While this article concerns a Florida living trust (AKA “inter vivos trust”), the concept is very similar from state to state. Taking the term “living trust” or “revocable living trust” down to its component parts means that the first question is what is a trust, and then what does “living” and “revocable” say about that trust.
What is a revocable living trust?
A trust is an agreement that is entered into by the person who creates the trust (the settlor, grantor or trustmaker) AND the beneficiaries (those who benefit from) of the trust.
This contract will regulate what happens to the assets (such as personal property and real property) that are held OR “titled” in the trust and this can include planning to avoid probate, plan for disability, reduce estate taxes and preserve medicaid benefits.
The origin of trust law began in England during the time when the ecclesiastical courts ruled the probate court system and was intended as an alternative to the probate process. This same basic purpose of revocable living trusts holds today, as probate in Florida continues to get more complicated and expensive; however, there are many other purposes and advantages to doing your Florida estate planning with a revocable living trust.
Revocable Living Trusts vs. Other Trusts
A revocable living trust is one that is created during the lifetime of the trustmaker rather than forming upon the trustmaker’s death.
In contrast to a revocable living trust, a testamentary trust in Florida is one that is formed upon the death of the trustmaker. Often, testamentary trusts are used as part of a last will and testament to provide that assets may be held in trust for underage beneficiaries. Importantly, testamentary trusts DO NOT avoid probate and are NOT effective for disability planning or some of the other side benefits of revocable living trusts.
A revocable trust is one that can be revoked by the trustmaker at any time rather than one that is irrevocable and cannot be undone. In contrast, an irrevocable trust in Florida cannot be changed or terminated after it is created. Irrevocable trusts, although they also may avoid probate, are often used for very different purposes such as Florida asset protection OR sophisticated estate tax planning such as multi-generational planning.
How a Florida living trust avoids probate in Florida?
When a revocable living trust in Florida (hereafter “trust” for purposes of this section) is properly in place, and property (AKA assets) are properly titled in the trust, then a probate will likely not be required.
Personal property vs. Real Property and Other Titled Assets
It is important to understand how to categorize assets for estate planning in Florida.
As an overview, the difference between personal property items such as guns, knives, stamps, coins, jewelry, art, furnishings AS OPPOSED TO real property and other titled assets such as bank accounts, stocks, bonds, life insurance, and qualified financial accounts, to name a few. A vehicle is also a titled asset and yet is sometimes treated more like personal property.
Real property, AKA real estate, is treated very differently from personal property because real property has ownership recorded in the public record and must be transferred accordingly to strict legal procedures. Thus, real estate must be transferred by deed into a revocable living trust as does other kinds of assets with a titled owner.
A process known as trust funding in Florida is basically a fancy way of referring to putting the name of your trust on all non-qualified titled assets.
By non-qualified accounts I am referring to all assets that are not held in a qualified retirement account (i.e. IRA, 401(k), 403(b), as these accounts cannot be re-titled in the trust. Instead, you can direct the beneficiary designations for these accounts to the revocable living trust if it makes sense for your Florida estate plan.
By “titled in the trust” I mean that, instead having an individual name on assets, one can have “Tom Jones, Trustee of the Jones Family Living Trust” on the title to the assets. In this case, a private trust administration could then take the place of the public probate administration process.
Personal property is handled in a less formal way, usually by either designating certain items for certain beneficiaries the revocable trust OR better yet, doing a memorandum of personal property distributions that provides instructions as to who will receive these personal items. Believe me when I tell you that these items often create more confusion and grief than the larger “titled assets”. Best practice is to have the memorandum of personal property referenced in the Florida revocable trust as well as the Florida last will and testament. An assignment of personal property in Florida is often used as a way to assign ALL non-titled assets to a revocable living trust in Florida so that the Trustee will have full authority to distribute them to designated beneficiaries.
Why is avoiding probate in Florida a good idea?
When someone passes away without a trust, that person’s assets must be re-titled and the only way to do that is through the probate court system. Probate in Florida is a public process that is time consuming and expensive.
The judge must carefully sort through assets of the probate estate and all heirs must be identified and this becomes very “involved”. Legal fees can soar under this system and assets can be contested by creditors, heirs and beneficiaries alike.
When someone passes away with a properly funded Florida trust, a private trust administration in Florida replaces the alternative of probate.
Initial and Successor Trustees in Florida
A trust administration, to be discussed, in many respects replaces the probate judge with your designated trustee to handle the distribution of your estate. When you set up a Florida revocable living trust, you may decide to serve as your own initial trustee and appoint a successor trustee to serve on your behalf if and when you’re unable to do so.
Upon the trustmaker’s death, your successor trustee will handle the distribution of your trust assets AND thus they should be selected after careful consideration. A successor trustee may be a professional entity, such as a trust officer in a banking institution OR a competent and trust friend. Often, larger estates are more appropriate to consider a corporate trustee based upon costs and complications of the estate, although this is NOT required.
Florida Trust Administration
A trust administration refers to the process that involves your hand-picked trustee notifying all beneficiaries, conducting an accounting of the assets, and privately distributing assets to the beneficiaries in accordance with the specific terms of the trust. The trustee may be assisted by professionals and may even receive reasonable compensation for serving as trustee.
