Revocable Trusts


A revocable trust (otherwise known as a “living trust”), is frequently used as a way to avoid probate and ultimately saving taxes after death. The revocable trust offers various advantages over a traditional will; however, there are multiple factors one must consider before ultimately deciding if a revocable trust is in your best interest in relation to your overall estate plan.

What is a Revocable Trust?


A revocable trust (otherwise known as a “trust agreement”) is a document that is created by you, and exists as a way for you to manage your assets during the course of your life, as well as assign your remaining assets after your death. The individual who creates a trust agreement carries the title “grantor” or “settlor.” The individual that is responsible for the administration of the trust assets also carries the title of “trustee.” You have the option of serving as a trustee, or you can alternatively appoint another person, bank, or trust company to act as your trustee. This trust is always “revocable” since you have the option of modifying or terminating the trust at any time during the course of your life; the only exception being if you are incapacitated.

Over the course of your life, the trustee will invest as well as manage the trust property. Almost all trust agreements give the grantor the option to withdraw money and/or assets from the trust of the time in any amount they desire. In the event you are incapacitated, the trustee is then authorized to continually administer your trust assets, pay bills, and fully make investment decisions.

By doing so, this bypasses the need to hire a court appointed guardian of any aspect of your property, which in turn is one of the biggest advantages of having a revocable trust.

After your death, the trustee (or, in the event that you were the initial trustee, your successor) is ultimately responsible for paying all claims and taxes, to which they will distribute your assets to each of your beneficiaries as stated in the trust agreement.

Each of your assets (e.g. bank accounts, real estate property, investments, etc.) must be formally transferred to the trust before you die to obtain the maximum benefits from the trust. This process, known as “funding the trust,” requires the changing of ownership from the assets of the trust. In the event that certain assets fail to be transferred properly, these assets have the potential to be bound by probate.

When do you need a revocable trust?


If you want to avoid probate on assets without a named beneficiary or your gross estate including life insurance death benefits exceeds $1,000,000.

Under funding for RT, the purpose is not just to avoid probate but also to minimize inheritance taxes.  In an estate over 1 million, without a RT, everything over 1 million is subject to inheritance tax of approximately 50%.

An RT allows 2 million for a married couple to pass to heirs without tax then over 2 million the couple should add the ILIT (IRREVOCABLE LIFE INSURANCE TRUST).  The cost of an ILIT is approximately  $1,000 in attorney fees.

What is Probate?


At its core, probate is the court supervised management of a descendant’s estate. This process, created by state law, is in place to transfer assets from the descendant’s name to his/her beneficiaries. In each case, a personal representative is appointed to administer the estate. This process always ensures that creditors, taxes (as well as expenses) are always paid before the distribution of the estate to beneficiaries. This personal representative is always accountable to the court, as well as the state beneficiaries for his/her actions during the course of this event. In the event that probate states contain less than $75,000 of assets that are non-exempt, it is up to Florida law to provide a conventional probate process that is known as “summary administration.”

Are All Assets Subject to Probate?


No. Assets that are owned by descendent in his/her individual name are subject to probate. Any assets that are owned jointly as “tenants by the entirety” via a spouse, or “with rights of survivorship” via a spouse or any other person will therefore pass to the surviving owner without the need for probate. Additionally, this is the case for assets with designated beneficiaries (e.g. life insurance, retirement accounts, annuities, bank accounts, investments, etc.) that has been designated as “pay on death” or “in trust for” a pre-designated beneficiary. Assets that are held in trust will also elude probate.

How Can a Revocable Trust Completely Avoid Probate?


It is possible for revocable trusts to avoid probate. This is possible via affecting the overall transferal of assets throughout the course of your life to the trustee. This in turn avoids the requirement of using the probate process to transfer your assets after you die. The trustee then has the instant authority to administer the trust assets at the moment of your death: therefore, appointment by the court is not needed.

The “funding” of revocable trusts is essential to effectively avert probate. Individuals that wish to not entirely fund their trusts more often than not require both a probate administration and a trust administration to successfully allocate the assets. Because the revocable trust may not fully avoid probate, a “pour over” will is required to successfully transfer any and all probate assets to the trust after death.

How to Know if Assets are Titled Properly to a Revocable Trust?


Your account statement as well as your stock certificate, your title, and/or deed shall reference the trust. Alternatively, it may reference yourself as the trustee. Additionally, you may also choose to fund your trust by naming said trust as a beneficiary of life insurance or another type of arrangement. Your attorney as well as your financial advisor can assist you with the overall transfer of assets to your trust. In the event that your trust will own real estate, it is vital to have the deed prepared by an attorney. The attorney will then consider the overall impact of surviving mortgages, as well as title matters and homestead limitations when the deed is prepared.

Can the Trust Hold Title to my Homestead?


In various circumstances, your homestead property can be shifted to your trust. Most Florida counties have in place special requirements that maintain the homestead tax exemption. Moreover, special language may be needed in the trust agreement as well as the deed. However, homestead property runs the risk of losing its exemption from creditors when the title is seized in a revocable a trust, resulting in the bankruptcy law on this point being unsettled. Your attorney has the ability to recommend you on whether or not placing your homestead into your trust is to your benefit. If it is, they will inform you of the requirements for a binding transfer.

Do I Benefit by Avoiding Probate?


