There are myriad reasons that a settlor may want to create a trust, ranging from a desire to avoid an expensive and lengthy probate process to the protection of assets from creditors
Probate avoidance is probably the most common reason Americans create trusts. Most states have expensive or tedious probate processes and it can be advisable to use a revocable trust as the primary estate planning document. The revocable trust is most useful when it is fully funded; that is, if the settlor transfers most assets to the trust during life, so there are no assets left in his or her own name, without a beneficiary designation directly on the asset, that would require probate for proper disposition.
Without proper funding a trust, in reality, is a hollow shell or just an agreement ready to accept property. Assets must be manually transferred one by one into a client’s revocable living trust. Real estate is transferred by deed; bank or brokerage accounts are transferred by filling out bank authorized forms; partnership or corporate interests are transferred typically by assignment and by obtaining the consent of the other partners or members of the entities; life insurance is transferred, if so desired, by a designation of beneficiary form; IRAs and other retirement benefits must be transferred by designation of beneficiary form and approved by the plan’s administrator.
Our approach is to fully assist with the funding process, but some clients may opt to do this part on their own.
Even where some assets may be titled in such a manner to pass outside of probate it is advisable to ensure these assets pass according to the terms of the revocable trust agreement upon death. In many cases you will retitle these assets into the names of their revocable living trust to maintain continuity with their estate planning goals.
Other assets requiring attention that are often transferred to revocable trusts are investment and brokerage accounts, savings accounts, real estate (with a small caveat on homestead property), partnership or other business interests, and valuable tangible property such as artwork or planes, etc. Savings, investment and brokerage accounts are relatively simple assets to retitle and your clients can contact their broker or investment advisor to obtain the necessary documents to retitle these accounts. Real estate should be handled properly by deed and if necessary, consultation with a real estate attorney should be encouraged. Finally, partnership or corporate entities in need of retitling should be treated carefully and a review of any governing documents should be conducted to ensure that a transfer of ownership is permissible under the entity’s governing agreement and applicable law, and that the transfer is made according to the terms of the entity’s governing agreement, such as a partnership or membership agreement.
Another use of a revocable living trust agreement is to avoid probate not only in Florida, but in other states where a client may own other real property. This frequently occurs in Florida with the number of snowbirds here who often own two or more homes in other states. For clients with multiple properties, transferring title to these secondary homes will avoid what is commonly known as ancillary probate in another jurisdiction. Avoiding ancillary probate can produce significant cost savings and provide a more efficient manner of administering a decedent’s estate..
When preparing a revocable living trust for a client, it is generally advisable to draft a pour-over will as well. A pour-over will is a companion document to a revocable trust and works to ensure that any assets that were not transferred to the revocable trust during life are transferred into the trust upon death. Florida allows a decedent’s property to be poured over from an estate to an inter vivos trust in existence when the will is signed or created by a written instrument subscribed concurrently with the making of the will, if the written instrument is identified in the will.
Another widely touted benefit of trusts is creditor protection, with the most common creditors of beneficiaries being divorcing spouses. Assets of a third-party irrevocable trust, that is, a trust for the benefit of anyone other than the settlor or the trustee, are generally exempt from the claims of the beneficiaries’ creditors for the very basic reason that the beneficiaries do not legally own those assets.
Florida’s spendthrift statute requires that a spendthrift provision restrain both voluntary and involuntary transfer of a beneficiary’s interest. It is strongly advised to include spendthrift language in trust instruments to make beneficial interests inalienable.
Indeed, Florida extends creditor protection to a beneficiary who is also trustee, provided that the trustee’s discretion to distribute for his or her own benefit is limited by an ascertainable standard (e.g., health, education, maintenance, and support). For maximum creditor protection, it is prudent to designate only independent trustees, or to restrict a beneficiary-trustee from exercising discretion over distributions to himself or herself.
