Trusts

The Jacksonville, Florida Estate Planning and Revocable Living Trust lawyers and attorneys associated with the Cramer Law Center, P.L. are pleased to provide this general information about revocable living trusts in Florida.

WHAT IS A REVOCABLE LIVING TRUST?

A revocable trust is a document (the “trust agreement”) created by you to manage your assets during your lifetime and distribute the remaining assets after your death.  The person who creates a trust is called the “grantor” or “settler”.  The person responsible for the management of the trust assets is the “trustee”.  You can serve as trustee, or you may appoint another person, bank or trust company to serve as your trustee.  The trust is “revocable” since you may modify or terminate the trust during your lifetime, as long as you are not incapacitated.

During your lifetime the trustee invests and manages the trust property.  Most trust agreements allow the grantor to withdraw money or assets from the trust at any time, and in any amount.  If you become incapacitated, the trustee is authorized to continue to manage your trust assets, pay your bills, and make investment decisions.  This may avoid the need for a court-appointed guardian of your property.  This is one of the advantages of a revocable trust.

Upon your death, the trustee (or your successor if you were the initial trustee) is responsible for paying all claims and taxes, and then distributing the assets to your beneficiaries as described in the trust agreement.  The trustee’s responsibilities at your death are discussed below.

Your assets, such as bank accounts, real estate and investments, must be formally transferred to the trust before your death to get the maximum benefit from the trust.  This process is called “funding” the trust and requires changing the ownership of the assets to the trust.  Assets that are not properly transferred to the trust may be subject to probate.  However, certain assets should not be transferred to a trust because income tax problems may result.  You should consult with your attorney, tax advisor and investment advisor to determine if your assets are appropriate for trust ownership.

HOW DOES A REVOCABLE LIVING TRUST AVOID PROBATE?

A revocable living trust avoids probate by effecting the transfer of assets during your lifetime to the trustee.  This avoids the need to use the probate process to make the transfer after your death.  The trustee has immediate authority to manage the trust assets at your death; appointment by the court is not necessary.

The “funding” of a revocable trust is critical to successfully avoid probate.  Those persons who do not fully fund their trusts often need both a probate administration for the non-trust assets as well as a trust administration to completely distribute the assets.  Because the revocable trust may not completely avoid probate, a “pour over” will is needed to transfer any probate assets to the trust after death.

WHAT IS THE BENEFIT OF AVOIDING PROBATE?

Avoiding probate may lower the cost of administering your estate and lessen time delays associated with the probate process.  Also, trust administration generally is a private process whereas probate is a public matter.

Administration of a revocable trust after death is similar to a probate administration.  IN certain circumstances, the trustee may be required to pay expenses of administration of the decedent’s estate, enforceable claims of the decedent’s creditors and any federal estate taxes payable from the trust assets.

The trustee of such a trust is always required to file a “Notice of Trust” with the Clerk of Court in the county in which the decedent resided at the time of the decedent’s death.  The Notice of Trust gives information concerning the identity of the decedent as the grantor or settler of the trust, and the current trustee of the trust.  The purpose of the Notice of Trust is to make the decedent’s creditors aware of the existence of the trust and of their rights to enforce their claims against the trust assets.

All of the tasks which must be performed by a personal representative in connection with the administration of a probate estate must also be performed by the trustee of a revocable trust, though the trustee generally will not need to file the same documents with the Clerk of Court.  Furthermore, if a probate proceeding is not commenced, the assets comprising the decedent’s revocable trust are subject to a two-year creditor’s claim period, rather than the tree-month non-claim available to a personal representative.

The assets in the decedent’s revocable trust are a part of his or her gross estate for purposes of determining federal estate tax liability.

Avoiding probate in multiple states also is a definite benefit.  Because of the nature of real estate, probate is usually required in every state in which you own real estate.  This can usually be avoided by transferring ownership of the real estate to your trust during your lifetime.

HOW ARE CREDITORS SATISFIED?

Florida’s trust law does not have a specific procedure for identifying and paying creditors at death.  The creditors have up to 2 years from the decedent’s death to file claims against the estate.  The trustee may be reluctant to distribute the trust assets to the beneficiaries until he or she is satisfied that all claims have been paid, and 2 years is a long time to wait.  For this reason, some clients choose to open a probate estate in addition to the trust administration to take advantage of the probate claim process.  The probate law limits the time for creditors to file claims against the estate (generally 3 months from the date of notice), and also provides a process for objection to claims.

DOES THE TRUST PROVIDE PROTECTION FROM CREDITOR CLAIMS?

