“Qualified Spousal Trusts” by Thomas D. Peebles, Jr. and Emily J. Kembell

The Missouri legislature recently passed Senate Bill 59, which among other things, creates an opportunity for clients to maintain asset protection for their property owned as husband and wife – also known as tenancy by the entirety property – by using a “qualified spousal trust,” or “QST.” This statute, which became effective on August 28, 2011, sets forth the requirements for qualifying as a QST and is applicable to revocable trusts created before or after this date.
Tenancy by the entirety property has always been a special form of joint ownership between husband and wife, receiving greater creditor protection than property held by a husband or wife individually. Separate creditors of a husband or wife cannot attach tenancy by the entirety property. Unfortunately, when tenancy by the entirety property is transferred to a joint trust or separate individual trusts, this preferential creditor protection characteristic is lost. Many clients shy away from using revocable trusts because of their concern for potential liability and the desire to protect their assets from creditors of one spouse – especially clients in high-liability professions.
Under the new law, loss of the tenancy by the entireties protection need no longer be a deterrent to the use of a Revocable Trust. If tenancy by the entirety property is transferred to a QST, it allows for “the same immunity from the claims of the separate creditors…as would have existed if the settlors had continued to hold that property as husband and wife as tenants by the entirety.” Although this statute has not been tested in the courts, we encourage clients to strongly consider the use of a QST to preserve the creditor protection afforded by tenancy by the entirety property in a form which allows us to achieve other important estate planning objectives.
In order for a trust to qualify as a QST, it must meet certain requirements set forth in the statute. Additionally, the property transferred to the QST must be titled as tenancy by the entirety property immediately before being transferred in order to maintain the creditor protection. Therefore, if the clients wish to take advantage of this creditor protection, it is imperative to examine whether a clients’ joint Revocable Trust meets the QST requirements and whether their assets were titled as tenancy by the entirety property prior to being transferred to their joint Trust.
What is even more exciting about the new statute is that it allows for estate tax planning which traditionally could only be accomplished by the use of separate Revocable Trusts. The QST can be drafted so that it creates a separate share for each spouse in order to take advantage of their respective unified credits to maximize estate tax savings at the second spouse’s death.
If you would like to discuss the potential use of a Qualified Spousal Trust in your particular circumstances, please contact a member of the CECB Estate Planning Practice Group.