Revocable and Irrevocable Trusts
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“I already have a will, why do I need a trust?” This is a common question for many people. A trust can be a powerful tool to use to avoid probate, which include the expense and delay following your death. Trusts also provide the privacy not available by probating your will in the courts, as your will must be filed with the clerk of court and is a public record. Finally, a trust can be effective the day you sign the document, unlike a will that does not take effect until death and upon court order. If you want to learn more about about this complicated legal matters, it is best to contact a knowledgeable Jacksonville trust lawyer at Preddy Law Firm, P.A. today.
For the purpose of estate planning, here are some important reasons to create a trust:
- Avoid probate
- Minimize or avoid taxes
- Provide for minors or special needs individuals
- Provide standards for distributions of your assets over a period of time or for a special purpose
- Asset protection from creditors
- Provide for both charities and beneficiaries at same time
- Help qualify a Medicaid benefits
The “grantor” is the creator of the trust and who “funds” or transfers assets into it. A “trustee” is the one who manages or administers the trust according to the terms. A grantor can also be the trustee. A “beneficiary” is one who will benefit from the trust.
Types of Florida Trusts
Trusts are an incredibly useful tool for those creating a Florida estate plan. However, selecting the correct type of trust is not always a straightforward task. Florida law recognizes several types of trusts, each of which serves a unique purpose. Understanding the benefits and limitations of each type of trust is crucial to creating an effective estate plan that serves all your needs.
Generally, trusts fall into two broad categories: revocable trusts and irrevocable trusts.
Florida Revocable Trusts
A revocable trust is one in which the grantor retains the ability to modify or cancel at any time during their lifetime. Grantors can also change the trustees or beneficiaries whenever they see fit. This is because even after the grantor transfers assets into the trust, the assets remain titled in the grantor’s name.
Florida revocable trusts have several important benefits, but also some limitations.
Revocable trusts are the most flexible type of trust, because the grantor can make changes to the trust, or cancel it altogether, at any point. A revocable trust allows for grantors to alter the terms of the trust as their life circumstances change. For example, a grantor may want to replace a trustee or the named beneficiaries in the event of death or divorce.
There is no special tax status to this Trust, as any trust account would just be listed on the grantor’s 1040 income tax return if there is income to report. Any account opened in the name of the trust would just use the grantor’s social security number.
The most common reason for creating a revocable trust is to avoid the Florida probate process, which can add expense and the possibility of conflict to the estate administration process. The probate process also takes time, meaning beneficiaries must wait to receive any inheritance. However, with properly transferred assets into a revocable trust, assets are not subject to probate.
Another reason many use a revocable trust is to preserve the family’s privacy. Probate proceedings are public, and any document involved in the probate process becomes part of the public record. By creating a revocable trust, a family’s financial situation is kept out of the public eye.
Limitations of revocable trusts
Assets in a revocable trust still legally belong to the grantor. Thus, a revocable trust does nothing to change the grantor’s assets. Because of this, a revocable trust does nothing to reduce any potential estate tax burden and does not provide any protection from creditors or court judgments.
Florida Irrevocable Trusts
Another type of trust is the irrevocable trust. When a grantor transfers assets into an irrevocable trust, the assets become titled in the name of the trust. As a result, the grantor losses control over the assets once they are transferred to the trust. Thus, unlike a revocable trust, a grantor cannot alter or cancel an irrevocable trust if they change their mind or their circumstances change.
At first glance, it may seem that irrevocable trusts are less desirable to their more flexible counterparts. However, in addition to probate avoidance, irrevocable trusts offer several benefits that revocable trusts do not.
One of the primary benefits of an irrevocable trust is that it removes trust assets from the grantor’s estate. While Florida does not have an estate tax, Florida estates may be required to pay federal estate taxes. Those whose estates exceed the federal estate tax exemption, which changes annually, are subject to federal estate tax. This larger exemption is temporary, and is scheduled to expire in 2026, at which time the exemption will go back to $5 million (after being adjusted for inflation).
The federal government assesses estate taxes on a tiered basis, considering the value of an estate. While in the past the estate tax would affect many people, now it effects a relatively small amount of Americans. In 2022, if you pass away with an estate worth more than $12.06 million, for any asset valued over the next $1 million, the rate is 40%. For a married couple that exemption amount can be doubled. Given this reality, for those with large estates, holding assets in an irrevocable trust can result in significant estate tax savings.
For landlords, doctors, lawyers, and other professionals who face the looming threat of litigation, an irrevocable trust offers the key benefit of protecting trust assets. Once a grantor transfers assets into an irrevocable trust, they are generally outside the reach of court judgments. Thus, if someone sues a grantor due to professional negligence, the suing party would not be able to access the trust funds. There are some exceptions, such as look back periods and transfers made with the intent to avoid known creditors.
Additionally, absent extenuating circumstances, a court cannot judicially remove assets from an irrevocable trust, making the assets unavailable to creditors. In this way, an irrevocable trust can offer significant protection to business owners who may, for example, default on the terms of a loan.
However, to fully benefit from the asset protection principles of an irrevocable trust, grantors must make sure that they set up the trust correctly and properly transfer all trust assets. Professionals and business owners should work with a knowledgeable Florida asset protection legal team who has relevant experience creating trusts for individuals in similar circumstances.
When can a grantor modify an irrevocable trust?
While the general rule is that grantors cannot modify or terminate an existing irrevocable trust, there are certain important exceptions that allow the trustee or any qualified beneficiary to modify the trust after the grantor’s death. Florida Statutes Section 736.0412 explains that a trustee or beneficiary of a Florida irrevocable trust can request the court modify or terminate a trust upon “unanimous agreement of the trustee and all qualified beneficiaries.” Additionally, a beneficiary or trustee can request that the court “direct or permit the trustee to do acts that are not authorized or that are prohibited by the terms of the trust,” or “prohibit the trustee from performing acts that are permitted or required by the terms of the trust.”
Modifying a Florida irrevocable trust is challenging. Fortunately, the process is much easier if the trust document anticipates the possibility of amendment. Thus, grantors who foresee the potential need for modification should work with an attorney when creating the trust as the grantor may specify that non-judicial modification is permitted. Similarly, trustees and beneficiaries who wish to modify the terms of an irrevocable trust should consult with an experienced Florida trust and estates legal team for guidance on how to best pursue their desired goals.
There are several types of trusts using charities, which are created to minimize or avoid tax and to accomplish charitable purposes. Charitable trusts are especially useful when a large portion of assets consists of highly appreciated stock or a very large retirement plan.
Contact a Skilled Jacksonville Revocable and Irrevocable Trusts Lawyer Today
Our highly-skilled legal team can help you draft a living trust. Discuss your case with an experienced Jacksonville trusts attorney. Let us assist you in every step of the process. Call us directly or contact us online to set up an appointment.