Trusts and Trust Administration
Trusts are a powerful and dynamic tool in the estate planner’s toolbox. Trusts come in all different shapes, sizes, and flavors and can be tailored to fit each client’s unique family situation, needs and wishes.
What is a Trust?
At its most basic definition, a trust is a legal relationship among three parties: the settlor (also known as a grantor or trustor), the trustee, and the beneficiary.
- The settlor creates the trust by executing a trust agreement and transferring property to the trustee.
- The trustee manages the property for the benefit of the beneficiary(ies) in accordance with the terms of the trust agreement.
- The beneficiary, in turn, is responsible for ensuring the trustee upholds its fiduciary duties to the beneficiary.
Trusts can be testamentary (i.e., created upon the settlor’s death) or inter vivos (i.e., created during the settlor’s life). While testamentary trusts are always irrevocable, inter vivos trusts can either be revocable or irrevocable.
A revocable trust may be amended or revoked by the settlor or the assets withdrawn by the settlor by following the terms of the trust agreement. An irrevocable trust generally cannot be amended or revoked, although there are a handful of mechanisms to “fix” irrevocable trusts.
Benefits of a Trust
Trusts offer a variety of benefits such as asset management, asset protection, control, and privacy. Florida residents often choose to work with a Palm Beach County trust lawyer to explore additional tax benefits.
Irrevocable trusts, unlike revocable trusts, can also provide immediate sophisticated income and transfer tax (i.e., gift, estate, and generation-skipping transfer tax) benefits.
Revocable trusts may be structured to provide tax benefits, but those tax benefits are not realized until after death.
Turning first to asset management, a settlor may transfer assets to a revocable trust during life so that, upon his or her incapacity, those assets will be managed by the trustee and used for the settlor’s benefit, including for his or her health and support needs. For irrevocable trusts, a settlor can appoint a professional trustee, such as a trust company or professional advisor, to manage and invest the trust assets for the benefit of the settlor’s descendants or other beneficiaries who may not be capable of responsibly managing, growing, and consuming wealth.
Assets held in an irrevocable trust are generally not reachable by the creditors of the beneficiaries. For example, if a mother creates an irrevocable trust for her son’s benefit, future creditors of the son cannot reach the trust assets to satisfy a judgment or debt against him. However, had the mother made the same gift outright to her son, her son’s creditors would be able to reach those gifted assets.
A trust permits a settlor to dictate the terms of how assets will be used for a beneficiary’s benefit. This is particularly useful for beneficiaries who may be irresponsible with money or struggle with addiction or gambling issues. Other clients worry that a large inheritance or gift could destroy a beneficiary’s ambition. The settlor can impose terms upon the assets placed in a trust to ensure that distributions are only made for certain purposes or upon achieving certain ages or goals.
A revocable trust is an integral part of an estate plan for privacy purposes (and also for probate avoidance purposes). A will must be filed with the probate court and, accordingly, becomes a public record; however, a trust does not need to be filed with the court. As a result, the “pour over will” is a popular estate planning technique, whereby a decedent’s will provides that his or her assets pass to a revocable trust, which in turn contains the dispositive provisions of the estate plan, such as “who gets what and when.”
Tax Benefits of Irrevocable Trusts
Irrevocable trusts have immediate tax consequences, whereas revocable trusts do not. An irrevocable trust can be structured as a “grantor trust” for federal income tax purposes, meaning that the settlor is the deemed owner of the trust assets and is therefore responsible for paying income tax on the trust’s income. Transactions between the settlor and the trust are ignored for income tax purposes. The benefit here is the settlor’s payment of the income tax is not a taxable gift to the trust or its beneficiaries. In other words, the trust assets will grow income tax-free.
Transfers to a revocable trust are generally treated as taxable gifts that must be reported on a gift tax return and, if structured properly, will not be subject to estate tax upon the settlor’s death. Any future growth in the value of the gifted assets will escape transfer taxation.
As a consequence, transfers of assets with appreciation potential (e.g., stock options and early-round investment opportunities) have the potential to offer valuable estate tax savings. Moreover, when properly structured, a settlor may apply his or her generation-skipping transfer tax exemption to a trust so that the trust assets will never be subject to transfer taxes.
Trust Administration in Florida
A trustee is required to administer a trust in accordance with the terms of the trust agreement for the benefit of the beneficiaries. Generally, while the settlor is alive and has capacity, the settlor serves as the initial trustee and administers the revocable trust similar to assets titled in the settlor’s individual name.
Upon the Settlor’s Incapacity
Upon the settlor’s incapacity, the successor trustee may use trust assets to support the settlor and pay for medical and living expenses on behalf of the settlor. To the extent assets are transferred to the revocable trust prior to the settlor’s incapacity, this will avoid the necessity of a guardianship, which is a costly and invasive process whereby a court is petitioned to appoint a guardian to manage the assets of an incapacitated person.
Upon the Settlor’s Death
Upon a settlor’s death, a revocable trust becomes irrevocable and will contain the dispositive provisions of the estate plan. The settlor’s estate will generally “pour over” to the revocable trust, and the trustee will divide and distribute the assets in accordance with the terms of the trust agreement.
This will often involve creating one or more trusts for the beneficiaries, retitling assets into the names of those new trusts, and obtaining taxpayer-identification numbers (EINs) from the IRS for those new trusts.
- The trustee will be tasked with managing and investing the trust assets and making distributions to the beneficiaries.
- The trustee will also be responsible for “back office” duties, such as fiduciary accounting and filing annual trust income tax returns.
Trusts play an integral role in many estate plans, from clients of modest means to those with dynastic wealth seeking to keep their hard-earned money flourishing for generations.
Speak with a Florida and Palm Beach County Trust Lawyer to Get Started
Questions about any creating a trust or the trust administration process? Speak with a Florida and Palm Beach County trust lawyer. Contact Comiter, Singer, Baseman & Braun either online or by calling us at 561-626-2101 or toll-free at 800-226-1484. We work with estate planning and administration clients throughout the state of Florida, including Palm Beach Gardens and Boca Raton.