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Trusts

  • Revocable Trust
  • Irrevocable Trust
  • Florida’s New Trust Code

A living trust is one that is established during the lifetime of the person responsible for creating the trust. A testamentary trust, in contrast, is one created from a person’s last will and testament at the time of their death.

The person who creates the trust is known as the settlor or grantor. Once a living trust is created, a trustee is appointed to manage and distribute the trust’s assets to the beneficiaries. A beneficiary is a person or persons named in the trust who will ultimately receive the assets listed in the trust.  The assets are usually distributed to the beneficiaries upon the death of the settlor or grantor. Within the trust, there are instructions for the appointed trustee on how the assets are to be managed, and when to distribute the assets to the beneficiaries. The settlor or grantor creating the trust can also be listed as a beneficiary of the trust during his or her lifetime.

Another possible arrangement in a living trust is for the grantor to serve as the trustee. In this case, a successor trustee is also named, and is responsible for taking over the trustee duties in the event that the grantor is no longer able to perform these tasks.

A trustee can only manage and distribute assets that have been conveyed to the trust. Therefore, beneficiaries listed on the trust are only entitled to the assets included within the trust. When the trust is created, the grantor must convey all real property by a correctly executed deed. Similarly, all personal property that will be moved into the trust must be transferred to the trustee using a properly executed bill of sale. Any bank accounts, stock certificates, certificates of deposits, and other intangible assets to be included in the trust must be retitled in the name of the trustee.

Any assets that are not conveyed or transferred to the trustee are subject to probate. In this case, a pour-over will is used to distribute assets to the trustee when the settlor or grantor dies. These assets are then administered and distributed to the beneficiaries named in the trust.

Revocable Trust

Any trust that is established while the grantor is still living is either revocable or irrevocable. A revocable trust gives the grantor the ability to alter the terms of the trust, withdraw some or all of the assets from the trust, and of course, revoke the trust completely. However, even a revocable trust becomes irrevocable upon the death of the grantor.

Because a revocable trust allows the grantor or settlor of a living trust to maintain control of the assets in the trust, there are no gift, income, or estate tax consequences when assets are conveyed to a revocable trust. If the grantor is also the trustee, he or she will continue to report any earnings derived from the trust’s assets on his or her personal income tax return.

The constitution of the state of Florida as well as the Florida statutes, grant a homestead exemption to every person who has legal or equitable title to real estate and maintains a permanent resident on that property. If this property is held by a revocable trust, the owner is still entitled to the homestead exemption, on the condition that he or she is the sole beneficiary of the trust during his or her lifetime. Furthermore, the owner must be using this property as his or her permanent residence. In the trust, the grantor must be allowed the sole right to the full use, occupancy, and possession of this homestead. The revocable trust may not grant the trustee any power, authority, or duty with respect to the homestead until the grantor directs otherwise, revokes the trust agreement, or the beneficiary dies.

A living trust is an excellent tool that can help plan how one’s assets are to be handled in the event of a disability.  A successor trustee can also be named to administer the trust’s assets in such a case. A trust will typically state that when the written opinions of two licensed physicians (both the grantor’s physician and another physician) certify that the grantor is either physically or mentally incapable of managing his or her property, the grantor’s right to serve as trustee is suspended. It is also common practice for the trust document to specify the right of the grantor to request a court decision to determine the question of incapacity. Once this decision is final, it is the responsibility of the successor trustee to manage the trust’s assets while the trustee is incapacitated.

The need for a living trust is based on many factors, including the amount of assets, the ability of the spouse to manage assets acquired during the marriage, and the health of both the husband and wife. While considering a living trust as soon as the circumstances call for it is best, it is especially wise to evaluate this option upon the death of a spouse. Furthermore, special consideration may be warranted based on the ability of a child to serve as a successor trustee. If a child is not able to serve as the successor trustee, a trust company or bank can also serve as the successor or initial trustee.

Any assets that are conveyed to a living trust are not subject to a probate proceeding, but they must be administered after the death of the grantor. The successor trustee is to collect the trust assets, pay all final bills, assume responsibility for the federal estate tax apportioned to the trust, and make the distribution of the remaining assets according to the instructions set forth by the trust. Creditors in a probate proceeding must file claims against probate assets no later than three months after the first notice to creditors is made in the newspaper. All assets listed within the trust, which have been distributed to the beneficiaries, are subject to creditor claims for a maximum of two years from the date of the grantor’s death. This time period is based on the statute of limitations that dictates all creditor claims must be asserted within two years of the settlor’s death. A summary probate administration can also be useful, given that this procedure permits the publication of a notice that requires creditors to file their claims within three months of the original publication date.

Irrevocable Trust

Another common type of trust, as mentioned above, is an irrevocable trust. An irrevocable trust cannot be altered or amended once is it put in place. That is, any assets conveyed to an irrevocable trust cannot be withdrawn or returned to the grantor. The most common reason to establish an irrevocable trust is for estate tax purposes. By transferring assets to an irrevocable trust, the grantor is not required to include the fair market value of these assets in their taxable estate upon their death. However, transferring these assets into an irrevocable trust constitutes a gift, as far as the IRS is concerned. As such, the fair market value of these assets at the time of the transfer must be reported to the IRS as a gift by April 15th of the year following the transfer. As a result of the transfer, the taxpayer’s estate or gift tax unified credit will be applied to any gift taxes incurred. The advantage of moving assets into an irrevocable trust is that any appreciate that may occur in the value of these assets is not subject to federal estate taxes upon the taxpayer’s death.

