Florida will be the 11th state in the nation to pass spousal lifetime access trust (SLAT)–friendly legislation that permits the grantor spouse (that is, the spouse who contributes to a SLAT) to become a beneficiary after the death of the initial beneficiary spouse (that is, the spouse who’s the beneficiary of the SLAT) without being considered to have been a contributor to the trust. Creditors of the grantor spouse won’t be able to reach into the SLAT under certain circumstances. (A SLAT is a trust that’s established by one spouse for federal estate tax purposes that can benefit the other spouse if distributions are ever needed.)
Florida’s SLAT Law
Florida’s new law (Florida Statutes, Section 736.0505), which will become effective for trusts established after June 30, 2022, provides that the creditors of the grantor spouse to a SLAT won’t be able to reach into the SLAT if:
1. The grantor spouse can’t be a beneficiary of the SLAT until after the death of the initial beneficiary spouse; and
2. The initial beneficiary spouse must remain a beneficiary for their entire lifetime; and
3. Transfers to the trust by the grantor spouse must be considered completed gifts under Internal Revenue Code Section 2511.
The Florida law provides that if these requirements are met, the grantor spouse isn’t considered to have contributed to the trust, so that creditors of the grantor spouse won’t be able to reach into the trust after the death of the lifetime beneficiary spouse, except for “exception creditors” as further discussed below.
The Exception Creditor Issue
One issue that arises with respect to a Florida SLAT is whether the ability of an “exception creditor” of the grantor spouse to reach into the trust may cause federal estate tax inclusion.
Florida has adopted the Uniform Trust Code verbatim with respect to allowing exception creditors to reach into a trust. The exception creditors under the Florida Trust Code consist of: (1) spouses and ex-spouses who are owed alimony, (2) those who are obligated to pay child support and (3) those who must pay attorneys’ fees and other costs incurred by the beneficiary of a trust to be represented with respect to that trust, if the beneficiary has no other resources.
One possible solution to the exception creditor issue is to have the Florida SLAT actually be drafted as two trusts from inception:
1. One trust that provides that any distributions to satisfy exception creditors as to both trusts could come from that trust (which could be known as the exception creditor trust ECT).
2. A second trust that could provide that the grantor spouse would be excluded as a beneficiary completely if and when the ECT would have a net worth of less than a reasonable amount, such as $400,000.
Expected Mistakes
Practitioners should be aware of possible mistakes that will inevitably be made when drafting Florida SLATs that seek to take advantage of this new change.
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 on the death of the original beneficiary spouse. Any situation in which 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 won’t 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 can’t be a beneficiary until after the death of the beneficiary spouse, and the IRS may consider the grantor/contributor to be a beneficiary if they’re 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 initial 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 initial beneficiary spouse, then the requirement that at no time during the lifetime of the grantor’s spouse is the grantor a beneficiary may not be satisfied. This is due to the fact that the grantor spouse would benefit from the trust after the removal of the initial 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. Due to the requirement that the initial beneficiary spouse must first die for the grantor 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 grantor spouse to become a beneficiary of the trust and then shack up with their new significant other.
Careful Drafting Required
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.
Practitioners with clients in Florida will be asked to establish SLATs for Floridians that will enable the grantor spouse to be a beneficiary after the death of the initial beneficiary spouse. They should be drafted and administered very carefully to help
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.