If you avoid probate, this may decrease the price of managing your estate as well as any time delays that are associated with the probate procedure. However, many of the costs and time delays that are associated with probate (e.g. filing a federal estate tax return) will be necessary with a revocable trust. The management of the revocable trust after death is nearly parallel to that of a probate administration. The trustee is responsible for collecting and valuing the trust assets, determining creditors and beneficiaries, paying taxes and expenses, and allocating the trust estate. The trustee is also entitled to a fee for the management of the trust, as is the private representative of the estate.

Alternatively, evading probate in various states is advantageous. Due to the nature of real estate, probate is required in every state where you on real estate. This can be avoided by reassigning possession of the real estate to your trust during the course of your life.

How are Creditors Satisfied?


Florida’s trust law fails to have a explicit method for finding and compensating creditors after death. Creditors have approximately two years from the descendant’s death to file a claim against the estate. The trustee may understandably be reluctant to distribute the trust assets to the beneficiaries until he/she is ultimately content that every claim has been paid. Therefore, various clients opt to create a probate estate in addition to the trust administration an order to take full advantage of the probate claim procedure. The probate law will then let the time for creditors to file claims against the estate (usually three months from the date of notice), but also provide a procedure for opposing claims.

Does the Trust Provide Protection From Creditor Claims?


In Florida, trust assets are never protected from the claims of your creditors. During your life, the assets present in your revocable trust shall be treated in the same way as if the trust were possessed via yourself, and are thus subject to your creditor in the same way as if you actually own them in your personal name. If the trust assets continue to remain in the trust after you die, the interests of the beneficiaries may be protected for various types of assets, which includes assets that are owned by a spouse as “tenants by the entirety.” Therefore, utmost consideration must be given to these assets when you decide how to fund your revocable trust.

Does the Trust Provide Protection From the Elective Share?


Florida law requires that a surviving spouse is permitted to a minimum percentage of the descendant’s estate (usually about 305 of the estate). This percentage usually includes certain assets that have been passed outside of probate. Usually, assets that are held in a revocable trust are subject to the elective share. Some exceptions are present to the elective share, meaning the right to receive an elective share can ultimately be renounced by the spouse. Thus, it is in your best interest to refer with your attorney in regards to the application of the elective share in your particular situation.

Who Pays Federal Income Tax on Trust Income?


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

A revocable trust becomes a completely separate entity for federal income tax purposes when it becomes irrevocable. The trustee must then file an annual fiduciary income tax return. Additionally, tax income, deductions, as well as credits are thus determined in much the same way as for an individual. Trusts are also allowed a deduction for distributions to beneficiaries. By doing so, the trespasses on income as well as deductions to beneficiaries to be taxed on their personal income tax returns. Finally, income that is not distributed to the beneficiaries is ultimately taxable to the trust.

Is it Possible for Revocable Trusts to Actually Keep Estate Taxes?


Many times, revocable trusts are credited with keeping estate taxes, which is not completely accurate. Your interest as well as your power over the trust assets will cause the trust to be included in your taxable estate after your death. The trust can be drafted in an effort to minimize the effect of estate taxes; however, the same estate planning tactics are also available to people who choose to use a will in addition to those that choose a revocable trust.

What are the Trustee’s Responsibilities?


The role of the trustee is never easy. The powers and duties a trustee have will solely depend on the instructions in your trust agreement. In general, your trustee will:

  • Dispense trust income and/or principal to each beneficiary as stated in the trust agreement.
  • Make the right decisions in accordance to taxes concerning the trust.
  • Keep accurate and up-to-date records of all trust transactions.
  • Issue statements of account and tax reports to each trust beneficiary.
  • Answer any and all questions you and any beneficiary has concerning any aspect of the trust. 

Your trustee may have broad powers or very limited powers; this solely depends on the nature of the trust. In any case, your trustee is a fiduciary and likewise must always follow a strict standard of care when performing trust responsibilities.

Who May Act as Trustee or Successor Trustee?


Choosing the trustee is one of the most important decisions in this process, and likewise may affect the way you are taxed. Of course, you are able to name nearly anyone as your trustee, but different than  the appointment of a personal representative of a probate estate, the trustee does not have to live in Florida or even be related to you. Additionally, you can name yourself or any other individual, or even corporate trustees such as a bank or trust company.

An individual trustee can also be a family member or a friend, or even a professional advisor. Many individuals choose to appoint family members or friends as successor trustee, as they will assume responsibility for the trust management and distribution after their death (and can likewise be trusted). If a family member or friend is chosen, it is to your benefit to place consideration into the person’s qualifications, the potential for conflict with other beneficiaries, and the overall burden you may be placing on that individual. The trust agreement should also allow these individuals to hire qualified professionals to assist them in their duties as the trustee.

How do I Know What I Need?


A thorough review with your estate planning attorney is in order. Revocable trusts should  be enforced as an overall portion of an estate strategy. Possession of assets shall also correlate between an individual as well as trust. Any and all decisions must also be prepared regarding which shall be funded, which transfers must occur, and what asset allocation must be occasionally reviewed to understand whether or not everything is going as smoothly as possible. Tax considerations must also be discussed with qualified professionals. The trust agreement should also reflect your family economic and tax goals. A revocable trust is in place to help you accomplish your goals when properly prepared and implemented.

Please contact your Assisted Living Services Of Florida advisor immediately in order to discuss your options and begin to take advantage of them today.

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