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Missouri Makes Dramatic Change to Asset Protection Law for Married Couples
On July 10, 2015, Governor Jay Nixon signed Senate Bill No. 164, which bill dramatically changes the Missouri Qualified Spousal Trust ("QST") requirements, and as a consequence the entire asset protection landscape for Missouri married couples. The new law is effective, retroactively, on August 28, and should apply to traditional as well as to same sex marriages.
Background re the QST – including all of the original qualification requirements of the same – can be found in my 2012 Journal of the Missouri Bar article on the topic, as well as in my other articles written for non-lawyers which are linked on this website.
On its face the new law would allow either spouse to transfer separately-owned assets directly to a joint QST, or directly to a separate share of a QST for his or her own benefit and revocable by him or her alone, and now have those assets completely insulated from all but joint lawsuits against the husband and wife. This change in the law follows on the heels of last year’s related change which allowed a married couple to transfer jointly-owned property, which was not owned as tenants by the entirety, to the QST and gain tenancy by the entirety type asset protection as a result of the transfer.
Apparently the 2015 amendment was passed in large part to take the pressure off of banks, brokers and other advisors who are required to make the transfers to the QST, and who do not wish to be responsible for making determinations ensuring that only tenancy by the entirety (or jointly-owned) assets are or have been transferred to the QST. This underlying purpose of the new law is certainly understandable.
Significant Benefits of New Law
The purported benefits of the new law are dramatic. Married couples (including second marriages) with separately-owned assets may now take full advantage of the significant asset protection offered by the QST, without having to first retitle their assets into joint names, which at best is a significant inconvenience, and at worst carries with it potentially adverse marital property consequences in the event of divorce. This two-step process can also result in potential adverse estate tax consequences, if either the husband or wife dies while the property is still jointly-owned. Under the new law, these couples may now transfer their separate assets directly to their respective shares of a QST, without granting the other spouse any rights in the property, and as a result be protected from all but joint lawsuits against both spouses.
Married couples who, under the original version of the QST, needed to retitle separately-owned assets into joint names prior to transferring the same to the QST, and then be concerned about how long the assets needed to remain in joint names prior to transferring them to the QST (i.e., because of step-transaction doctrine fears), now no longer need to worry about this two-step process, and its attendant “waiting period” issues.
The new law also creates a huge benefit for married couples who have already established and funded a joint revocable trust. As alluded to above, no longer need the couple or their financial advisors be required to determine whether the assets owned by the joint trust have as their source assets which were originally titled in tenancy by the entirety form (or under last year’s formulation, joint tenancy form). Assets could have been transferred to the trust directly via deposits of paychecks or bonus checks, IRA or 401k distributions, or inheritance or gift receipts.
Under prior law, the safest course was for the married couple to (a) transfer all of the assets of an existing joint trust which could not be traced back to tenancy by the entirety property (or, under the 2014 formulation, joint property) at the time the assets were transferred to the trust, out of the joint trust and into the married couple’s joint names, (b) hold the assets in joint names for a sufficient period to avoid the step transaction doctrine (whatever that period is), and then (c) retransfer the assets back to the joint trust – all while also, if necessary, amending the terms of the joint trust to ensure that it qualifies as a QST.
On the surface, at least, all of the above-described issues and complexities are eliminated under the new law which goes into effect on August 28.
Will the New Law Accomplish Its Intended Goal?
The question is whether the 2015 amendments (and even the 2014 amendments, which included transfers of all property jointly owned by a husband and wife within the protections of a QST) will actually protect transfers of separately-owned property from the claims of future unknown creditors of the transferor spouse. There appear to be at least three areas of potential challenge.
Potential Challenge Under Federal Constitutional Law
The Equal Protection Clause is located at the end of Section 1 of the Fourteenth Amendment: “All persons born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States and of the State wherein they reside. No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws.” (Emphasis supplied.)
