Creating a Florida Irrevocable Homestead Trust for Ad Valorem, Income, and Transfer Tax Purposes

Parents can help their kids buy a home by transferring the home or money to an irrevocable trust. This can help the child avoid taxes and protect the home in case of divorce. The trust needs to be set up in a certain way to work properly. Here are some sample provisions for the trust. An irrevocable trust is a trust that can’t be changed once it’s set up. When parents put property into this kind of trust, they are seen as the ones who own the property for tax purposes. But if the parents give up control over the trust, their child can be seen as the owner for tax purposes instead. This kind of trust is called a beneficiary deemed owned trust (BDOT). For a trust to be a BDOT, the child must have the right to take money or property from the trust whenever they want, and there must be a trustee or someone else who has to approve any other money or property taken out of the trust. In Mallinckrodt v. Nunan, a son was supposed to get income from a trust, but he didn’t withdraw any money. The IRS said he should pay taxes on that money anyway, because he could have taken it if he wanted to. The court agreed, saying it doesn’t matter if he could have taken the money as a gift from his dad or as a beneficiary—it’s still his money for tax purposes. To make the child the owner of the BDOT, the trust needs to say that the child can take money or property from the trust all by themselves. They can’t just be the only one who gets money from the trust; they have to be able to take the money out on their own. Typically, the child can take out a certain amount of money from the trust each year. But if they only have this power, only part of the home owned by the trust is considered to be owned by the child. Also, if the child can take out all the money from the trust but there’s a rule that the power goes away each year, that means they still have some control over the money. This control could cause the value of the trust to be considered part of the child’s estate for estate taxes. A better option for a trust holding a personal residence is to give the child the right to withdraw all the income from the trust each year, including any money made from selling the home. The trust should limit the amount the child can withdraw to avoid extra taxes. If the trust only has income from selling the home, the child can use the money to pay the taxes on the sale. This way, the child can avoid paying extra taxes on the trust’s income. In the Campbell case, a trust was set up by a person for their daughter to manage. The trust said that the income from the trust, specifically from selling investments, could be given to the person and their spouse if they asked for it. If they didn’t ask for it, the money would stay in the trust and be reinvested. The court decided that because the person and their spouse had the power to ask for this money, they should be considered the owners of it for tax purposes. If you have the right to take money out of a trust, you have to report that money on your taxes, even if you don’t have control over the trust’s property. To make sure a trust is taxed as a beneficiary-owned trust, and not a grantor trust, the grantor can’t have any special powers over the trust’s property. If a trust is treated as owned by a beneficiary, it can qualify for tax breaks when the beneficiary sells their home. In simple terms, a BDOT can provide tax benefits for income and estate taxes. If a beneficiary has the power to withdraw income and capital gains from the trust, only the remaining amount of this power at the time of their death would be included in their estate for tax purposes. If the beneficiary dies before receiving any money from the trust, then there would be no estate tax inclusion. In Florida, a person can claim a homestead exemption on their home even if it’s owned by a trust, as long as they have the right to use and live in the home. This also applies to irrevocable trusts, as long as the person living in the home has the right to use it and the trust is passive. This means the person can still claim the homestead exemption even if the home is owned by a trust. In a divorce, assets held in a trust that one spouse is not actively managing are considered nonmarital property and are not subject to being split between the spouses. However, if marital assets are used to pay for expenses or the mortgage on the trust-owned home, it could become subject to being split in a divorce. It’s recommended that if a trust is created to own a home for a child and their spouse, they should sign a prenuptial agreement to make sure the home and assets in the trust are not considered marital property during a divorce.

As for the trust itself, it should include a provision that allows the child to withdraw all the income from the trust each year. This provision will make the child responsible for paying income tax on the trust’s income and also be treated as the owner of the home for tax purposes, which can be important for things like the two-year ownership requirement for tax breaks when selling a home. You can take money out of the trust within two months of finding out how much money is in it each year. If you don’t take the money out during that time, you lose the right to take it out. But if the amount of money you can take out is more than a certain limit, you can still take out the extra amount in the future. When you die, you can’t take any more money out. If you don’t take all the money out, the remaining money is kept in the trust. In simple terms, the first part says that the trust is set up so that the child and parents don’t have control over it for tax purposes. The second part says that the child can live in any property owned by the trust and get a tax break for it. A trust can help a child avoid paying income taxes on property held in the trust, and also get tax benefits for owning a home in Florida. This can protect the home from being included in the child’s estate for tax purposes and also protect it in case of a divorce. Florida residents get tax exemptions and caps on property value increases, and can also transfer tax benefits to a new home if they sell the old one and buy a new one in Florida within two years. They also get protection from most creditors. [2] If you sell your home and make a profit, you may not have to pay taxes on up to $250,000 of the profit if you’re single or $500,000 if you’re married, as long as you’ve lived in the home for at least two out of the past five years. You can also deduct interest on the first $750,000 of mortgage debt used to buy or improve the home, but this rule only applies to mortgage debt taken on after December 15, 2017.

[3] In 2020, each person has a credit to avoid paying taxes on gifts and inheritance up to $11,580,000. This amount may change each year. However, this credit will decrease by 50% on January 1, 2026, so it may be smart to avoid including a child’s inheritance in their taxes.

[4] Florida law has rules for dividing assets and property in a divorce, including assets acquired during the marriage, increases in value of pre-marriage assets, and paying off a mortgage using money earned during the marriage.

[5] A revocable trust is one that the person who set it up can cancel without needing permission from anyone else.

[6] and [7] These are specific sections of the tax code that explain how certain trusts and their income are treated for tax purposes.

[8] This section of the tax code says that if a parent has control over the income or property in a trust, that parent will be treated as the owner for tax purposes.

Source: https://www.floridabar.org/the-florida-bar-journal/creating-a-florida-irrevocable-homestead-trust-for-ad-valorem-income-and-transfer-tax-purposes/