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The Revocable Trust in Florida
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Therevocable,or“living,”trustisoftenpro-moted as a means of avoiding probate andsavingtaxesatdeath.Therevocabletrusthascertainadvantagesoveratraditionalwill,buttherearemanyfactorstoconsiderbeforeyoudecideifarevocabletrustisbestsuitedtoyouroverallestateplan.
What is a revocable trust? Arevocabletrust isadocument(the“trustagreement”)createdbyyou tomanageyourassetsduringyour lifetimeanddistribute theremainingassetsafteryourdeath.Thepersonwhocreatesa trust iscalled the “grantor”or“settlor.”Thepersonresponsiblefortheman-agement of the trust assets is the “trustee.”Youcanserveastrustee,oryoumayappointanotherperson,bankortrustcompanytoserveasyourtrustee.Thetrustis“revocable”sinceyoumaymodifyorterminatethetrustduringyourlifetime,aslongasyouarenotincapaci-tated. Duringyourlifetimethetrusteeinvestsandmanagesthetrustproperty.Mosttrustagree-ments allow the grantor to withdraw moneyor assets from the trust at any time, and inanyamount.Ifyoubecomeincapacitated,thetrustee is authorized to continue to manageyourtrustassets,payyourbills,andmakein-vestmentdecisions.Thismayavoidtheneedforacourt-appointedguardianofyourproperty.Thisisoneoftheadvantagesofarevocabletrust. Uponyourdeath,thetrustee(oryoursuc-cessorifyouweretheinitialtrustee)isrespon-sibleforpayingallclaimsandtaxes,andthendistributingtheassetstoyourbeneficiariesasdescribedinthetrustagreement.Thetrustee’sresponsibilities at your death are discussedbelow. Your assets, such as bank accounts, real
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estateandinvestments,mustbeformallytrans-ferredtothetrustbeforeyourdeathtogetthemaximumbenefitfromthetrust.Thisprocessiscalled“funding”thetrustandrequireschangingtheownershipoftheassetstothetrust.Assetsthatarenotproperlytransferredtothetrustmaybesubjecttoprobate.However,certainassetsshouldnotbe transferred toa trustbecauseincometaxproblemsmayresult.Youshouldconsult with your attorney, tax advisor andinvestmentadvisortodetermineifyourassetsareappropriatefortrustownership.
What is probate? Probateisthecourt-supervisedadministra-tionofadecedent’sestate.Itisaprocesscre-atedbystate lawto transferassets fromthedecedent’snametohisorherbeneficiaries.Apersonalrepresentativeisappointedtohandletheestateadministration.Theprobateprocessensures that creditors, taxes and expensesarepaidbeforedistributionoftheestatetothebeneficiaries.Thepersonal representative isaccountabletothecourtaswellastheestatebeneficiariesforhisorheractionsduringtheadministration.Forprobateestateshavinglessthan$75,000ofnon-exemptassets,Floridalawprovidesasimplifiedprobateprocedure,knownassummaryadministration.
Are all assets subject to probate? No,onlyassetsownedbyadecedentinhisorherindividualnamerequireprobate.Assetsownedjointlyas“tenantsbytheentirety”withaspouse,or“withrightsofsurvivorship”withaspouseoranyotherpersonwillpasstothesurvivingownerwithoutprobate.This isalsotrueforassetswithdesignatedbeneficiaries,such as life insurance, retirement accounts,annuities,andbankaccountsandinvestmentsdesignatedas“payondeath”or“intrustfor”a
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namedbeneficiary.Assetsheldintrustwillalsoavoidprobate.
How does a revocable trust avoid pro-bate? Arevocabletrustavoidsprobatebyeffectingthetransferofassetsduringyourlifetimetothetrustee.Thisavoidstheneedtousetheprobateprocesstomakethetransferafteryourdeath.Thetrusteehasimmediateauthoritytomanagethetrustassetsatyourdeath;appointmentbythecourtisnotnecessary. The“funding”ofarevocabletrustiscriticaltosuccessfullyavoidprobate.Thosepersonswhodonotfullyfundtheirtrustsoftenneedbothaprobateadministrationforthenon-trustassetsaswellasatrustadministrationtocompletelydistribute theassets.Because the revocabletrust may not completely avoid probate, asimple “pour over” will is needed to transferanyprobateassetstothetrustafterdeath.