As currently crafted, a married individual may transfer his or her separate assets to his or her separate share of a QST, totally controlled and revocable by said individual, and have those separate assets protected from all separate claims against the individual, and only be subject to joint claims against the married couple. A single individual, on the other hand, will not receive “equal protection” under Missouri law. If the single individual transfers his or her assets to a revocable trust, they remain completely subject to his individual creditors. (The same principle now applies under Missouri law to property jointly owned by a husband and wife, but not as tenants by the entirety, versus property jointly owned by two individuals who are not married to each other.)
Assume, for example, that a man and woman, each owning $2 million in separate assets, decide to marry. They enter into a prenuptial agreement, each waiving all rights in the other’s assets. The couple marries, and immediately executes a two-share QST. Husband then transfers his $2 million in separate assets to his separate share of the QST, and wife transfers her $2 million in separate assets to her separate share of the QST. Each of these spouses now suddenly has his or her separate assets completely protected from all but joint lawsuits. Husband’s and wife’s single friends, however, have no way to protect their assets from lawsuits using a revocable trust, under Missouri law. The “protection” afforded by Missouri law to married individuals owning separate assets, versus single individuals owning assets, would thus not be “equal,” but to the contrary would be dramatically different.
Not being a federal constitutional law expert, I can only present this issue for consideration. The concern, of course, is that if the relevant 2014 and 2015 amendments to the Missouri QST law are void under federal constitutional law, as not being supported by a rational basis (or whatever intermediate level of scrutiny the court should decide applies), then arguably, at least, they are also void as to potential future creditors of the spouse making the separate transfers. I would tend to doubt that passing a law primarily as a matter of convenience for married couples and their advisors, would be sufficient to satisfy the rational basis, etc. tests.
A court would hopefully at least “blue pencil” the Missouri QST statute, however, to continue to protect transfers of tenancy by the entirety property to a QST, and only strike down transfers made under the offending amendments to the original statute.
Potential Challenge Under Missouri Uniform Fraudulent Transfer Act
The 2015 amendments specify that “no transfer to a qualified spousal trust shall avoid or defeat the Missouri Uniform Fraudulent Transfer Act” (hereinafter the “UFTA”) – RSMo Section 428.024. This provision was presumably added to the QST law as a necessary consequence of generally permitting transfers of separately-owned property, and property jointly owned by a married couple but not as tenants by the entirety, to a QST, with the same protections as tenancy by the entirety property. A husband or wife with existing or reasonably anticipated and specific future claimants obviously cannot expect to avoid the existing or potential separate claims, by transferring his or her separate assets to a QST.
The question becomes, how will the UFTA apply to future separate claims against either spouse, for transfers of separately-owned property directly to a QST? Again, not being a creditors rights expert, I can only surmise based upon the statements of legal experts in the area.
Surely the new amendments to the Missouri QST law must be given some meaning and legal effect, since such is a general principle of legislative construction.
In the 4/27/15 issue of Forbes, Jay Adkisson asserts that “if a person makes a transfer with the intent of defeating a future creditor, even if that creditor is totally unknown [to] the debtor and doesn’t even have a claim at the time of transfer, then under Section 4 [RSMo Section 428.024] that transfer is a fraudulent transfer.” Mr. Adkisson bases his conclusion in large part on the title to Section 4 - “Transfers fraudulent as to present and future creditors.” (Emphasis supplied.)
The problem with focusing largely on the title to a statute, of course, is that the actual body of the statute may be much more limiting than the title. For example, the body of RSMo Section 428.024 is arguably only applying to certain future creditors, specifically the type of future creditors referred to in subsection 1(2), not future creditors generally.
Many creditor rights experts also make the distinction (not found in the title to UFTA itself) between future creditors and future potential creditors. For example, Jacob Stein defines a “future creditor” as a creditor whose claim arose after the transfer in question, but where there was a foreseeable connection between the creditor and the debtor at the time. Generally, a future creditor is one who holds a contingent, unliquidated or unmatured claim against the debtor. A transfer is fraudulent as to a future creditor if there is a fraudulent intent directed at the creditor at the time of the transfer. For example, if a debtor is about to default on a personal guaranty, and transfers his or her assets in anticipation of such default, the holder of the guarantee is a future creditor and the transfer is made with the intent to defraud the creditor. Jacob Stein, “Fraudulent Transfers in Asset Protection” (JDSupra Business Advisor, 7/27/2010).