Another use of an irrevocable trust is for the purchase of life insurance, in order to provide the beneficiaries of the trust money to pay the estate taxes of the grantor. Because the life insurance is held by the trust, it is officially owned by the trustee rather than the grantor. This means that upon the death of the grantor, any proceeds paid out by the life insurance policy as exempted from the grantor’s gross estate. The life insurance premiums paid during the grantor’s life are normally paid by annual contributions by the grantor to the trustee of the irrevocable trust. Because of the current $12,000 per donee annual exclusion that is applied to federal gift taxes, no gift taxes are owed as a result of these annual contributions, on the condition that the beneficiaries of the trust are given the unrestricted right to withdraw these contributions during the year in which they are paid to the trustee. The withdraw right of each beneficiary is typically limited to the amount of the annual gift tax exclusion. This exclusion is subject to change, but as I mentioned above, is currently equal to $12,000 per donee.

Any proceeds of an existing lift insurance policy that has been transferred into an irrevocable trust will be included in the estate of the grantor of he is she does not survive at least three years after the transfer is made. There is also a gift tax on the total value of the life insurance policy that occurs on the date of the transfer to the irrevocable trust.

Now, if the goal of the trust is to avoid probate on the distribution of ones assets after his or her death, then there are also other options that are worth exploring. Bank accounts can be distributed to beneficiaries without a living trust or a probate proceeding by using joint bank accounts with the right of survivorship. However, the risk of this method is the ability of the joint owner(s) to remove funds from the account without the knowledge or consent of the original owner.

Florida’s New Trust Code

Florida’s new trust code became effective on July 1, 2007. With a few exceptions, the new statutes apply to all trusts regardless of whether or not they were created before or after July 1, 2007.

Before this new code was created, Florida’s trust laws only covered a portion of the law regarding trusts. Many provisions required for a valid trust and for the rights of the creditors were either found in other statutes or were not written at all.

This new code allows the grantor of the trust to designate a person in charge of representing and binding a trust beneficiary, or to receive notices, information, reports, and accounts on the beneficiary’s behalf. This becomes applicable if the grantor believes that the beneficiary may not be willing or able to sign receipts and communicate with the trustee. Thus, in these cases, an attorney or a family member could accept notices or information, and bind the beneficiary who may not be involved in the communications. This will save a substantial amount of money related to court hearings to approve accountings or obtain necessary approvals needed by the trustee.

The person who receives a notice as a designated representative is not a fiduciary. They are not liable for any acts or omissions that are made in good faith. The trustee cannot serve as the designated representative, and a beneficiary may only serve as a representative if they are a spouse, grandparent, or the descendant of a grandparent of the beneficiary being represented or that beneficiary’s spouse. An amendment can be made to an existing trust using an attorney, allowing a grantor to appoint a designated representative.

The new Florida Trust Code states that a trust is valid as long as it complies with either the law where it is to be executed, or the law where the grantor lived when the trust was created. However, according to Florida statutes, any trust that deals with real property must be in writing and signed before witnesses by the party authorized the create the trust for the land.

The new trust code confirms that the testamentary aspects of a revocable trust created by a Florida resident are invalid unless the trust is signed with the formalities required for the execution of a will in this state. According to the new trust code, the capacity to create a trust is equivalent to the capacity required to execute a will. A trust may be void if it was created by fraud, duress, mistake, or undue influence.

The new law dictates that all trusts must name a definite beneficiary or a charity. A trust may also be established for the care of an animal that has survived the grantor. The new laws allow a trust for a trust to be created for a non-charitable purpose for no longer than 21 years, if the trustee is directed to apply the income annually to such worthy purposes as the trustee decides.

As part of the new trust codes, non-judicial modification of a trust is allowed after the grantor’s death. In order for any modifications to occur, the trustee and all living persons who are current, intermediate, and first remainder beneficiaries must unanimously agree upon the changes. However, this rule only applies as long as there is not a provision in the trust that prohibits any modifications or revocations.

A trust that contains property valued at less than $50,000 may be terminated if the trustee discovers that the cost of administering the trust will be greater than the value of the property it contains.

According to the new trust code, if a revocable trust is created or funded by multiple parties, each party involved may revoke or amend the trust with regard to the portion of the trust property attributed to that party’s contribution. If any revocations or amendments are made to the trust by less than all of the total parties involved in the trust, it is the responsibility of the trustee to notify the remaining parties.

A provision added to the new trust code says that any action which challenges the validity of a revocable trust must be commenced either within the time dictated by the Florida statute of limitations or six months after the trustee has sent a copy of the trust instrument, a notice informing the person of the trust’s existence, the trustee’s name and address, and the time allowed for commencing a proceeding, whichever is shorter.

Anyone who has created a revocable trust should consider sitting down with their attorney to learn more about the new trust codes. After learning more about these changes, as well as any other changes not mentioned, the grantor can decide whether or not the trust should be amended to take advantage of the new laws in place.