What Is a Living Trust?

A living trust, often referred to as an “inter vivos” trust, is a legal entity created during an individual’s lifetime to hold and manage assets for their benefit and the benefit of chosen beneficiaries. The individual who creates the trust is commonly known as the “grantor” or “settlor,” and they can also act as the trustee, meaning they can retain control over the assets during their lifetime.

There are primarily two types of living trusts: revocable and irrevocable.

• Revocable Living Trust: A Florida revocable living trust can be altered, amended, or revoked entirely by the grantor at any time during their life. This flexibility allows for changes in circumstances or decisions. However, because the grantor retains such control, the assets in the trust are still considered part of the grantor’s estate for tax and liability purposes.
• Irrevocable Living Trust: Once established, this type of trust generally cannot be changed or revoked without the beneficiaries’ consent. Transferring assets into an irrevocable trust removes them from the grantor’s estate, potentially offering benefits in terms of estate tax and asset protection.

In Florida, living trusts are versatile estate planning tools that serve various purposes, including:

• Avoiding the probate process.
• Maintaining privacy concerning assets and beneficiaries.
• Setting clear instructions for asset distribution upon the grantor’s passing.
• Providing for minor children or individuals with special needs.
• Protecting assets from potential creditors (more common with irrevocable trusts).

How to Set Up a Living Trust in Florida

Creating a living trust in Florida involves several steps. A Florida living trust, also known as a revocable trust, is an estate planning tool that allows you to manage your assets while you’re alive and distribute them after your death, often without the need for probate. To set up a living trust, a person should:

1. Decide on the Type of Trust. You can have an individual trust or, for married couples, a joint trust.
2. Choose a Trustee. Decide who will be the trustee—the person responsible for managing the trust assets. You can be your own trustee, or you can appoint someone else. Make sure to name a successor trustee who will take over if the initial trustee becomes unable or unwilling to serve.
3. Identify Beneficiaries. Decide who will receive the assets in the trust after your death. These can be people, organizations, or even pets.
4. Draft the Trust Agreement. This is the legal document that sets up the trust. You can draft this document using online templates or software or hire an attorney to help you. The trust document should include:
   • Name of the trust
   • Names of the trustee and successor trustees.
   • Detailed instructions on how the assets should be managed and distributed during your life and after your death.
   • You might also include provisions for specific beneficiaries, stipulations about how funds can be used (e.g., for education, healthcare), etc.
5. Sign the Trust Document. In Florida, the living trust document must be signed in the presence of two witnesses and a notary.
6. Fund the Trust. Transferring assets into the trust is crucial; otherwise, it will remain empty and ineffective. Each type of asset (real estate, bank accounts, etc.) has its own procedure for transfer. For example, real estate would involve deeding the property to the trust.
7. Keep Updated Records. Over time, you might acquire or dispose of assets. Make sure to update the assets titled in the name of the trust as necessary. Additionally, you can amend or revoke the trust during your lifetime. Consult with an attorney if you wish to make significant changes.
8. Draft a “Pour-Over” Will. Even with a living trust, it’s a good idea to have a will. A pour-over will ensures any assets not specifically included in your trust at the time of your death will be transferred to your trust upon your passing.
9. Review the Plan Periodically. Review your trust (and overall estate plan) every few years or after major life events (e.g., marriage, birth of a child, significant asset acquisition, etc.) to ensure it aligns with your current wishes and circumstances.
10. Consider Other Estate Planning Documents. Along with a trust, you might want to establish a durable power of attorney, a health care surrogate designation, or a living will. These can provide comprehensive protection and guidance in case you become incapacitated.

