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Trusts offer many advantages, both during the grantor’s lifetime and as an estate planning tool. However, one aspect that is often overlooked is the responsibility placed on the trustee. When a grantor who has been serving as trustee during his lifetime passes away or a trust is created by the grantor’s will and a trustee appointed, the duties may be daunting and confusing to the newly appointed trustee.
Florida residents may use many different types of trusts to protect and manage property during their lifetimes and to pass property upon or after their deaths. The most common type of trust employed in estate planning is known as a living trust. The grantor places his property into the trust and, during his lifetime, serves as both trustee and beneficiary, using the property as he chooses. When he dies, successor trustees and beneficiaries are appointed, and the beneficial use of the property passes to those the grantor has selected.
Some other Florida trusts include:
Charitable Remainder Trust: A charitable remainder trust may be created during the grantor’s lifetime or may be created by the grantor’s will. This type of trust has significant tax benefits. A charitable remainder trust pays out either a flat amount or percentage of the trust assets to the beneficiary at intervals over a period of up to 20 years. When the beneficiary passes away or the pre-determined period expires, the remainder of the trust assets are transferred to a designated charity.
Charitable Lead Trust: A charitable lead trust operates similarly to a charitable remainder trust, except that the payouts are reversed. The trust makes periodic payments to a designated charity over a pre-determined number of years, then the remaining balance of the trust is paid out to non-charitable beneficiaries such as the grantor’s descendants. This type of trust also offers significant tax advantages.
Domestic Asset Protection Trust: This type of trust is designed to secure assets from creditors. Although Florida law generally will not allow a grantor to retain a beneficial interest in a trust and still enjoy protection from creditors, this type of trust can be used to great advantage in a situation where leaving a direct inheritance to a child, grandchild or other loved one would be likely to result in seizure of the asset by the beneficiary’s creditors.
Grantor Retained Annuity Trust: This type of trust allows the grantor to receive regular distributions over a period of years, after which the remaining trust assets are transferred to a designated beneficiary. One key advantage of this type of trust is that the assets are valued at a discount for federal gift tax purposes.
Qualified Domestic Trust: The primary function of a qualified domestic trust is to allow a non-citizen surviving spouse to enjoy the same opportunity to defer estate taxes until his or her death that is available to surviving spouses who are U.S. citizens.
Although the exact responsibilities of a Florida trustee will vary depending on the type of trust and the terms of the trust, every trustee has certain obligations. Some, such as the requirement that a successor trustee appointed as a result of the death of the grantor must file a Notice of Trust in the appropriate court, are simple but technical. Others, such as the obligation to identify creditors and to manage trust assets responsibly for the good of the beneficiaries, can be complicated.
The trustee plays a fiduciary role, which means that he or she can be responsible to the beneficiaries of the trust if the assets are not managed properly. It is often in the best interests of the trustee to retain the services of an experienced trust administration attorney.
While choosing the right type of trust to serve your needs and those of your beneficiaries is a personal, specific process, general information about trusts, the trust creation process, and trust administration can be a helpful start.
Here are general answers to some of the questions we hear most often.
Trusts may be beneficial in many different circumstances. One common example is the use of a revocable living trust in place of a will, which is discussed in more detail below. Some other reasons people leave money in trust include protecting assets against creditors, ensuring that money and property stays in the family as children and grandchildren may marry and divorce, providing for loved ones with special needs, and providing support for family members who may not benefit from direct transfers, such as adult children with addictions or gambling problems.
A trust allows the grantor to appoint a trusted person or entity to manage the trust assets on behalf of the beneficiaries and distribute them according to the grantor’s instructions.
While many people just beginning their estate planning journey ask whether a will or living trust is better, the answer depends on your specific goals and priorities. A living trust can expedite the process of passing property to beneficiaries, and is typically more private than a will, since probate is a matter of public record. A living trust also allows the grantor greater control over how and under what circumstances assets and income are distributed. On the other hand, some people favor wills because they are generally easier to create and maintain during their lifetimes—while a will generally requires a refresh when there’s a significant change such as divorce or a new child, the grantor of a living trust must remember to title each new asset acquired to the trust throughout his or her lifetime, or risks created a messy trust-probate hybrid.