According to Mr. Stein:
"A future creditor must not only be foreseeable at the time of the transfer of assets, the timing of such creditor’s claim must be proximate to the time of the transfer. In one case, the court defined the term “future creditor” as one whose claim is “reasonably foreseen as arising in the immediate future.” . . . Future potential creditors are distinguished from future creditors by the fact that there is no intent to defraud a particular future potential creditor. For example, a debtor is worried that he has insufficient automobile insurance coverage and transfers his assets. Those who may in the future be run over by the debtor are potential future creditors, as there is no intent to run over a specific person. . . . Because the UFTA is commonly held to apply only to future creditors, but not to future potential creditors, asset protection planning should focus on future potential creditors, if possible. This generally means that planning ahead cannot be challenged under the “actual intent” test."
Mr. Stein also asserts “[t]he actual intent test looks to the debtor’s intent to defraud ‘any’ creditor. The modifier ‘any’ is very important. A creditor seeking to set aside a conveyance as a fraudulent transfer need not show that the debtor intended to defraud him. The creditor need only demonstrate that at the time of the transfer the debtor sought to defraud some specific creditor.” Thus, there is a theory under the UFTA where even a potential future creditor may be able to recover against a transferor, if the prerequisites of the case are proven. (This may be referred to as the “tacking” or “piggyback” argument.)
One potential way to avoid the assertion that the transfer of separately owned property to a QST was intended to defraud a specific present or future creditor of the transferor spouse is to specifically provide in the QST document that all assets transferred to the trust (including the proceeds and reinvested proceeds of the same) at a time when there are creditors of the transferor holding present, contingent, unliquidated or unmatured claims against the transferor, shall continue to be subject to the claims of all of these present or future creditors, and shall be paid by the trustee when due.
Mr. Adkisson would no doubt disagree that the latter planning technique would be successful, however, since his view is that “[i]f the creditor can find evidence that the debtor made the transaction with the specific intent to defeat future creditors, then the creditor can win. . . . This proof can be found in evidence that the debtor has engaged in planning with precisely this intention, or what is now commonly termed “asset protection planning” and which is aimed at unknown future creditors, but (properly, at least) not existing ones.” According to Mr. Adkisson, “[t]his is why it is so important that planning done be for reasons other than asset protection planning . . ..”
One could argue that transfers of separately owned assets to a separate share of a QST is done for legitimate estate planning reasons unrelated to asset protection planning. It is much simpler, after all, to transfer these separately-owned asset to a QST, rather than create a separate trust document just for these assets. The problem with this traditional argument, however, is that the 2015 amendments to the QST statute specifically provide that all property transferred to a QST will be treated as tenancy by the entirety for creditors rights purposes “unless otherwise provided in writing by the settlor or settlors who transferred such property to the trust.” Thus, it would actually be an easy matter for the spouse transferring separately owned property to a QST to agree in writing that the separately owned assets should not be insulated against attack by his or her separate creditors.
At least in Missouri, the better argument against Mr. Adkisson’s broad reading of the UFTA, i.e., to include all future creditors, is the language of the QST statute itself. Similar to the language of the Missouri Asset Protection (“MAP”) Trust statute which preceded the QST statute, if the 2014 and 2015 amendments to the QST statute are to be given any legal effect, transfers of separately owned assets to the transferor’s separate share of a QST must be protected against the separate claims of future potential creditors of the transferor spouse. The only possible exception to this general rule would be the creditor “tacking” or “piggyback” situation referenced above, which situation again can be easily addressed with the special trust drafting language, already referenced, to specifically account for known present and future creditors.
Even assuming, for the same of argument, that Mr. Adkisson’s conclusions are correct, separately owned assets which were transferred to a QST prior to the passage of the 2015 amendments should nevertheless still be protected from the claims of the transferor-spouse’s separate creditors, because it would be impossible for the creditor to demonstrate the actual intent required, as of the time the assets were transferred to the trust. Of course, if the 2015 amendment was ruled unconstitutional, the creditor would retain a separate ground for attack.