In Florida, the trust assets are not protected from the claims of your creditors.  During your lifetime the assets in a revocable trust are treated as owned by you and subject to the claims of your creditor as if you owned them in your personal name.  If the trust assets remain in trust after your death, the interests of the beneficiaries may be protected from their creditors by a “spendthrift” provision in the trust agreement.  Florida law provides special protection for many types of assets, including assets owned by a husband and wife as “tenants by the entirety”.  Consideration should be given to these assets when you decide how to fund your revocable trust.  Your attorney can advise you on the types of assets that offer creditor protection and the effect of funding your trust with them.

DOES THE TRUST PROVIDE PROTECTION FROM THE ELECTIVE SHARE?

Florida law provides that a surviving spouse is entitled to a minimum portion of the decedent’s estate.  This elective share is equal to 30% of the estate, including certain assets passing outside of probate.  Generally, assets held in a revocable trust will be subject to the elective share.  There are some exceptions to the elective share, and the right to receive an elective share can be waived by the spouse.  You should consult with your attorney regarding the application of the elective share to your particular situation.

WHO PAYS FEDERAL INCOME TAX ON TRUST INCOME?

In most instances, the revocable living trust is ignored for federal income tax purposes during the grantor’s lifetime.  The income and deductions are reported directly on your individual income tax return.  The trust will use your social security number as its tax identification number.

A revocable trust becomes a separate entity for federal income tax purposes when it becomes irrevocable, or stops reporting income under your social security number for any other reason.  The trustee is then required to file an annual fiduciary income tax return.  Taxable income, deductions and credits are determined in much the same way as for an individual.  Trusts also are allowed a deduction for distributions to beneficiaries.  In this way, the trust passes on income and deductions to the beneficiaries to be taxed on their personal income tax returns.  Income that is not distributed to the beneficiaries is taxable to the trust.

DOES A REVOCABLE LIVING TRUST SAVE ESTATE TAXES?

Revocable living trusts are often credited with saving estate taxes, but this is not entirely accurate.  Your retained interest and power over the trust assets will cause the trust to be included in your taxable estate at death.  The trust can be drafted to minimize the effect of estate taxes, but the same estate planning techniques are available to persons who choose to use a will as those who choose a revocable living trust.

WHAT ARE THE TRUSTEE’S RESPONSIBILITIES?

Serving as trustee is no simple task.  While very important, the prudent investment of trust assets is not a trustee’s only responsibility.  Your trustee’s exact powers and duties will depend on the instructions in your trust agreement.  But, in general, your trustee will:

  • Hold trust property
  • Invest the trust assets
  • Distribute trust income and/or principal to the beneficiaries, as directed in the trust agreement
  • Make tax decisions concerning the trust
  • Keep records of all trust transactions
  • Issue statements of account and tax reports to the trust beneficiaries
  • Answer any questions you and the beneficiaries may have concerning the trust

Your trustee may have broad powers or very limited powers.  In either case, your trustee is a fiduciary and must follow a strict standard of care when performing trust functions.

WHO MAY ACT AS TRUSTEE OR SUCCESSOR TRUSTEE?

The choice of a trustee is extremely important, and may have tax consequences.  You can name almost anyone as your trustee.  Unlike the appointment of a personal representative of a probate estate, a trustee does not have to live in Florida or be related to you.  You can name yourself or any other individual (subject to tax considerations), or a corporate trustee, such as a bank or trust company.  The individual trustee can be a family member, friend or professional advisor.  Many individuals appoint family members or friends as successor trustee, to assume responsibility for the trust management and distribution after their death.  When a family member or friend is chosen, consideration must be given to the person’s qualifications, the potential for friction with other beneficiaries, and the potential burden you are placing on that individual.  The trust agreement should allow these individuals to hire qualified professionals to assist them in their duties, such as attorneys, accountants and financial advisors.

HOW DO I KNOW WHAT I NEED?

This document is intended to give you a basic understanding of revocable living trusts, but it cannot substitute for a thorough review with your estate planning attorney.  A revocable living trust must be implemented as part of an overall estate plan.  Ownership of assets must be coordinated between the individual and the trust.  Decisions must be made as to what assets are appropriate to fund the trust, the transfers must then occur, the asset allocation should be periodically reviewed.  Tax considerations must be discussed with qualified professionals.  The trust agreement should reflect your family, economic and tax goals.  A revocable living trust can help you accomplish these goals when properly prepared and implemented.

The above information is provided to give you a basic overview of revocable living trusts in Florida, but it is no substitute for thorough counseling with a Florida estate planning attorney or revocable living trust lawyer.  If you would like a free initial consultation with a Jacksonville, Florida estate planning lawyer or attorney to find out how a revocable living trust may fit in with your estate planning goals, please contact the Cramer Law Center to schedule your appointment.

j:\wp8\blog – website\web.revocable living trusts .doc