The specific actions taken by a Florida trustee vary depending on the property in the trust and the grantor’s instructions. However, the trustee’s general duty is to manage the trust assets for the benefit of the beneficiaries of the trust, and to distribute assets or trust income according to the terms of the trust. The trustee is also responsible for administrative duties such as preparing annual accountings and paying taxes.
The trust administration process is unfamiliar to most people who have been appointed trustee by a friend or family member. In that situation, it is usually in everyone’s best interest for the trustee to work with an experienced trust administration attorney.
Generally, a trust must file income tax returns for any year in which the trust receives at least $600 in income. A trust is also required to file a return even if it did not have $600 in income, if the trust has one or more non-resident aliens as beneficiaries. A grantor trust may not be required to file a return if the grantor reports all income on his or her personal tax return.
The consequences of failure to file can be serious, so if you are in doubt as to whether or not the trust you administer must file tax returns, consult an experienced trust attorney or an accountant or tax professional familiar with taxation of trusts.
There’s no legal requirement that a person creating a trust work with an attorney. However, trust creation is complex, and attempting to do it yourself can have unintended consequences. In the case of a living trust used for succession planning, those consequences may not become clear until after you’ve passed, making it difficult or impossible to correct the problems and proceed according to your original intentions.
There are also formal requirements that most people are unaware of. For example, a trust used in place of a will is generally not valid in the state of Florida unless it has been executed in the same manner required for a will.
So, while having an experienced trust attorney create your trust isn’t mandatory, it is typically in the best interests of both the grantor and beneficiaries.
Florida law mandates only that a trustee should be paid a reasonable fee, which is not particularly useful for an inexperienced person attempting to determine trustee compensation. Often, trustees are paid on a percentage basis, but this can lead to unreasonably low payment for the trustee of a small trust. Similarly, hourly compensation is acceptable, but has been determined to result in unreasonably low compensation in some cases. Thus, compensation is best determined on a case-by case basis.
When compensation is in dispute, Florida courts consider a variety of factors, such as the amount of income collected and distributed, the trust’s capital assets, local wage norms for similar work, the number of hours invested, any special qualifications of the trustee, and how well and faithfully his or her responsibilities have been carried out.
The mechanism for terminating a trust differs depending on the type of trust and the circumstances. For instance, a revocable trust can be revoked by the grantor at will. The general procedure is fairly simple, and involves a letter to the trustee from all creators stating their intention to revoke the trust, followed by transfer of property out of the trust. However, if the trust terms set forth specific procedures, those procedures must be followed.
The term “irrevocable trust” suggests that this type of trust can’t be revoked at all, but that isn’t entirely accurate. While the grantor can’t simply decide to revoke the trust or to add or remove beneficiaries, certain irrevocable trusts can be dissolved by agreement of the trustee and all beneficiaries after the grantor’s death. Florida law also sets forth specific circumstances under which a court may revoke or revise an irrevocable trust that is no longer serving its intended purpose.
Many people aren’t aware that in most states, trusts can’t be perpetual. Limitations differ from state to state. Florida allows for “dynasty trusts”—trusts intended to protect family assets across generations—that can endure for as long as 360 years.
While the idea of leaving behind a trust that will provide for your family for a dozen generations or more is appealing, it’s important to walk through the ramifications of a centuries-long commitment with your legal and financial professionals before making a decision.
Avoid unnecessary stress and prevent costly mistakes by getting the guidance you need from the beginning. Fill out the form at the bottom of this page or call 386-320-6169 to talk to a Florida probate attorney and learn more about how we can help you manage your responsibilities as trustee.
Probate is the court supervised process in which a deceased person’s assets are transferred to the beneficiaries listed in his or her will.READ MORE