The Revocable Trust in
Frequently Asked Questions
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.
WHAT IS A REVOCABLE TRUST?
WHAT IS PROBATE?
ARE ALL ASSETS SUBJECT TO PROBATE?
HOW DOES A REVOCABLE TRUST AVOID PROBATE?
HOW DO I KNOW IF MY ASSETS ARE PROPERLY TITLED TO MY REVOCABLE TRUST?
CAN THE TRUST HOLD TITLE TO MY
DO I BENEFIT BY AVOIDING PROBATE?
HOW ARE CREDITORS SATISFIED?
DOES THE TRUST PROVIDE PROTECTION FROM CREDITOR CLAIMS?
DOES THE TRUST PROVIDE PROTECTION FROM THE ELECTIVE SHARE?
WHO PAYS FEDERAL INCOME TAX ON TRUST INCOME?
WHAT ARE THE TRUSTEE'S RESPONSIBILITIES?
WHO MAY ACT AS TRUSTEE OR SUCCESSOR TRUSTEE?
HOW DO I KNOW IF A REVOCABLE LIVING TRUST IS WHAT I NEED?
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. Most trust agreements allow the grantor 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.
Upon your death, the trustee (or your successor if you were the initial trustee) is responsible for paying all claims and taxes, 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 problems may result. You should consult with your attorney, tax advisor and investment advisor to determine if your assets are appropriate for trust ownership. (Back to Top)
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 to his or her beneficiaries. A personal representative is appointed by the Florida probate court to handle the probate estate administration. The probate process ensures that creditors, taxes and expenses are paid before distribution of the probate estate assets to the beneficiaries. The personal representative is accountable to the probate court as well as the estate beneficiaries for his or her actions during the administration. For Florida probate estates having less than $75,000 of non-exempt assets,
ARE ALL ASSETS SUBJECT TO PROBATE?
No, only assets owned by a decedent in his or her individual name 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 “in trust for” a named beneficiary. Assets held in a living trust will also avoid Florida probate. (Back to Top)
HOW DOES A REVOCABLE LIVING TRUST AVOID PROBATE IN FLORIDA?
A revocable living trust avoids probate by effecting the transfer of estate assets during your lifetime to the trustee of the living trust. This avoids the need to use the Florida probate process to make the transfer after your death. The trustee of the living trust has immediate authority to manage the revocable trust assets at your death; appointment 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 revocable trusts often need both a Florida probate administration for the non-trust assets as well as a living trust administration to completely distribute the assets of the estate. Because the revocable trust may not completely avoid probate, a simple “pour over” will is needed to transfer any probate assets to the living trust after death. (Back to Top)
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 revocable trust or to you as trustee of your living trust. You might also elect to fund your revocable trust by naming the living trust as a beneficiary of life insurance or other similar arrangements. Your estate planning or trust attorney and financial advisor may assist you with the transfer of assets to your revocable trust. If your living trust will own real estate then it is important to have the deed prepared by a qualified estate planning attorney. The estate planning attorney will consider the impact of existing mortgages, title issues and Florida exempt homestead restrictions when the real estate deed transferring the real property into your revocable trust is prepared. (Back to Top)
CAN THE LIVING TRUST HOLD TITLE TO MY
In some situations your exempt Florida homestead property can be transferred to your revocable trust. Most
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. However, many of the costs and time delays associated with Florida probate process, such as filing a federal estate tax return, will also be necessary with a revocable trust. The administration of a revocable trust after death is similar to a probate administration. The trustee must collect and value the trust assets, determine creditors and beneficiaries, pay taxes and expenses, and ultimately distribute the trust estate. A trustee is entitled to a trustee's fee for administration of the trust, as is the personal representative of a probate estate. To the extent professional services of estate planning and trust attorneys, accountants and estate liquidators are used to complete the process, the savings may be marginal.
On the other hand, avoiding probate in multiple states is a definite benefit. Because of the nature of real estate, 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 living trust during your lifetime. (Back to Top)
HOW ARE CREDITORS SATISFIED?
DOES THE REVOCABLE LIVING TRUST PROVIDE PROTECTION FROM CREDITOR CLAIMS?
In
DOES THE TRUST PROVIDE PROTECTION FROM THE ELECTIVE SHARE?
WHO PAYS FEDERAL INCOME TAX ON TRUST INCOME?
In most instances, the revocable 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. The 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, 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 distributions to beneficiaries. In this way, the trust passes on income and deductions to the beneficiaries to be taxed on their personal income tax returns. Income that is not distributed to the beneficiaries is taxable to the trust. (Back to Top)
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 revocable trust to be included in your taxable estate at death. The revocable living trust can be drafted to minimize the effect of estate taxes, but the same estate planning techniques are available to persons who choose to use a last will and testament as those who choose a revocable living trust.(Back to Top)
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, in general, your trustee will:
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 when performing trust functions. (Back to Top)
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 Florida probate estate, a trustee does not have to live in
HOW DO I KNOW IF A REVOCABLE LIVING TRUST IS WHAT I NEED?
This information is intended to give you a basic understanding of revocable living trusts in Florida, but it cannot substitute for a thorough review with your 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 revocable living trust. Decisions must be made as to what assets are appropriate to fund the living trust, the transfers must then occur, and the asset allocation should be periodically reviewed. Tax considerations must be discussed with qualified income tax and estate tax professionals. The revocable trust agreement should reflect your family, economic and tax goals. A revocable trust can help you accomplish these goals when properly prepared and implemented.(Back to Top)
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