Potential Challenge Under Federal Bankruptcy Law
Missouri estate planning attorneys and other advisors need to also be cautioned regarding the potential federal bankruptcy law aspects of transferring a spouse’s individually-owned assets directly to his or her separate share of a QST. This is despite the fact that the 2015 amendments to the QST statute provide that the property owned by the trust is to be treated as tenancy by the entirety property for federal bankruptcy purposes.
Although, without a change in the federal bankruptcy law, the bankruptcy judge would be bound by the Missouri law and its asset protection statutes, the bankruptcy court judge is free to apply its own construction of the bankruptcy code’s fraudulent transfer “actual intent” language, under 11 U.S.C. Section 548. Just as importantly, it must be remembered that, over 10 years ago, Senator Jim Talent of Missouri proposed the following amendment to the federal bankruptcy code, which proposed amendment was eventually codified as part of new Section 548(e) of Title 11, United States Code:
“(e)(1) In addition to any transfer that the trustee may otherwise avoid, the trustee may avoid any transfer of an interest of the debtor in property that was made on or within 10 years before the date of the filing of the petition, if--
(A) such transfer was made to a self-settled trust or similar device;
(B) such transfer was by the debtor;
(C) the debtor is a beneficiary of such trust or similar device; and
(D) the debtor made such transfer with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made, indebted.”
Thus, whereas a two-year bankruptcy “recapture period” applies to transfers to third parties generally, if actual intent to defraud is found, under new Section 548(e) of the Federal Bankruptcy Code an extended 10-year recapture period applies to transfers to self-settled trusts and similar devices, i.e., trusts and other devices in which the settlor has retained an interest as beneficiary, but only if “the debtor made such transfer with actual intent to hinder, delay, or defraud any entity which the debtor was or became, or or after the date that such transfer was made, indebted.” (Emphasis supplied.)
Somewhat similar to the above-described attorney debate over the precise meaning of the UFTA “actual intent” language, over the last 10 years attorneys have debated whether this 10-year federal bankruptcy recapture period was intended to apply to all transfers to domestic asset protection trusts, even if there is no finding of an actual intent at the time of creation of the trust to avoid the rights of a specific (i.e., known) existing or future creditor of the settlor.
The view of many, at least, is that there is a significant risk of the 10-year “recapture period” applying to transfers to any “self-settled trust or similar device,” as long as at least one of the purposes of the transfer is to avoid creditors, whether they be present or future, and whether or not the present or future creditors are specifically identifiable at the time of the transfer. Again, this 10-year recapture period is in lieu of the normal two-year waiting period for fraudulent transfers generally, which can be found in 11 U.S.C. Section 548(a)(1).
An equally persuasive view, however, would be that Section 548(e) only applies if there was actual intent to hinder, delay or defraud a specific present or future creditor. The best support for this position can be found in the Congressional Record history to Senator Talent’s amendment, which is examined further, below. See Congressional Record, 109th Congress, March, 7, 2005, page S2137, and March 10, 2005, pages S2427 - S2428.]
The best explanation we have to date as to what Congress intended by the phrase “or similar device” can be found in a recent decision of the Bankruptcy Court for the Southern District of Illinois – Quality Meat Products, LLC v. Porco, Inc. and Amy Bouvet, Case No. 09-31587 (Filed March 30, 2011). There the court ruled that the term “similar device,” as employed in 11 U.S.C. 548(e), required some form of an express trust, i.e., it did not include a “constructive” or “resulting” trust.
Some may argue Section 548(e) is only intended to apply to irrevocable trusts, but the federal bankruptcy code itself does not so provide, nor does the Congressional Record discussion, and even if either did, clients and their advisors would still need to deal with the “or similar device” language of the Code.
Others may attempt to argue that the term “self-settled trust” cannot possibly apply to a QST, since a QST requires two settlors to establish, not just one, thus emphasizing the word “self.” Again, however, there is no direct authority for this position, and it would seem unlikely Congress would have intended the new law to be avoided so simply.