Trust administration may be completed in days or weeks rather than months at a fraction of the cost of probate. Also, creditor issues or disputes that can often occur in probates may be entirely avoided by using a revocable living trust. Additionally, a trust can afford protection for you and your beneficiaries on a number of other fronts, which may include estate tax protection, disability planning, divorce protection and creditor protection.
Revocable living trusts in Florida can also be used for estate tax planning. There was a trend for many years to create separate revocable trusts for husbands and wives as an estate tax planning strategy. The current trend is to create joint revocable trusts in Florida, and I will address why at the end of this chapter.
There are all kinds of other special provisions that can and should be included in your revocable trust if they are applicable to your estate. For example, qualified Subchapter “S” provisions, special needs beneficiary provisions, homestead provisions, Florida HIPAA provisions, Florida Medicaid planning or other unique provisions may be warranted based upon the circumstances of your particular estate.
There are also special kinds of revocable trusts for unique purposes such as IRA trusts and NFA gun trusts. The important thing is that now you have the framework to identify your specific area of concern and make sure that it is addressed in your estate plan.
It is worth noting that another method of avoiding Florida probate is through joint titling of assets. While this can be an effective strategy, it is not often recommended due to the issues that can arise and the superiority of using a Florida revocable trust for identical planning purposes.
An especially common approach is to jointly title assets with adult children. Putting your adult child’s name on your assets may seem like a good estate planning option, yet there are some very serious drawbacks because young adults are likely to be less responsible than their parents, and this exposes the adult’s assets to numerous risks. For more insight about this issue visit why to avoid titling your assets with adult children.
An adult child is also vulnerable to many life changes that create risk to your assets such as divorce, bankruptcy, IRS problems, problems with the law, injuries and illness. Worse yet, when someone’s name is titled (with yours) on an asset, this cannot be easily reversed.
The risks with any kind of ALTERNATIVE TITLING strategy are:
Divorce can financially devastate the participants and generally splits the estate assets in half between you and your spouse, so at least ½ of an adult child’s assets are in jeopardy including any jointly titled assets with the parents.
Similar to divorce, a bankruptcy places all the adult child’s assets at risk only, this time, the pursuer is an aggressive bankruptcy trustee.
Young adults often face tax problems, and this triggers the sweeping powers of the IRS and the possibility of tax liens on all assets.
4. Legal Problems
Accidents due to DUIs and civil and criminal judgments could result in judgment liens upon all assets.
5. Health Concerns and Injuries
Young adults may be subject to injuries due to an active lifestyle or may experience medical emergencies such as heart attacks, and medical bills can pose a substantial risk to all assets.
TOD & POD
Another estate planning strategy is using transfers upon death (“TOD”) OR pay on death (“POD”) designations and can be used for accounts of all types in order to avoid probate in Florida.
Although this strategy can be useful, there are still major limitations with this approach, the foremost of which is that people can forget all about TODs and PODs and if the circumstances change then the designation is worthless.
For example, if the transferee dies, the TOD/POD is no good. If the transferee becomes disabled, they could be disqualified from government benefits by a direct transfer upon death. If the transferee falls out of favor and the testator forgets, the entire estate plan is destroyed.
Why does a Florida Living Trust solve these problems more effectively than ANY other strategy?
Revocable trust planning in Florida, thoroughly done, solves all the above problems with a level of flexibility that other methods simply CANNOT accomplish.
Remember that a Florida last will and testament does NOT avoid probate but rather only helps make it easier. The revocable trust allows you to title the assets in the name of the trust rather than individuals, and numerous trust provisions can then govern how the assets are distributed, thereby avoiding probate entirely.
A revocable living trust can provide a surviving spouse with a relatively easy transition following the traumatic loss of a deceased spouse. The trust makes things simpler because everything may have been titled in a Florida joint revocable living trust, so there is no need to retitle assets or open a probate for any singularly titled assets.
An adult child may still be a beneficiary of the trust, and yet there is no risk that the assets will be exposed to any of the beneficiary’s creditors. A trust also provides asset protection for beneficiaries so that your kids can be protected from creditors even after your death.
A trust may also be the transferee on a TOD or POD account, and the trust can never die or become disabled so the estate planning purposes will be preserved and managed in a simpler fashion than having multiple POD or TOD accounts or jointly titled assets all over the place.
Additionally, the trust can include “special needs trust” provisions so that no disabled beneficiary would be disqualified due to the trust having received a transfer due to a TOD or POD.
Of course, above are just examples because the kinds of issues that can arise in an estate are as unique as the individual who make up the family AND the random circumstances that are part of life.
So, the rule of thumb in an uncertain world is to create planning with as much flexibility as possible AND this the basis for effective estate planning with a revocable living trust.
Also, remember that a Florida revocable living trust should be accompanied by a sworn affidavit that is notarized by a Florida notary and also attested by 2 witnesses. These formalities are used for Florida revocable living trust in the same way that is required for a last will and testament in Florida.
Get more information about maximizing the effectiveness of your Florida revocable living trust (fine tune) AND learn 5 key ways to use your Florida revocable living trust effectively (can my trust do that?).
Steven J. Gibbs, Esq.