Frequently Asked Questions Regarding
Estate Planning and Revocable Trusts in Florida
The revocable, or “living,” trust is often promoted as a means of avoiding probate and saving taxes at death. The revocable trust has certain advantages over a traditional will, but there are many factors to consider before you decide if a revocable trust is best suited to your overall estate plan. We at the law office of Henry J. Kulakowski, Jr. can help you evaluate whether a revocable living trust should be a part of your estate plan.
WHAT IS A REVOCABLE 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 “settlor.” 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. Revocable trust agreements typically allow the settler 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. A will cannot operate in that manner. A will becomes effective only upon your death. It cannot aid in avoiding guardianship proceedings. To learn more about the reasons for avoiding a court-appointed guardians, contact the law office of Henry J. Kulakowski, Jr.
Upon your death, the trustee (or your successor if you were the initial trustee) is responsible for paying all valid claims and any tax liabilities, 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 or other problem issues may arise. You should consult with your Florida estate planning attorney, tax advisor and investment advisor to determine if your assets are appropriate for trust ownership. If you would like the assistance of a Florida revocable living trust attorney, please contact the law office of Henry J. Kulakowski, Jr. so that we can assist you in making the determination of whether the revocable trust is appropriate for your circumstances.
WHAT IS PROBATE?
Probate is the court-supervised administration of a decedent’s estate. It is a process created by state law to transfer assets from the decedent’s name alone to his or her beneficiaries. A personal representative is appointed to handle the estate administration. The probate process ensures that creditors, taxes and expenses are paid before distribution of the estate to the beneficiaries. The personal representative is accountable to the Florida probate court as well as the estate beneficiaries for his or her actions during the probate administration. Florida law provides a simplified probate procedure, known as summary administration, for probate estates having less than $75,000 of non-exempt assets, and which meet with other statutory restrictions.
ARE ALL ASSETS SUBJECT TO PROBATE?
No, only assets owned by a decedent in his or her individual name without a co-owner (who has survivorship rights) or beneficiary require probate. Assets owned jointly as “tenants by the entirety” with a spouse, or “with rights of survivorship” with a spouse or any other person will pass to the surviving owner without probate. This is also true for assets with designated beneficiaries, such as life insurance, retirement accounts, annuities, and bank accounts and investments designated as “pay on death” or “transfer on death” or “in trust for” with a named beneficiary unless, of course the beneficiary predeceases the asset owner or the decedent’s estate is the beneficiary by designation or by operation of law. Assets held in trust will also avoid probate. However, the use of joint ownership and beneficiary designations may create other adverse consequences within the context of your overall estate plan. Joint ownership and beneficiary designations will not provide any creditor protections to the survivor or beneficiary, nor will it allow for a structured payout to the survivor or beneficiary. Before you rely exclusively on joint tenancy or beneficiary designations to avoid probate, please contact the law office of Henry J. Kulakowski, Jr. to learn how it will impact your estate plan.
HOW DOES A REVOCABLE TRUST AVOID PROBATE?
A revocable 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 and distribute the trust assets at your death. Therefore, appointment of a person to make such transfers by the Florida probate 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 Florida 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 if not fully funded during the decedent’s lifetime, a simple “pour over” will is needed to transfer any probate assets to the trust after death.
HOW DO I KNOW IF MY ASSETS ARE PROPERLY TITLED TO MY REVOCABLE TRUST?
The account statement, stock certificate, title or deed will make some reference to the trust or to you as trustee. It is advisable, however, to get a written confirmation from the depository or broker to confirm proper ownership of the assets. You may also elect to fund your trust by naming the trust as a beneficiary of life insurance or other similar arrangements. Again, written confirmation of proper titling or beneficiary designations is advisable. Your Florida estate planning attorney and financial advisor may assist you with determining whether your trust should be such a beneficiary and help you with the transfer of assets to your trust. If your trust will own real estate then it is important to have the deed prepared by an experienced Florida attorney. The attorney will consider the impact of existing mortgages, title issues and homestead restrictions when the deed is prepared. If you would like to have your existing revocable living trust reviewed by an estate planning lawyer or attorney, please contact the law office of Henry J. Kulakowski, Jr. to schedule an appointment at (727) 787-9100.
CAN THE TRUST HOLD TITLE TO MY HOMESTEAD?
In some situations your homestead property can be transferred to your trust. Most Florida counties have special requirements to maintain the homestead tax exemption and special language may be required in the trust agreement and the deed. However, there still remain certain questions regarding the creditor protections available under the Florida Constitution for your homestead if held in your living trust, so you should consult with an experienced Florida estate planning attorney as to whether placing your homestead in your trust is appropriate, and if so, the requirements for a valid transfer.
DO I BENEFIT BY AVOIDING PROBATE?
Avoiding probate may lower the cost of administering your estate and time delays associated with the Florida probate process. Florida Statutes provide a schedule for reasonable fees to a personal representative and his/her attorney. On the first one million dollars in probate assets, those fees calculate to equal six percent for ordinary services. There is a declining scale after that. If there is real estate to be sold, a business to be managed or transferred, an estate tax return is required to be filed, or if any litigation or unusual matter arises, the fees can be much higher.
Also, a properly funded trust can help avoid probate in multiple states. Because of the nature of real estate, and the fact that Florida courts have no jurisdiction over real estate located in states other than Florida, 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 Florida probate estate in addition to the trust administration to take advantage of the shortened probate claims process. The probate law limits the time for properly noticed creditors to file claims against the estate (generally 3 months from the date of notice), and also provides a process for objecting to claims.
DOES THE TRUST PROVIDE PROTECTION FROM CREDITOR CLAIMS?
In Florida, the assets in a revocable living trust are generally not protected from the claims of your creditors either during your lifetime or after your death. 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, but your own creditors are usually not so restricted. Florida law provides special protection for many types of assets, including, among other items, retirement plans, certain insurance products and 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 Florida estate planning attorney can advise you on the types of assets that offer creditor protection and the effect of funding your trust with them. If you would like to consult with an attorney to determine whether your assets are protected from creditors’ claims, please contact the law office of Henry J. Kulakowski, Jr. to schedule an appointment at (727) 787-9100.
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 regardless of the provisions of the decedent’s will or trust. This elective share is generally equal to 30% of the elective estate, including certain assets passing outside of probate. Usually, 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 Florida estate planning 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 as if the revocable trust did not exist. The revocable living 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 at your death, 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 are also allowed a deduction for income distributed to beneficiaries. In this way, the trust passes the income and deductions onto 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 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 assets to be included in your taxable estate at death. However, a properly designed and drafted trust, whether living or testamentary, can make effective use of the marital deduction and applicable estate tax exclusion to minimize or eliminate estate taxes.
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, among other duties, 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 qualified beneficiaries of the trust
- Answer any questions you and the qualified trust beneficiaries may have concerning the trust and provide copies of the trust documents to qualified beneficiaries or their representatives
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 and good faith when performing trustee’s duties.
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 adult 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 information is intended to give you a basic understanding of revocable living trusts, but it cannot substitute for a thorough review with your Florida estate planning attorney. A revocable 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, and 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. It can serve as a means to pass not only your assets to your loved ones in an orderly and advantaged manner, but also your values. A revocable trust can help you accomplish these goals when properly prepared and implemented.
If you would like a consultation with an experienced estate planning attorney to explore how a revocable living trust may assist you in achieving your estate planning goals, please contact the law office of Henry J. Kulakowski, Jr. to schedule an appointment at (727) 787-9100.