[5] Florida statute section 736.0103(19) defines a “qualified beneficiary” as “a living beneficiary who, on the date beneficiary qualification is determined: (a) is a beneficiary or authorized beneficiary of income or principal of the trust; (b) Would be a beneficiary or permitted beneficiary of the income or principal of the trust if the interests of the beneficiaries described in paragraph (a) terminated on that date without causing the termination of the trust; or (c) Would be a beneficiary or authorized beneficiary of the income or principal of the trust if the trust was terminated in accordance with its terms on that date.”