Requirements for Living Trusts in Florida

A Florida living trust has certain requirements to be valid. Here are some of the primary requirements:

1. Written Agreement. The trust must be in writing. Florida does not recognize oral trusts for assets meant to be transferred after the grantor’s death.
2. Settlor’s Capacity. The person creating the trust (often called the “settlor” or “grantor”) must be of sound mind.
3. Definite Beneficiary. There must be a definite beneficiary or beneficiaries unless the trust is a charitable trust, a trust for the care of an animal, or another non-charitable trust with a specific purpose.
4. Proper Purpose. The trust must have a lawful purpose. A trust won’t be valid if its purpose is illegal or against public policy.
5. Trustee. The trust must have a named trustee. This can be the person creating the trust (for a revocable living trust) or another individual or entity. The trustee must accept the responsibility, and there must be some duties for the trustee to perform (no “honorary” trusts). If a trustee is not named or the named trustee declines to serve, a court may appoint one.
6. Funding. While not a requirement for the trust’s creation, for the trust to be effective, it needs to be “funded.” This means that assets (like real estate, bank accounts, or other property) must be legally transferred into the trust. If assets are not transferred to the trust, they will not be governed by its provisions.
7. Execution Requirements. For a revocable living trust to be valid in Florida, it generally needs to be executed with the same formalities as a will in Florida. This means the settlor must sign the trust document, and the signing must be witnessed by two witnesses, all being in the presence of each other. The execution must also be notarized.
8. No Requirement for Court Approval: Unlike some legal documents, a living trust doesn’t need court approval to be valid. However, after the settlor’s death, certain notifications may need to be provided, and if there are disputes, the court might be involved.
9. Specific Rules for Certain Assets: For instance, if you’re transferring the title of real estate to a trust, you need to draft and execute a new deed transferring the property from the individual owner to the trustee.

How Does a Living Trust Work?

A Florida revocable trust allows a person to provide for their heirs in a flexible way without having to go through the expensive and time-consuming probate process. Revocable living trusts are governed by Chapter 736 of the Florida statutes, which is known as the Florida Trust Code.

After the death of the trustmaker, the assets of the trust will be distributed or held in trust for the beneficiaries without going through probate. With a typical married couple, the assets will be left to the surviving spouse. Upon the death of the surviving spouse, a standard trust will leave the assets to the children. Particularly when the trustmaker has younger children, assets will stay in trust for the benefit of the children until they reach a certain age at which they can responsibly manage the assets.

Florida recognizes the validity of a living trust created in another state so long as the trust has been properly executed under the laws of the state of formation. Therefore, people moving to Florida do not necessarily have to redo their living trust for its testamentary provisions to be enforceable under Florida law.

Benefits of a Living Trust in Florida

Living trusts in Florida offer numerous benefits for asset management and estate planning. Here are the key benefits of establishing a living trust in Florida:

1. Avoiding Probate: One of the primary benefits of a living trust in Florida is avoiding probate. Probate can be time-consuming, expensive, and public. By transferring assets into a living trust, they can be distributed to beneficiaries upon the grantor’s death without going through probate.
2. Privacy: Since probate is a public process, all documents, including the will and the list of assets, become part of the public record. On the other hand, a living trust remains private, ensuring that details about the grantor’s assets and to whom they’re distributed remain confidential.
3. Asset Management During Incapacity: If the grantor becomes mentally incapacitated due to illness, injury, or other reasons, the named successor trustee can manage the assets in the trust without needing a court-appointed guardian or conservator.
4. Flexibility: A revocable living trust can be modified during the grantor’s lifetime. This flexibility allows the grantor to make changes in response to life events such as marriage, divorce, births, deaths, or other changes in personal or financial circumstances.
5. Avoiding Ancillary Probate: For Florida residents who own real estate or tangible assets in another state, transferring those assets to a living trust can avoid ancillary probate (probate in another state). This can save time and money after the grantor’s death.
6. Continuous Management: Upon the grantor’s death or incapacitation, the successor trustee can immediately take over the trust’s management without any court intervention, ensuring continuity and avoiding potential disruptions.
7. Tax Benefits: While revocable living trusts don’t offer direct tax advantages, they can be structured to maximize estate tax exemptions, especially for married couples. Additionally, they can be paired with other estate planning tools that do offer tax benefits.
8. Protection for Beneficiaries: Living trusts can be structured to include provisions for beneficiaries who might not be ready or able to manage their inheritances directly, such as minors, individuals with special needs, or those who might be financially irresponsible.
9. Avoiding Challenges: While wills can be challenged in probate court, contesting a living trust is more difficult. Establishing a living trust can reduce the likelihood of successful legal challenges and disputes among heirs.
10. Streamlined Process: With a living trust, the administrative process after the grantor’s death can be simpler and more streamlined than with a will, leading to faster distributions to beneficiaries.