How do I know if my assets are properly titled to my revocable trust? Theaccountstatement,stockcertificate,titleordeedwillmakesomereferencetothetrustortoyouastrustee.Youmightalsoelecttofundyourtrustbynamingthetrustasabeneficiaryoflifeinsuranceorothersimilararrangements.Yourattorneyandfinancialadvisormayassistyouwiththetransferofassetstoyourtrust.Ifyourtrustwillownrealestatethenitisimportanttohavethedeedpreparedbyanattorney.Theattorney will consider the impact of existingmortgages,titleissuesandhomesteadrestric-tionswhenthedeedisprepared.
Can the trust hold title to my homestead? Insomesituationsyourhomesteadpropertycanbetransferredtoyourtrust.MostFloridacountieshavespecialrequirementstomaintain
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thehomesteadtaxexemptionandspeciallan-guagemayberequiredinthetrustagreementandthedeed.However,homesteadpropertymay lose its exemption from creditors whentitleisheldinarevocabletrust—thebankruptcylawonthispointisunsettled.Yourattorneycanadviseyouonwhetherplacingyourhomesteadinyourtrust isappropriate,andifso, there-quirementsforavalidtransfer.Do I benefit by avoiding probate? Avoiding probate may lower the cost ofadministeringyourestateandtimedelaysas-sociatedwith theprobateprocess.However,manyofthecostsandtimedelaysassociatedwithprobate,suchasfilingafederalestatetaxreturn,willalsobenecessarywitharevocabletrust.Theadministrationofarevocabletrustaf-terdeathissimilartoaprobateadministration.Thetrusteemustcollectandvaluethetrustas-sets,determinecreditorsandbeneficiaries,paytaxesandexpenses,andultimatelydistributethetrustestate.Atrusteeisentitledtoafeeforadministrationofthetrust,asisthepersonalrepresentativeofanestate.Totheextentpro-fessional services of attorneys, accountantsandestateliquidatorsareusedtocompletetheprocess,thesavingsmaybemarginal. Ontheotherhand,avoidingprobateinmul-tiplestatesisadefinitebenefit.Becauseofthenatureofrealestate,probateisusuallyrequiredineverystateinwhichyouownrealestate.Thiscanusuallybeavoidedbytransferringowner-shipoftherealestatetoyourtrustduringyourlifetime.
How are creditors satisfied? Florida’strustlawdoesnothaveaspecificprocedureforidentifyingandpayingcreditorsatdeath.Thecreditorshaveupto2yearsfromthedecedent’sdeathtofileclaimsagainstthe
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estate.Thetrusteemaybereluctanttodistrib-ute the trust assets to thebeneficiariesuntilheorsheissatisfiedthatallclaimshavebeenpaid,and2yearsisalongtimetowait.Forthisreason,someclientschoosetoopenaprobateestateinadditiontothetrustadministrationtotakeadvantageoftheprobateclaimprocess.The probate law limits the time for creditorsto file claims against the estate (generally 3monthsfromthedateofnotice),andalsopro-videsaprocessforobjectingtoclaims.
Does the trust provide protection from creditor claims? InFlorida,thetrustassetsarenotprotectedfromtheclaimsofyourcreditors.Duringyourlifetime the assets in a revocable trust aretreatedasownedbyyou,andsubject to theclaimsofyourcreditorasifyouownedtheminyourpersonalname.Ifthetrustassetsre-mainintrustafteryourdeath,theinterestsofthebeneficiariesmaybeprotectedfromtheircreditorsbya“spendthrift”provisioninthetrustagreement.Floridalawprovidesspecialprotec-tionformanytypesofassets,includingassetsownedbyahusbandandwifeas“tenantsbythe entirety.” Consideration should be giventotheseassetswhenyoudecidehowtofundyourrevocabletrust.Yourattorneycanadviseyouonthetypesofassetsthatoffercreditorprotectionandtheeffectoffundingyourtrustwiththem.
Does the trust provide protection from the elective share? Floridalawprovidesthatasurvivingspouseisentitledtoaminimumportionof thedece-dent’sestate.Thiselectiveshare isequal to30% of the estate, including certain assetspassingoutsideofprobate.Generally,assetsheldinarevocabletrustwillbesubjecttothe
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electiveshare.Therearesomeexceptionstotheelectiveshare,andtherighttoreceiveanelectivesharecanbewaivedbythespouse.Youshouldconsultwithyourattorneyregard-ingtheapplicationoftheelectivesharetoyourparticularsituation.
