The concept known as a trust is mystical to many, so exactly what is a trust? A Trust is one way to avoid complicated and expensive probate because any property in the Trust will not be part of a person's estate. A Trust is another way to provide for Asset Protection from creditors or other third parties. A Trust should be used by most no matter how many assets someone has, especially if a person wants their family to avoid an expensive probate. In simple terms, a trust is a legal agreement or contract between three parties:
Essentially, the trustmaker transfers ownership (by changing title) of certain assets to the trust and the trustee, and the trustee then manages and administers the property and assets for the benefit of the beneficiary or beneficiaries as provided by the written Trust Agreement. For example, if a piece of real estate is owned by the trustmaker personally, he or she will transfer the property by a quitclaim deed to the Trust as owner. Now the real property is in the Trust and now will not be subject to probate. The trust is generally drafted by an Estate Planning Lawyer, who will draft the trust agreement specific to your wishes and goals.
The trust agreement should list other beneficiaries as well, those who will inherit from the trust after the trustmaker's death. A trustmaker should list subsequent beneficiaries in the event the primary beneficiaries die prior to the trustmaker. These secondary beneficiaries will only receive property and assets from the Trust in the event the primary beneficiaries are unable to take the property and assets. Failure to name secondary beneficiaries could force the property back into the Estate, which then will require probate.
The trustmaker of the trust should also list someone else to take the original Trustee's place as a subsequent trustee in the event they can no longer serve as Trustee due to mental incapacity and/or death. The person who takes over from the original Trustee is called the "successor trustee". This avoids having a court having to get involved to pick a successor trustee or other complications such as a conservator or guardian to take over his or her financial affairs when he's unable to.
There are two ways a Trust can be drafted - one as a Revocable Trust and second as an Irrevocable Trust.
Very simply put, a Revocable Trust is one that may be modified during the Trustmaker's life. As stated above, in most cases, the trustmaker, trustee and beneficiary of a revocable trust are the same people.
The difference between a Revocable Trust and an Irrevocable Trust, is that the Irrevocable Trust cannot be modified or changed. In most cases, the trustmaker cannot act as a trustee if he or she forms an irrevocable trust. The most common use of an irrevocable trust is to move assets out of the trustmaker's name to the next generation for their use and enjoyment, which in turn reduces the value of the trustmaker's estate for estate tax purposes.
You cannot take your property back after you transfer it into an irrevocable trust. The trustmaker reserves the right to dissolve or change his revocable trust at any time, but an irrevocable trust is, for the most part, forever.
A living trust is created and immediately is in effect during the trustmaker's lifetime. While some trusts do not go into effect until after the trustmaker has died, this trust is administered during the trustmaker's lifetime. Generally a living trust is administered by trustmaker, serving as both the Trustee and Beneficiary until they die, naming successor Trustees and successor Beneficiaries. A living trust is designed to pass your assets to heirs without going through a probate. Also, more importantly, it can help ensure that your assets will be used for your benefit and welfare if you become unable to manage your own affairs.
A provision in your Last Will and Testament will have a clause referred to as a testamentary trust, which is typically formed by the executor of the decedent's estate when the decedent's Will names a trust as a beneficiary. The Will directs that his or her property should be moved into the trust at his death. A trust takes no effect until property is transferred into it. In other words, a Trust is not valid unless there is property and assets in the Trust. However, it is important to note that this type of Trust will still subject the Estate to Probate.
Bypass Trusts: Also called the credit shelter trust, marital trust, and family trust, this bypass trust is designed to help a married couple avoid estate taxes. Each person may pass to heirs a certain amount of money at death with no estate tax. The bypass trust can increase this. Because tax laws vary year to year, it is important to speak to an estate planning attorney to make sure you have current information.
Special Needs Trusts: This trust provides financial support to a person who is unable to manage his or her own financial affairs. To avoid the risk of interfering with the support that's otherwise available from social services, the trustee may not want to use these assets for housing, clothing, or food.
Spendthrift Trusts: Instead of leaving an heir a large sum of money that he or she may quickly squander, you place that inheritance into a trust. The trust would then distribute the inheritance to the heir later, perhaps when the heir reaches a certain age, or in the form of an allowance, or for specific expenses, such as college or medical expenses. Such can also create a shield against creditors.
Life Insurance Trusts: Put your life insurance in the name of your trust! For high net-worth individuals, owning their own life insurance in their personal name is a huge mistake because the death benefit is subject to estate taxes. To solve this problem, have a life insurance trust own your policy or have the beneficiary changed to your Trust. The trust would be the beneficiary, and your heirs would be the beneficiaries of the trust. There is an additional benefit of a life insurance trust being created. Instead of beneficiaries automatically getting the insurance proceeds immediately upon your death, you can instruct the trust to distribute the money to the heirs more slowly (see Spendthrift Trust above). If you do not currently have life insurance, we highly recommend it.
Charitable Remainder Trusts: If you plan to donate assets to a charity after your death, you may find it beneficial, instead, to donate to a charity now. By doing so, you can actually get a tax deduction right now for your gift. You also can name yourself as the income beneficiary (giving yourself an annual income) and the charity gets what's left after your death; tax-free, just as you've intended. If you're concerned that making the gift to the CRT denies your children their inheritance, you can buy a life insurance policy equal to the size of your gift, naming your children as beneficiaries of the insurance, using some of the trust's income to pay the policy's premiums (see Insurance Trust above). We can help you locate the proper life insurance policies that meet your goals.
Miller Trusts / Qualified Income Trusts (QIT): The type of trust is used to continue to retain income and still legally qualify for Medicaid's income caps. As of January 1, 2020, the Medicaid Income Cap in Florida is currently $2,349 per month. Consequently, if your gross income exceeds the Medicaid Income Cap, a Miller Trust, also known as a quantified income trust (QIT), must be drafted to qualify for Medicaid. Most noteworthy, if you exceed the Florida Medicaid income caps and you do not have a QIT / Qualified Income Trust / Miller Trust (all the same thing) YOUR MEDICAID APPLICATION WILL BE DENIED.
QTIP Trusts: Say you die leaving a spouse, minor children, and assets. Further, say your spouse remarries, then dies. Result: Your spouse's new spouse gets all your money, and your children are left with nothing. Unfortunately, we have seen this happen too many times. To avoid this scenario, consider the Qualified Terminal Interest Property Trust. Instead of leaving your assets to your spouse when you die, you leave your assets to the QTIP trust. The trust gives income to your surviving spouse for his or her lifetime. But when your spouse dies, the assets remain in the trust for the benefit of your children. Because your spouse doesn't directly own the assets, he or she cannot convey them to a new spouse and his or her heirs.
Generation-Skipping Trusts: Such trusts are truly intended for very wealthy estates. This type of trust can preserve your assets for several generations while avoiding estate taxes. You can fund a Generation-Skipping Trust with the same amount as the bypass trust for the benefit of your grandchildren and great-grandchildren, and the assets will appreciate free of income and estate taxes. Such assets can also be protected from creditors.
Material discussed is meant for general illustration and/or informational purposes only, and it is not to be construed as tax or legal advice.
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