Difference Between a Will and a Trust

The difference between a will and a trust is that a will leaves everything to designated beneficiaries at one time upon death, whereas a trust allows the trustmaker to control the timing, manner, and amount of distributions over time after the trustmaker dies. In addition, a will must be probated through a court proceeding, while a trust can be administered privately.

A Florida living trust has many estate planning benefits compared to a will. The two most well-known benefits are avoidance of guardianship and avoidance of probate.

Avoiding Guardianship

First, a living trust avoids guardianship in the event of the grantor’s incapacity. The living trust agreement typically provides that if the grantor cannot manage trust property, then a successor beneficiary takes over the administration of trust property for the grantor’s benefit.

Incapacity is a defined term within the trust document, and a living trust agreement should include procedures for determining the grantor’s incapacity and their recovery. The incapacity provisions of a living trust permit the grantor and their family to avoid a public guardianship if the grantor becomes unable to manage trust assets.

Avoiding Probate

The other primary estate planning advantage of a living trust is the avoidance of probate upon the grantor’s death. Probate is a proceeding to administer property titled in the decedent’s name according to the terms of a grantor’s last will and testament. Property owned by a decedent’s living trust does not require probate. The appointed successor trustee may administer living trust property and transfer the property to trust beneficiaries without probate.

The mere creation of a living trust document does not avoid probate—only those assets whose title the decedent had transferred to their living trust can avoid probate upon the decedent’s death.

Living trusts have additional estate planning benefits for people owning property in multiple states. A separate probate proceeding is necessary in each state where a decedent dies with property titled in the decedent’s individual name. If multi-state property is titled in a living trust, the decedent’s family avoids multiple probate proceedings in the states where each property is located. The singular living trust administration can convey ownership of property throughout the U.S. after the decedent’s death.

Government Benefits

A living trust can help the trustmaker effectively manage Medicaid benefits. A living trust can be designed to help a physically ill spouse retain Medicaid benefits after the death of the healthy spouse even when the ill spouse inherits the assets of the healthy spouse. The living trust can specify an “elective share for Medicaid” that enables the ill spouse to retain benefits and reduce any applicable Medicaid penalty.

Similarly, a living trust may be drafted to protect Supplemental Security Income (SSI) benefits. SSI regulations can deny benefits to persons who inherit significant sums of money. Disclaiming (refusing) the inheritance does not resolve the issue. A customized living trust can incorporate a special needs provision that directs money allocated to a disabled individual to a separate sub-trust designated to receive government benefits. The beneficiary may then continue to receive SSI benefits notwithstanding the additional assets inherited via the special needs trust.

Business Succession

A business owner often struggles with planning for the succession of leadership and operation of his business after his death. Business succession provisions may be incorporated in a customized living trust agreement. A customized living trust could nominate a special trustee whose primary role is to operate the business in the event of the owner’s death or incapacity. The special trustee can continue business operations without interruption until the business is either sold or finds a new, long-term manager.

Joint vs. Separate Living Trust

Married couples may have a joint living trust agreement. A joint living trust is a trust agreement that incorporates the testamentary wishes of both spouses in a single document. The joint living trust provides terms and conditions for the administration of each spouse’s separately owned property as well as their joint property.

Technically, in Florida, there is no such thing as a “joint trust.” Just as each person has their own will, power of attorney, living will, and other estate planning directives, each person has a unique trust that is their own. A joint trust agreement is a document that combines the common testamentary provisions for each spouse into a single trust agreement.

A joint living trust is more difficult to administer and account for than an individual trust. A joint trust must keep accounts for different types of spouses’ property.

