What is a Living Trust in Florida?

A Florida living trust is to a type of revocable trust agreement usually used for testamentary estate planning. A living trust is a trust that a Florida resident makes during their lifetime for their own benefit and for the benefit of a spouse and designated people after their death. Florida trusts are governed by Chapter 736 of the Florida statutes. The chapter is known as the Florida Trust Code.

The basic parts of a Florida revocable living trust include:

  • Trustmaker, Grantor or Settlor. This is the person that establishes the trust and designs the provisions of the living trust agreement.
  • Trustee. The trustee takes legal title to the trust assets and ensures that the trust directions are carried out. A trustee has a fiduciary duty to the grantor and the beneficiaries to carry out the grantor’s intentions in a fair and reasonable manner. The grantor usually serves as the initial trustee of a living trust.
  • Lifetime Beneficiary. The lifetime beneficiary is usually grantor. The lifetime beneficiary has full access to income and principal of the living trust during their lifetime.
  • Death beneficiary. The trust establishes who will benefit from the remaining income and principal of the trust upon the grantor’s death.

A typical living trust created for estate planning is revocable in full or in part. The trustmaker can amend any part of the trust while the trustmaker is alive and mentally competent. When the trustmaker dies the living trust becomes irrevocable, and the trust beneficiaries and successor trustees may not alter any of the trust provisions.

A trust agreement is recorded in the public records and is not filed with any government agency. A living trust is a private document between the parties.

A revocable living trust in Florida does not need its own tax identification number when the grantor is alive and either the grantor or spouse serves as the Trustee. All taxable income or tax losses generated by living trust assets flow through to the grantor.

A living trust that directs distribution of the grantor’s property after the grantor’s death ( testamentary instructions) must be properly executed with the same formalities as a will. That is, the living trust must be signed before two witnesses and a notary. 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.

Using a living trust for asset protection in Florida

Estate Planning Benefits of a Florida Revocable Living Trust

A revocable living trust has two estate planning benefits. 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 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. The incapacity provisions of a living trust permit the grantor and his family to avoid a public guardianship if the grantor becomes unable to manage trust assets.

The other estate planning advantage of a living trust is avoidance of probate upon the grantor’s death. Probate is a proceeding to administer property titled in the decedent’s name. 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 his 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 title 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.

Asset Protection for Living Trusts

Some people mistakenly believe that 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 his 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.

Estate Tax Choices in Living Trust Design

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 benefit of the surviving spouse, 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 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 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. As of 2020 each U.S. citizen can transfer approximately $11 million, and a married couple has a combined unified credit of approximately $22 million. (these amounts will increase with inflation) With the larger federal estate tax exemption and portability, most couples are not concerned about federal estate tax. Portability makes credit trust planning unnecessary for most people. Today, most couples chose a simple plan that leaves all assets outright to their spouse or in a trust for the benefit of the surviving spouse, and they use the marital deduction with portability , rather than a unified credit trust, to take advantage of a combined $22 million estate tax credit.

Florida living trust

Income Tax and Asset Protection Issues in Living Trust Design

A living trust plan that leaves the trust estate to the surviving spouse using a marital deduction only, although seemingly simple, presents other planning choices. One choice involves an asset protection. Trust assets are 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. A unified credit trust, even if unnecessary for estate tax planning, is still a preferred asset protection tool.

The second issue involves income tax rather than estate tax. There is an income tax advantage of using either an outright bequest to a surviving spouse or 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 fair market value of the property 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 has asset protection benefits for the surviving spouse, but it 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 make the decision 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, and fund the marital and credit trusts in a manner that best servers the family’s legal and tax goals.

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

There are inexpensive, boiler plate living trust agreements available on the internet and at office supply stores. However, 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. A living trust should be drafted by an experienced attorney. In fact, the Florida Supreme Court has held that preparation of a living trust by anyone other than a licensed lawyer constitutes the unauthorized practice of law.

What to Do Next

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