Still a third argument against the application of Section 548(e) in the QST context might be that, because joint creditors of the husband and wife can reach the assets of a QST, transfers to a QST are not the type of transfers envisioned by the Code. Again, however, the federal bankruptcy code itself does not contain such limiting language. In fact, a contrary argument can be formulated as a result of the Code’s use of the phrases “debtor made such transfer” and “debtor . . . became . . . indebted,” as opposed to two debtors jointly made such transfer and jointly became indebted.
The reason Section 548(e) was not an issue prior to the 2014 and 2015 amendments to the Missouri QST law, is that only tenancy by entirety property could be transferred to the QST, under the original law. Because tenancy by the entirety property was already protected from all but joint claims against both spouses, and because a QST by definition preserves joint claims against both spouses, transfers to a QST cannot be said to have been made with the required Section 548(e) actual intent to hinder future joint creditors of the couple. The situation as far as creditors’ rights is not changed after the tenancy by the entirety assets are transferred to the QST, in other words.
With the addition of “any joint property” transfers to the trust last year, and now with the total elimination of any prior titling requirements for property owned by a QST, transfers of jointly owned (but not tenancy by the entirety) property to the QST, such as a jointly owned credit union account, as well as transfers of assets owned separately by a husband or wife to a QST, now at least potentially fall within the scope of 11 U.S.C. Section 548(e), and the 10-year waiting period for claims in bankruptcy.
Did Senator Talent Intend His Amendment to Extend This Far?
The question remains: Did Senator Talent intend his Section 548(e) amendment to the federal bankruptcy code to extend to all transfers of separately owned assets to a settlor spouse’s separate share of a QST, or only to transfers where an actual intent to hinder, delay or defraud a specific present or future creditor can be found? At one point during the Congressional debate the senator said simply: “My amendment states clearly that these [self-settled] trusts cannot be used in bankruptcy to allow a person to shelter their assets to avoid repaying their debts because of a judgment in criminal, civil, or bankruptcy court.”
Other comments by Senator Talent during his oratory in the Senate focused on the intent requirement of his proposed amendment (i.e., the fourth prong of his proposed amendment, quoted above), a requirement which Senator Schumer was attempting to remove from the bill: “[W]e should not allow criminals to hide their assets and avoid paying their bills. This amendment makes certain that dishonest people can't hide their assets, especially if they have caused others to lose their jobs, retirement pensions, health care benefits and, in some cases, their life savings. . . . My amendment is simple. It closes the asset protection trust loophole by empowering bankruptcy courts to go back 10 years to take away fraudulent transfers that criminals have sheltered away in an attempt to avoid paying back their debts.”
The question thus becomes: Does a married couple establishing a QST for their tenancy by the entirety assets, merely attempting to preserve the already protected status for the same, suddenly and automatically fall within the grasp of Section 548(e) when either of them transfers separately-owned assets to the QST (whether to the joint share or to his or her separate share of the trust), at least with respect to the property which was previously separately owned? The answer depends on how one reads the fourth prong of Section 548(e): “the debtor made such transfer with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made, indebted.” (Emphasis supplied.)
Because the language of the UFTA and Section 548 of the bankruptcy code is virtually identical, with the exception that the term "future creditors" is not employed in the heading of the latter, the better position would appear to be to read Section 548(e)'s “actual intent” language as not automatically applying to all separately owned assets which were transferred to a QST within 10 years of the filing of the petition in bankruptcy, regardless of whether the debtors in bankruptcy were present creditors, future creditors, or future potential creditors, at the time of the transfers in question. Rather, the trustee in bankruptcy's recapture power should be limited to situations in which actual intent to hinder, delay or defraud a specific present or future creditor is found.
This certainly was the assumption Senator Schumer was operating under, when he attempted to remove the “actual intent” language from Senator Talent’s proposed amendment:
"My friend from Missouri has offered an amendment that frankly keeps the status quo. I understand many on the other side are sort of pained that they had to vote against this amendment, but let me tell colleagues what the Talent amendment does. It requires a showing of intent to defraud in order to not shield the assets. Well, give me a break. Or as my kids would say: Hello.