A good way to understand the joint trust is to think of the trust as containing several “pots” of assets. Each spouse has a pot within the joint trust that holds property they held in their individual names before the property was assigned to the trust. There is a third pot under the trust agreement that holds assets jointly owned before assignment to the trust. Upon the death of the first spouse to die, each pot is administered differently. At the second death, the joint trust usually implements an agreed testamentary plan for all trust property.

If each spouse creates a separate living trust, instead of a joint trust, then their trust contains only the property they owned individually plus their share of any joint property that both spouses convey to one of their separate trusts. Each married trustmaker has no interest in property conveyed to their spouse’s separate living trust.

The choice of separate living trusts or joint trusts for married couples involves several issues and tax considerations. Married couples should ask for a full understanding of the advantages and disadvantages of each living trust arrangement and decide on the solution they believe is practical and beneficial for their unique family situation.

Using a Joint Trust

A joint trust is appropriate for a typical married couple with common children in a longstanding marriage. In this case, most family assets are marital property are acquired jointly during the marriage. The couple probably agrees on their testamentary plan for their property after they are both deceased, and this plan usually leaves the property to their children.

In Florida, a joint living trust maintains asset protection for each individual spouse so long as the trust is drafted in a way that maintains tenants by entireties protection for joint property assigned to the living trust.

Using a Separate Trust

Separate trusts are appropriate in blended families when each spouse has children from a prior marriage and where each spouse has acquired their separate assets before the marriage. Each spouse wants to make sure their own children are provided for after they die. They may be reluctant to contribute the property to a joint trust agreement where the surviving spouse may modify or fail to carry out their testamentary plan for their own property and children.

Sometimes, separate trusts are appropriate for asset protection. A living trust provides no asset protection during the life of the trustmaker.

Where one spouse is in a high-risk business or profession, and the other spouse is not significantly exposed to legal risk, the couple may want separate property ownership. The couple can divide assets fairly equally in a way that assigns the high-risk spouse ownership of exempt assets, such as homestead property, annuities, and retirement accounts, and assigns to the low-risk spouse non-exempt assets such as real estate investment, cash accounts, and non-qualified securities. To maintain the separate property, each spouse would have their separate living trust agreement and fund their separate property into their own trust.

Even in a long-standing marriage with common children, separate trusts are preferred when one spouse has disproportionate family wealth. If one or the other spouse has acquired—or expects to inherit—a large sum of money from their parents, that spouse may want to segregate their inheritance or may want control over the disposition of the money after their death.

The two spouses’ testamentary plans may be significantly different. The wealthy spouse can design a plan that provides generously for their surviving spouse but also gives some of the family wealth to the trustmaker’s own relatives, personal friends,  or charities. The other spouse’s trust need not leave any money for the wealthy spouse—who has ample family wealth—and instead leave their share of joint property and separate property directly to children and lineal descendants.

Asset Protection for Living Trusts in Florida

Some people mistakenly believe that Florida living trusts provide asset protection for the trustmaker. In fact, a living trust does not protect living trust property from the trustmaker’s creditors.

A living trust is a “self-settled” trust. A self-settled trust is one where the person who creates and funds the trust is also a trust beneficiary. Florida law unequivocally provides that a living trust that a trustmaker creates for their own benefit is not protected from the beneficiary/trustmaker’s creditors.

A living trust can be written to provide substantial asset protection benefits for future trust beneficiaries, such as the trustmaker’s own children. If a living trust provides that upon the trustmaker’s death, the remaining trust property is held within the living trust, or in separate sub-trusts, for the benefit of the trustmaker’s spouse, children, or other beneficiaries, the money can be shielded from these beneficiaries’ creditors. A customized living trust may prohibit any payments to the beneficiary’s creditors or a former spouse.

Many married couples own their principal assets jointly as tenants by entireties. Tenants by entireties provides asset protection against the individual debts of either spouse. Spouses may lose entireties asset protection if they transfer their assets without careful planning. If a husband and wife create two separate living trusts, any entireties assets transferred to either spouse’s individual trust will lose tenants by entireties protection.

