Following changes to the federal estate tax law in 2010 – which eliminated the need for separate trusts for married couples to use both spouses’ federal estate tax exemptions – Missouri enacted a new law in 2011 authorizing the creation of a “Qualified Spousal Trust” (QST).
A QST is a specific type of joint trust that not only simplifies estate planning and avoids probate, but also offers unique creditor protection benefits for married couples. What makes the QST especially valuable is that it allows married couples to transfer property – including but not limited to property held as “tenancy by the entirety” (TBE) – into a joint trust without losing the creditor protection feature that comes with the TBE ownership. In addition, the Missouri law was recently expanded to provide that the assets in a QST remain protected from the separate creditors of either spouse, even after the death of the first spouse, as long as certain requirements are met.
What Is TBE?
TBE is a form of joint property ownership specifically designed for married couples. TBE is recognized in 25 states and the District of Columbia. The specific rules and limitations of TBE vary by state.
In Missouri, TBE is very similar to what is commonly referred to as “joint tenancy with right of survivorship” (JTWRS) in that the surviving spouse automatically becomes the owner of the entire property upon the death of the first spouse. TBE property in Missouri also has a unique creditor protection feature – when both spouses are alive, a creditor of only one spouse cannot reach any interest in the TBE property. Conversely, in many JTWRS states, a creditor of one spouse may be able to recover the debtor-spouse’s interest in a joint property if a judgment is obtained against that spouse.
In Missouri, all jointly owned property (including real and personal property) held by a married couple is presumed to be held as TBE unless expressly provided otherwise in a titling document. However, the protection of TBE has its own limitation if a QST is not used: it only applies during marriage. When the first spouse dies, the protection of TBE is lost because the survivor is no longer married.
Why Are Assets in a QST Considered More Protected than TBE Assets?
- Creditor protection during and after the marriage — The assets in a QST are protected from separate creditors of either spouse, similar to how TBE assets are protected outside of a trust. However, the TBE assets are protected only during the marriage, while assets in a QST are protected not only during the marriage but also remain protected from separate creditors of either spouse, even after the death of the first spouse, as long as certain requirements are met.
- Use of QST to protect separately owned assets — Without a QST, separately owned assets are exposed to the creditors of the owner-spouse. With a QST, separately owned assets can be transferred to the owner-spouse’s share of the QST and remain under that spouse’s exclusive control, but benefit from the TBE creditor protection feature.
- Revocable by either or both spouses — Either or both spouses can amend or revoke their share of the QST while living. In contrast, with TBE property, neither spouse may sever the TBE ownership during the marriage or dispose of his or her interest in the TBE property without the consent of the other spouse.
- Versatile estate planning tool — A QST is typically structured to benefit both spouses during their joint lives. After the death of one spouse, the trust can be structured to continue to give the surviving spouse exclusive control of the assets, similar to an outright distribution, or one or more trust shares can be created for the surviving spouse or other beneficiaries as directed by the trust document. Furthermore, the same tax planning that previously had been done in separate trusts can now be done in a QST, which can simplify estate planning and avoid probate at the time of death.
How Can a QST Obtain and Maintain its Unique Creditor Protection Feature?
A QST must meet specific requirements outlined in Missouri law to obtain and maintain its TBE creditor protection feature. Only assets transferred to a QST during the marriage will receive creditor protection, so it is vital that assets that are to be protected be transferred to the trust after the QST is created and before the first death. Assets that come into the trust by way of a beneficiary designation, including by Beneficiary Deed, after the first spouse dies, or assets that the surviving spouse may transfer to the trust after the first death, will not be protected unless those assets are otherwise exempt from attachment by creditors under Missouri law, or those assets are placed in an irrevocable share of the trust. Thus, it is important that those assets be segregated and accounted for separately.
What Does This Mean for Married Couples in Missouri?
With the recent expansion of the creditor protection of assets in QSTs after the death of the first spouse, it is important for married couples in Missouri who have separate revocable trusts to review their estate plan to determine if converting to a QST is recommended. This may make sense if one spouse has separate liabilities or engages in a risky profession. In addition, married couples who previously set up a QST should review their asset titling, and particularly any beneficiary designations, including Beneficiary Deeds and/or Transfer on Death (TOD) and Pay on Death (POD) designations, to determine if any assets can or should be transferred to the QST during the marriage, rather than upon the death of the first spouse.
For any questions about how a Missouri QST might affect your current estate plan or assets titling, please contact Ruth Brackney or Gretchen Gold, or your regular Lathrop GPM attorney.
*Haozheng Jiang, a Summer Associate for Lathrop GPM, contributed significantly to this content.