Establishing and funding a trust to protect against claims of the beneficiaries’ creditors is a different matter entirely than establishing and funding a trust to place assets beyond the reach of the settlor’s creditors. Whereas a client concerned with the claims of creditors may request an attorney to create an irrevocable trust for the benefit of various family members, then transfer assets to that trust to frustrate creditors’ claims, those transfers would likely be voidable as fraudulent conveyances, and if the client is in bankruptcy, could be deemed bankruptcy fraud.
Protection for Beneficiaries
Often clients are interested in using trusts to protect beneficiaries from themselves. For younger beneficiaries, protection is relatively easy to justify: how many 18-year-olds or even 21-year-olds are mature enough, emotionally or financially, to handle a large inheritance? As beneficiaries get older, however, proper drafting can ensure a balance of protection and responsibility. As beneficiaries mature, receiving some assets outright may actually help beneficiaries by requiring them to manage their own money and reap benefits from a financial education perspective.
No one size fits all strategy will be appropriate for all clients and it is wise to discuss when clients think their younger beneficiaries should receive assets outright. Relevant factors include the amount of wealth at stake and how well clients know their beneficiaries. You might draft a client’s will or revocable trust to include lifetime trusts for children who are very young, when their financial maturity is inherently unpredictable, then later on, if the children seem to be maturing normally, revise the will or revocable trust later so that, for example, the trusts terminate at age 35 or provide for distributions in multiple stages at ages 30, 35, and 40.
Whereas revocable trusts afford no direct tax benefits, tax avoidance or reduction is a frequently cited reason for the creation of irrevocable trusts. There are wide range of tax savings opportunities are available through trusts, such as qualifying for a charitable income tax deduction, deferring estate taxes until the death of a surviving spouse, maximizing both spouses’ federal and state estate tax exemptions, deferring capital gains taxes, and leveraging gifts.
Some individuals create and fund revocable trusts for their own benefit primarily so that if he or she becomes incapacitated, a successor trustee may continue managing the trust assets for the settlor’s benefit. There are, of course, other ways of addressing asset management in case of incapacity. For example, a guardian could be appointed for the incapacitated person, or an attorney-in-fact under a power of attorney could manage the principal’s assets. It is often more desirable to avoid guardianships because guardianships can be are time-consuming and expensive. Powers of attorney are easy to implement but may not be readily accepted by third parties to which a document is presented by an attorney-in-fact. In addition, attorney-in-fact is not compelled to act, whereas a trustee has an affirmative obligation to administer the trust’s assets. Consequently, incapacity planning is an huge benefit of revocable trusts.
Access to Digital Assets
Another asset class that a client may need managed during life, or more commonly, during incapacity or at death, are digital assets. Internet and social media usage by individuals is widespread, and it is necessary to properly address fiduciary access and supervision of electronic assets, the Florida Fiduciary Access to Digital Assets Act (the Act), effective as of July 1, 2016, was created to offer a forum for proper authority over the digital property and account access.
A user can provide authorization allowing another person or entity’s use of his or her digital asset in three ways:
Directly with the custodian
In trust or other legal document, with the trust or other legal document being silent on the extent of access
In trust or other legal document, with the trust or other legal document expressly stating the amount of access to be given
A user may provide direction for disclosure of the digital information directly with the custodian through the custodian’s online tool. This direction can have priority over anything written in the user’s legal documents. To the extent that direction is not provided by the user through the online tool, the legal documents will direct.
As this is a new area of law and as digital presence continues to grow, it is important for clients to properly address the issue of digital assets in their trusts and other legal documents so that trustees and other fiduciaries are able to properly access and manage their digital assets.
During the estate planning process, it may be beneficial for you to draft a trust that reassigns your assets and outlines how you want your estate to be managed. Creating a trust can help save your family time, frustration, hassle, and confusion in the event of your death. There are different types of trusts, each with its unique benefits.
Kendrick Law Group can review each option with you, so you can make the best decision for your situation. Our desire is to help clients in Orlando and the surrounding areas be confident that their estate is and will be in good hands.