Transfers of entireties assets to a joint living trust can also forfeit entireties protection if the trust agreement is not properly drafted. A Florida joint living trust should include “entireties savings” provisions to show the trustmakers’ intent to retain tenants by entireties ownership as joint trustees of the couple’s joint living trust.

Advanced Planning

There are specialized living trust plans that can help married couples protect their assets during their lifetime. This plan involves the spouses dividing their joint property into individual ownership, and then each spouse creating a separate irrevocable trust for the other spouse with asset protection provisions in the trust agreement.

A new law permits the grantor spouse to become a beneficiary of the trust upon the death of the grantee spouse. The trust is not considered a “self-settled trust” at that point even though the trust was originated by the surviving grantor who becomes a beneficiary of the trust they first created. These special trusts protect marital assets from creditors and reduce the amount of the trustmaker’s estates that would be taxable upon death.

Estate Tax Planning

For many years prior to 2013, living trusts were designed to make sure each person, and both spouses in the case of married trustmakers, took advantage of their separate credits against estate taxation.

Typical married couples’ living trusts provided that the assets of the first spouse to die were left for the surviving spouse in a so-called “unified credit trust” up to the amount of the then-effective unified estate planning credit of approximately $3.5 million prior to 2013. Assets directed to a unified credit trust would be retained in trust for the surviving spouse’s benefit, and perhaps even the children or other heirs. Regardless of the increase in value, these trust assets would not be subject to federal estate tax at the death of the second spouse to die.

This trust design further said that any assets in excess of the unified credit amount would be held in a separate trust for the surviving spouse, called a “marital exemption trust.” The marital trust could avoid estate taxation at the first spouse’s death by applying an unlimited marital exemption against the estate tax. The surviving spouse applied their separate $3.5 million estate tax credit upon their own subsequent death. That way, each spouse used at different times their separate estate tax credits.

Living trust planning and design changed in 2013 when the American Taxpayer Relief Act of 2012 went into effect and then again with the 2017 Tax Cuts and Jobs Act. The 2012 estate tax law added the concept of portability, which allows the surviving spouse to elect to apply any unused exemption of the first spouse to die. In 2017, Congress increased the estate tax exemption.

Estate Tax Limits for 2022

As of 2022, each U.S. citizen can transfer approximately $12 million, and a married couple has a combined unified credit of approximately $24 million (these amounts will increase with inflation). With the larger federal estate tax exemption and portability, most couples are not concerned about the federal estate tax. Portability makes credit trust planning unnecessary for most people.

Today, most couples choose a simple plan that leaves all assets outright to their spouse or in a trust for the surviving spouse’s benefit. They use the marital deduction with portability, rather than a unified credit trust, to take advantage of a combined $24 million estate tax credit.

Income Tax and Asset Protection Issues

A typical living trust for married people leaves the trust assets to the trustmaker’s surviving spouse using the marital deduction from estate taxation. The assets may be left to the spouse individually or in a marital deduction trust. In either case, the value of the assets is not subject to the estate tax because of the unlimited marital estate tax deduction. However, the typical plan presents asset protection issues.

Trust assets left directly to a surviving spouse are vulnerable to the surviving spouse’s judgment creditors. Even assets held in a marital trust that uses the marital deduction are not creditor protected; tax law requires the marital trust to distribute all income to the surviving spouse. The surviving spouse’s creditors can serve the trustee with a writ of garnishment to claim the mandated distributed income. Money left for a surviving spouse in a unified credit trust is not exposed to the surviving spouse’s creditors because a credit trust does not require distributions to the spouse beneficiary.

The credit trust is not eligible for a marital deduction for estate tax, so the amount allocated to the surviving spouse’s credit trust should not exceed the then-applicable unified estate tax credit. (currently about $11 million) Therefore, a living trust that directs the decedent’s assets to a unified credit trust, instead of a marital trust or directly to the surviving spouse, may be preferred for asset protection when the surviving spouse has asset protection concerns.

