Trusts

Trusts are a significant tool used in Estate Planning, perhaps the most significant, and are used to achieve a series of important goals.

But first, what is a Trust? The answer to that question is actually not completely simple. There is a provision in Florida Statutes (section 736.0103) that contains definitions of many of the important terms for trusts, but not for the term “trust” itself.

One topic that arises sometimes is whether a trust is a legal entity, like a corporation or limited liability company, or something different. Often people will talk about “funding” a trust, i.e. transferring assets to a trust, but the most common formulations for transfers of property to a trust state something along of the lines of, transferring to Joe or Jill Trustee, Trustee of the ABC Family Trust – i.e. a transfer to the Trustee of the Trust. Common language in Trust documents also refers to funding the trust by transferring assets to the trustee. Some trusts, for example, Irrevocable Trusts, are required to obtain a separate tax I.D., and in that sense are separate legal entities.

One way to think of a Trust is that it is an agreement or legal relationship between the person who creates the trust – often called the Settlor or Trustor, in which a “Trustee” holds property for the benefit of “Beneficiaries” of the trust, with the Trustee managing Trust assets according to the instructions of the Settlor. All of this is laid out in a long written, legal document called the “Trust Instrument”. A typical approach is to have both the settlor(s) and trustee sign the trust instrument, but it possible for the trustee to accept the appointment later.

The trustee is a “fiduciary”, which mean he or she holds a position in which they are trusted, and have the obligation to act for the benefit of the beneficiaries, according to the instructions of the settlor.

The beneficiaries are the people or entities for example a charity, who will ultimately receive the trust property and income. One common arrangement is for spouses to create something called a revocable trust, to hold their assets and provide for their needs during their lifetimes, with property ultimately going to their children when they have both passed away.

There are many complicated issues that can arise in the creation and later administration of a trust, and one approach in modern trust law is to include a designation in the trust instrument of a “Trust Protector” who will have the authority, in a sense a super authority to modify certain terms of the trust if necessary or certain contingencies arise.

Two common types of trusts are revocable trusts and irrevocable trusts. A revocable trust, as the name implies, can be revoked by the settlors, and can give the person(s) who create the trust control during their lifetime. Another type of trust, called an irrevocable trust cannot be revoked. Some of the reasons for establishing an irrevocable trust are to remove the assets from your ownership and therefore from your estate for estate tax; or to qualify for certain government benefits/programs. There are stringent requirements for the latter.

Another important function of trusts is to protect assets. There are asset protection trusts that can be established by a person creating a trust in certain States in the U.S. or other countries. Because of issues like a trust being used to defeat the legitimate claims of creditors, it is more difficult to protect assets via a trust created by the Settlor – i.e. a situation where a person transfers their own assets to the trust. This type of “asset protection” for the Settlor is a specialized area of trust and business law.

Strong asset protection, however, in a fairly straightforward way and clearly provided for in Florida law, is available to protect assets when they pass in a trust to the settlor’s children or surviving spouse. For example, a trust can protect assets you leave to your children from claims of an adult child’s creditors, or from being lost as part of a divorce. There is more about his topic in the Estate Planning page here on the website. There are rules that need to be followed, but this asset protection is available for assets in a trust, for example for a surviving spouse, even when the surviving spouse is the trustee. This is an example of use of a trust as part of estate planning, where you and your spouse decide to build in asset protection for the surviving spouse.

Trusts can be used for holding assets for the benefit of minor children. In addition, often parents will not want assets to go to adult, for example immediately when the child turns 18. Trust can be set up to provide supervision of the assets and distributions from the trust until the adult child reaches an older age. Or, the trust can provide that the adult child at some age becomes joint trustee and the later sole trustee, but retains the assets in the trust for the adult child’s lifetime, with the adult child being able to receive distribution according to something called an “ascertainable standard; and being able to invest the funds and assets within the trust in securities, or even form businesses held in the name of the trust. This structure if done correctly provides the asset protection described earlier.

The current estate tax exemption (i.e. the amount of your property exempt from estate tax) is $11.58 million per person. Most people will not exceed this exemption amount, but there is planning using trusts that can be done to take advantage of both spouse’s exemption, to double the amount to $23.16 million. Part of this consideration will be what will be the value of the surviving spouse’s estate when they pass away and whether that will be subject to tax, for example if the values of assets increase (also, it is important to remember that the estate tax exemption amount could change).

If as part of your estate planning, assets, when the first spouse dies, go into an irrevocable trust, those can be excluded from the surviving spouse’s estate when they pass away, because the surviving spouse is treated as never having owned the assets. The issues can seem complicated, but as part of your Life & Estate Planning, we’ll meet for approximately two hours to go through all of these options in a fairly structured way, which I believe will make all clear for you. There is more also about estate taxes, as well as income tax issues relevant for estate plans in Estate Tax Planning page here on the website.

Some other important types of trust are “Stand Alone Retirement Trusts”, “Charitable Remainder Trusts”, and “Irrevocable Life Insurance Trusts”.

There are some recent new rules regarding passing on retirement accounts, and Stand Alone Retirement Trusts can be used to allow you to pursue the twin objectives of stretching out the period of time your heir can receive distributions and defer income tax, while providing flexibility to limit distributions and protect assets if necessary in the future. This type of trust isn’t necessary for everyone, but is available as tool if needed.

Irrevocable Life Insurance Trust are a way to keep proceeds of a life insurance policy out of your estate and not subject to estate tax.

Charitable Remainder Trusts, in addition to providing for a contribution to charity and corresponding deduction for the gift, are a way to transfer appreciated assets into the trust; and the assets can be sold without generating any tax due on the sale, because the trust is a charitable trust. Then a portion of the trust’s assets or income is paid to beneficiaries each year, with the remainder going to the charity. There are rules regarding the minimum remainder amount which must go to the charity, who are the permissible beneficiaries of this type of trust and the minimum and maximum amounts that can be paid out to the beneficiaries each year; and how those distributions are taxed for the beneficiaries.

Call (954) 636-7498, or use the contact form, and we can discuss use of Trusts for your Life & Estate Planning