Which millionaire is going to hire a lawyer and say, make sure you leave a paper trail so they can prove intent? Of course, one cannot prove intent, particularly if the actual intent is to hide the assets.
So in all due respect to my good friend from Missouri, this amendment is simply a subterfuge. Make no mistake about it, the Talent amendment will not rectify the millionaire's loophole, will not provide cover for people who seek cover.
If we want to correct the Talent amendment, vote for the Schumer second-degree to Talent, which eliminates the intent requirement."
See Congressional Record, 109th Congress, March 10, 2005, pages S2427 - S2428.
A few days earlier during the Senate debate, Senator Schumer, in offering his own alternative to Senator Talent's amendment, had commented that a basic problem with Senator Talent's proposed amendment is that "you would have to prove that the intent of the filer [i.e., settlor] of the trust was to avoid [claims in] bankruptcy. I do not have to tell anyone here who is a lawyer that to prove that intent, especially when the filer would want to make sure that intent could not be proven and would leave no paper trail, no documents or anything else, would be next to impossible. . . . This Amendment removes the requirement that you must prove the intent of setting up the trust was simply to avoid your assets being taken in bankruptcy . . .." See Congressional Record, 109th Congress, March 7, 2005, page S2137.
These comments of Senator Schumer, teamed with the above-referenced statements by Senator Talent regarding criminal behavior and how his proposed amendment "makes certain that dishonest people can't hide their assets," leads one fairly clearly to the conclusion that Section 548(e) was not designed to reach legitimate asset protection planning aimed at unknown potential future creditors, such as the planning a physician might do when concerned about potential future unknown malpractice claims, or which any other individual might undergo when concerned about a potential unanticipated and large automobile accident judgment.
What to Do Now?
If married couples and their advisors are concerned that Mr. Adkisson’s broad construction of the “actual intent” standard will apply for state or federal fraudulent transfer purposes (including claims in bankruptcy), it may be wise not to reference the Missouri QST statute, RSMo Section 456.950, in the trust document, or anywhere else. The reason for this is to minimize any evidence that one of the purposes for the trust is to insulate assets from potential future creditors. Whereas when the QST statute was first passed in 2011it contained several ambiguities which required a statement of the couple’s intent to comply with Section 456.950 (as outlined in my 2012 Journal of the Missouri Bar article on the topic), since most of these ambiguities have now been resolved by statutory amendment (including as a result of a 2015 amendment clarifying that a QST may contain a discretionary power to distribute trust property to a person in addition to a settlor), continued references to Section 456.950 are not as necessary as they once were, and may no longer be advisable.
Additional Planning for Assets Already Transferred to Existing Joint Trusts*
Subject to the potential equal protection clause objection outlined above, in situations where a joint trust meeting the requirements of a QST has already been funded, and it is thus difficult to prove all assets transferred to the trust were owned as tenancy by the entirety at the time they were transferred to the joint trust, the clients may choose to simply leave the assets in the trust. The reason for this is that it would be much more difficult for a claimant to successfully argue the existence of the requisite fraudulent “actual intent,” if the assets at issue were transferred to the joint trust before Missouri even had a law protecting separately-owned assets owned by a QST. The couple merely elected to continue on with its existing joint revocable trust (amending the trust instrument in the unlikely event it does not already comply with RSMo Section 456.950), and chose not to be burdened by transferring assets out of the trust and into tenancy by the entirety form, only to have to transfer the assets back to the trust, later on.
Even if the trust is later divided into separate shares for the husband and wife, it could still be argued that, since the joint share QST trust assets were already protected as a result of the 2015 amendments, and not as a result of any action by the couple, this protection should continue to apply to the new separate shares, i.e., because the spouses are not creating any additional protections by the division. Of course, a like argument could not be made as to any subsequent transfers of separately-owned assets to the husband’s and/or wife’s respective separate shares.