Who pays federal income tax on trust in-come? Inmostinstances,therevocabletrustisig-noredforfederalincometaxpurposesduringthegrantor’slifetime.Theincomeanddeduc-tions are reported directly on your individualincometaxreturn.Thetrustwilluseyoursocialsecuritynumberasitstaxidentificationnum-ber. Arevocabletrustbecomesaseparateentityfor federal income tax purposes when it be-comesirrevocable,orstopsreportingincomeunderyoursocialsecuritynumberforanyotherreason.Thetrusteeisthenrequiredtofileanannualfiduciaryincometaxreturn.Taxablein-come,deductionsandcreditsaredeterminedinmuchthesamewayasforanindividual.Trustsarealsoallowedadeductionfordistributionstobeneficiaries.Inthisway,thetrustpassesonincomeanddeductionstothebeneficiariestobetaxedontheirpersonalincometaxreturns.Incomethatisnotdistributedtothebeneficia-riesistaxabletothetrust.
Does a revocable trust save estate taxes? Revocabletrustsareoftencreditedwithsav-ingestatetaxes,butthisisnotentirelyaccurate.Yourretainedinterestandpoweroverthetrustassets will cause the trust to be included inyourtaxableestateatdeath.Thetrustcanbedraftedtominimizetheeffectofestatetaxes,butthesameestateplanningtechniquesareavailabletopersonswhochoosetouseawillasthosewhochoosearevocabletrust.
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What are the trustee’s responsibilities? Servingastrusteeisnosimpletask.Whileveryimportant,theprudentinvestmentoftrustassetsisnotatrustee’sonlyresponsibility.Yourtrustee’sexactpowersanddutieswilldependontheinstructionsinyourtrustagreement.But,ingeneral,yourtrusteewill:
• Holdtrustproperty• Investthetrustassets• Distributetrustincomeand/orprincipalto
thebeneficiaries,asdirected in the trustagreement
• Maketaxdecisionsconcerningthetrust• Keeprecordsofalltrusttransactions• Issue statements of account and tax re-
portstothetrustbeneficiaries• Answeranyquestionsyouandthebenefi-
ciariesmayhaveconcerningthetrust
Yourtrusteemayhavebroadpowersorverylimitedpowers.Ineithercase,yourtrusteeisafiduciaryandmustfollowastrictstandardofcarewhenperformingtrustfunctions.
Who may act as trustee or successor trustee? Thechoiceofatrusteeisextremelyimpor-tant,andmayhavetaxconsequences.Youcannamealmostanyoneasyourtrustee.Unliketheappointmentofapersonalrepresentativeofaprobateestate,atrusteedoesnothavetoliveinFloridaorberelatedtoyou.Youcannameyourselforanyotherindividual(subjecttotaxconsiderations),oracorporatetrustee,suchasabankortrustcompany.Theindividualtrusteecanbeafamilymember,friendorprofessionaladvisor.Manyindividualsappointfamilymem-bersorfriendsassuccessortrustee,toassumeresponsibility for the trust management anddistribution after their death. When a family
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memberorfriendischosen,considerationmustbegiventotheperson’squalifications,thepo-tentialforfrictionwithotherbeneficiaries,andthepotential burdenyouareplacingon thatindividual.The trust agreement shouldallowtheseindividualstohirequalifiedprofessionalstoassistthemintheirduties,suchasattorneys,accountantsandfinancialadvisors.
How do I know what I need? This brochure is intended to give you abasic understanding of revocable trusts, butitcannotsubstituteforathoroughreviewwithyourestateplanningattorney.Arevocabletrustmust be implemented as part of an overallestateplan.Ownershipofassetsmustbeco-ordinatedbetweentheindividualandthetrust.Decisionsmustbemadeastowhatassetsareappropriatetofundthetrust,thetransfersmustthenoccur,andtheassetallocationshouldbeperiodicallyreviewed.Taxconsiderationsmustbediscussedwithqualifiedprofessionals.Thetrust agreement should reflect your family,economicandtaxgoals.Arevocabletrustcanhelpyouaccomplishthesegoalswhenproperlypreparedandimplemented.
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Rev.8/0953-TheRevocableTrustinFlorida(Eng).indd
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