The second choice involves income tax rather than estate tax. There is an income tax advantage to either making an outright bequest to a surviving spouse or leaving assets to a marital deduction trust.

The Internal Revenue Code provides that any appreciated assets receive a new basis, or stepped-up basis, to their tax cost equal to the property’s fair market value at the date of the decedent’s death.

Consider an example where two parents bought stock for $10 per share, and when the first parent dies, the stock is valued at $50 per share. Then, at the second parent’s death, the same stock is worth $60. The parents’ estate plan leaves the stock to a child after both parents have died. The parents’ child inherits the stock with a new income tax basis equal to its $60 date-of-death value. If the child sells the same stock for $70, the child’s taxable capital gain would be the difference between the $70 sale price and the $60 date-of-death value rather than the parent’s original $10 cost basis (a $10 capital gain).

In the above example, the child has received an income tax benefit from a $40 tax basis increase at the first parent’s death and another $10 basis increase at the second death—this is referred to as a “double step-up” of tax basis. When assets are left to a spouse in an asset-protected credit shelter trust, there’s a “step up in basis” at the death of the first spouse to die, but there’s no step up in basis for the child after the surviving spouse’s death. In the above example, if the first parent left the stock in a credit shelter trust, the child would pay upon sale a capital gain on the difference between the sale price and the single basis step-up at the death of the first parent. (tax imposed on a $20 capital gain).

Therefore, a living trust that leaves assets to a surviving spouse in a credit shelter trust for the spouse’s asset protection may impose additional income tax on children who inherit property from the surviving spouse.

A Florida living trust can be drafted to permit the surviving spouse to decide whether the deceased spouse’s assets are left in a unified credit trust or a marital trust. This way, the surviving spouse may consult with legal and tax professionals, examine the value of assets at the time of transfer, evaluate asset protection issues, and fund the marital and credit trusts in a manner that best serves the family’s legal and tax goals.

Trust Ownership of Subchapter S Corporations

A living trust may have adverse income tax consequences for owners of a small business taxed as a Subchapter S corporation (S-Corp) unless the trust agreement is property drafted. An owner of a small, family business typically may want to transfer the stock in their living trust so that the stock will pass to their heirs without probate. A prolonged probate proceeding may substantially interfere with a smooth business continuation after the owner’s death.

There is no issue with a living trust having S corp stock during the trustmaker’s lifetime because the individual trustmaker is considered the stock owner for tax purposes. Income tax rules pertaining to S-corps create tax risks when the trust becomes irrevocable after a trustmaker’s death. The IRS tax code has rules about ownership of S Corp shares that restrict ownership to individuals.

The general rule prohibits ownership by an irrevocable trust. There is an exception to this general rule where the trust is a qualifying subchapter s trust (“QSST”). A QSST must hold no assets other than S Corp stock and the trust must provide for mandatory distribution of income. A business owner’s trust that holds S Corp stock together with the owner’s real estate and publicly traded stocks would not qualify as a QSST. The result could be the loss of the owner’s S Corp treatment with adverse income tax effects.

People may have more than one living trust. Small business owners should consider a separate living trust to hold stock in their Subchapter S corporations. Alternatively, a living trust agreement should provide that after the trustmaker’s death the stock is segregated into a separate sub-trust that qualifies as a QSST.

Homestead Exemption in a Florida Living Trust

A trust creator can put their home into a Florida revocable living trust and still qualify for the Florida homestead exemption. This is true for both the homestead tax exemption and for the exemption of the homestead from judgment creditors.

Often, however, there are simpler ways to transfer a homestead upon death to beneficiaries, such as a lady bird deed.

Do You Need an Attorney to Prepare a Living Trust in Florida?

Yes, you do need an attorney to prepare a living trust in Florida. In fact, the Florida Supreme Court has held that the preparation of a living trust by anyone other than a licensed lawyer constitutes the unauthorized practice of law. There are many options in designing and drafting a living trust agreement, and the choices made can have significant tax and asset protection consequences for the trustmakers and their children.

Common Questions about Florida Living Trusts

Below are answers to some common questions about Florida living trusts.