The only approach which addresses the possible equal protection argument, however, will be to transfer the existing assets of a joint revocable trust out of the trust and into tenancy by the entirety form, to the extent there is any question about the ability to prove the origin of the assets at the time they were transferred to the trust. It will also require that any assets which are re-transferred into tenancy by the entirety form, with the eventual goal of gaining the protections of the QST, be held in tenancy by the entirety form for a sufficient period ranging from 90 to 180 days, in order to minimize the effect of “step transaction” arguments of a claimant.
Additional Planning for New Transfers*
When assets are to be transferred to an existing or new QST, whether for the sole or added purpose of asset protection, the safest planning would be to ensure that only tenancy by the entirety property is transferred to the QST, whether to the joint share or to either spouse’s separate share. If separate property is transferred to the QST, but it is not intended that the protections of Section 456.950 apply to it, prepare the trust document to allow for these separate “non-protected” shares. You can do this by labeling the shares H-1 and W-1, as opposed to shares H and W – which would be intended as the QST-protected shares – and the 2014 amendments to the Missouri QST statute confirm this is permissible.
Based on the above-referenced holding in the Quality Meat Products case, which required that transfers to an express trust exist in order for the 10-year bankruptcy recapture period to apply, it would seem that transfers of separately owned or jointly owned assets into protected tenancy by the entirety form would not be subject to the 10-year bankruptcy rule. Of course, such transfers would still be subject to the general 2-year bankruptcy rule for fraudulent transfers generally, as well as any separate state law fraudulent transfer claim still open under the applicable statute of limitations.
Although Missouri state law is not completely clear on the point, it would appear that a married couple may enter into a valid agreement declaring that, when assets are transferred into tenancy by the entirety form, the marital and non-marital property attributes of the property are not changed, as long as all independent counsel and full disclosure requirements are satisfied. It would also appear that the tax law has developed sufficiently that such an agreement will not constitute an estate tax including “string” over the new tenancy by the entirety property, primarily because of the requirement that a spouse/transferor would need to act against his or her own interest, in order to have his or her full interest in the transferred property returned.
What if a nonresident of the state of Missouri brings a claim against a Missouri resident who, along with his or her Missouri resident spouse, have established and funded a QST? Although not free from doubt, here it is likely that the state of Missouri would have the strongest contacts to the matter at issue, and therefore the protection of the Missouri law would be upheld, notwithstanding a strong state policy of the forum jurisdiction in opposition to the Missouri law.
Can a married couple not residing in the state of Missouri establish a QST, under Missouri law, which will be enforceable under the laws of the nonresidents' jurisdiction, especially if it can be demonstrated that the nonresidents' jurisdiction has a strong public policy against asset protection planning? The Missouri statutes, Section 456.1-107, provide that a mere choice of law clause would not be sufficient, and a recent federal bankruptcy decision out of the state of Washington, In re Huber, 201 B.R. 685 (Bankr. W.D. WA May 17, 2013), supports this position. [Also note that the Comment to Section 107 of the Uniform Trust Code actually lists preserving creditors’ rights among its list of potential public policy concerns.]
Note, however, that if the nonresident married couple reside in a so-called “tenancy by the entirety” state, such as Florida, and only transfer tenancy by the entirety property to the trust, there would be a much stronger argument that the transaction is not against a strong public policy of the forum jurisdiction. Also, if the nonresident married couple is able to move the trust's principal place of administration to Missouri (e.g., by using a Missouri corporate trustee), there would at least be an argument that Missouri law should govern the administration of the trust, and therefore creditors' rights against the trust corpus. See Comment to Section 107 of the Uniform Trust Code, and Rothschild and Rubin, "Alaska Asset Protection Trust Deemed Invalid Under Washington Law," Trusts & Estates (May 29, 2013).
*Note that these recommendations are in addition to the other drafting and funding recommendations outlined earlier in this article.
©James G. Blase, St. Louis, Missouri - 5/31/2015.
DISCLAIMER: The above materials are provided for informational purposes only, and are not intended as legal or tax advice. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship.
The Estate Planning Edge is a periodic column written by Mr. Blase in an effort to keep his clients and website readers current on the most recent federal and state law developments in estate planning.