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Are Florida Living Trusts An Effective Asset Protection Plan?

Florida Living Trust Asset Protection

You’ve probably heard that living trusts can avoid probate, yet how about providing asset protection from protection creditor attacks? Florida living trust asset protection is thus a hot topic and one that often involves a few misconceptions.

Understanding Asset Protection in Florida

Defining asset protection in Florida is a great first step to understanding how to use your living trust effectively because asset protection is a important part of your Florida estate plan.

Doing asset protection is about adopting strategies to legally protect your assets.  Assets are defined as anything that you own that has value.  

A revocable living trust in Florida does NOT provide asset protection for the person who created the trust (the “trustmaker”) but does provide asset protection for succeeding generations.

Thus, if the trustmaker of a living trust is sued, all of the assets held in the name of the Trust will be subject to liens and judgments.  Further,  all assets held in the name of the trust at the time of death will be subject to both state and federal estate taxes.

Why are living trusts not asset protected for the trustmaker/s?

When we refer to a living trust, for purposes of inquiring into Florida living trust asset protection, we’re talking interchangeably about a revocable trust, revocable living trust, intervivos trust, or any combination thereof as defined in the Florida trust code.  We are not talking about an irrevocable trust in Florida and the difference between revocable trusts and irrevocable trusts in Florida is an important distinction because the “revocability” of the trust makes it unsuitable for providing asset protection for the trustmaker.

Why does revocability create a problem for asset protection?  

Revocability by definition means that a trust may be changed or terminated by the trustmaker at any time.  This results in a very flexible tool for the trustmaker that is great for certain legal strategies that we will discuss below.

Asset protection by definition requires that one’s assets be transferred to a separate entity of some type in order to be protected.  This is required because, if a judgment creditor seeks to attach a lien to your assets, you want to be able to say that they are in a separate entity that was intended to be inaccessible to future creditors.  Living trusts, which are revocable, are designed to be fully accessible by the trustmaker and thus would also be fully accessible by creditors.  On the other hand, living trusts are an integral part of a legal strategy that is not concerned about asset protection for the trustmaker.

What legal strategy is accomplished with revocable trust planning?  

Living trusts were invented by the British in as alternative to, and to avoid, the ecclesiastical probate court system. So, they were invented to avoid the high cost and control issues inherent in the probate court process.  These issues still plague the probate court system in Florida and other states today, and thus most people seek to have a living trust for this very same purpose.  As a bonus, living trusts are also good for managing estate assets with flexibility and protecting the trustmaker in the event of disability.

As trust law continues to evolve, new uses for living trusts arise, such as allowing flexibility for Florida Medicaid planning, or dynasty trust planning.  Living trusts are also good for protecting children and grandchildren where estate planning in Florida for second marriages are concerned.

So this means…

A living trust is first and foremost used to provide a place to title your assets so that in the event of your demise, probate will be unnecessary.  A solid legal strategy utilizing a living trust means that it will be properly drafted to address the above issues based upon the unique circumstances of the trustmaker.  Your assets will need to be titled in the name of the trust, a process called trust funding in Florida, in order for probate avoidance and these other strategies to work.

Where does asset protection come into the picture with living trusts? 

When it comes to Florida living trust asset protection, Living trusts come with a “twist” and that is the fact that when the trustmaker passes away, the living trust becomes irrevocable.   If the “now irrevocable” trust contains what is called a “spendthrift clause”, it has become an asset protection trust.  An important thing to clarify is that if a joint living trust was originally established and one of the joint trustmakers passes away, the trust remains revocable and is thus not asset protected.  It is only when the last trustmaker passes that the living trust becomes irrevocable.   Some additional steps may be required to establish the irrevocable trust such as obtaining a tax id number for the trust.  When the separate identity of the trust is establish, it will come irrevocable.

Your trust beneficiaries thus can now take advantage of the asset protection offered by this spendthrift trust and this is the foundation of dynasty trust planning in Florida.

Living Trust Asset Protection

Living Trusts Provide Asset Protection for Family Members 

Life events happen, and when they do it pays to have your hard earned assets protected.

The simple truth is that we are all vulnerable to potential lawsuits.  Let that sink in for a moment.  

We live in a “litigious society”  and this is largely due to the ease of access to the court system and the fact that plaintiff’s attorneys often charge little up front to take a case to trial.  Relationships gone bad, auto accidents, and defaulting on loans and contracts are all ready sources of litigation.  Do you have a plan for your family members in the event they are forced to deal with these kinds of unfortunate circumstances?   If your living trust includes spendthrift protection then the foundation of your plan may already be in place.

The basic idea with a spendthrift trust is that if your family members experience a life event such as divorce, bankruptcy, foreclosure, they can keep their assets in the trust and they will stay protected from those claims.

Additionally, we all know that people tend to mature as they grow in both age and experience.  This is a key aspect of asset protection planning for younger family members (i.e. children and grandchildren) who may be vulnerable to all kinds of pitfalls.   The idea is that an older responsible family member who is serving as Trustee can protect that younger generation by moderating the use of that beneficiary’s trust fund.  In setting up your family asset protection trust plan, you may also add conditions to a beneficiary’s access to funds such as “remaining drug free or “pursuing a college education“.

So, your Florida living trust asset protection plan is not only protecting your family from potential “outside creditor attacks” but also from protecting them from themselves during periods of youthful indiscretion or from areas of personal vulnerability such as drug and alcohol abuse.

Special needs trust planning is another area of asset protection for family living trusts.  

Anything having to do with the cost of debilitating medical conditions is naturally a critical area of asset protection. When a loved one has special needs based upon a medical diagnosis that includes a mental or physical disability, medical costs are a key concern.  Many people do not realize that if a loved one is receiving government benefits (SSI) for disability, an outright inheritance will immediately disqualify them from their benefits.  In fact, even if they try to “disclaim” the inheritance, they will still be penalized and will lose benefits for doing so.

The good news is that your Florida living trust asset protection  plan can include a special needs trust in Florida to assure that your most vulnerable family members will not suffer.   A special needs trust allows your family member to continue receiving needed public benefits while also protecting the trust assets of that loved one from creditor attacks.

Does a family asset protection plan keep my family members from accessing their own trust account?

The short answer is…

Your Florida living trust asset protection plan as provided in your family living trust can be as permissive or as stringent as you need it to be.  So, the examples above referencing drug use and college education are simply examples for making your family asset protection plan more stringent.  Age limitations for receiving distributions are another way to protect younger beneficiaries from receiving too much too soon during vulnerable periods in life.  Your asset protection plan can also allow a family member to leave assets in their trust account at their discretion and this approach is called a “holdback provison“.  This approach is generally used as a means for a beneficiary to temporarily protect his trust account if a creditor attack is pending or occurring.  Or, if a very relaxed plan is preferred, your family living trust may authorize an immediate outright distribution to a family member upon attaining a certain age.

In summary, the amount flexibility and other details that concern your family asset protection plan are yours to create based upon your values and the circumstances in your family.  An important first step is just knowing that your family living trust offers substantial asset protection that may be utilized for your family and future generations.

Steve Gibbs, Esq.