Designing Trust Systems for Florida Residents: Planning Strategies, Things You Should Know, and Traps for the Unwary

Trusts are commonly used for estate and financial planning. They help avoid probate and protect assets. There are different types of trusts and it’s important to understand the implications before funding one. For unmarried individuals, a revocable trust is often used to avoid probate and maintain control over assets. However, in some cases, it may be best not to fund a revocable trust, especially if creditor protection is a priority. A revocable trust can help protect your money and property from creditors if you’re sued or file for bankruptcy. This includes things like life insurance policies, annuity contracts, and your home. You can also protect your pension, IRA, and Social Security money from creditors by putting it in a special bank account. The trust can also have rules to make sure no one can change it or take out a lot of money unless you’re mentally okay and not being pressured by anyone. For elderly or sick people, it can be really expensive to get the care they need. To help protect their money, it’s a good idea for them to have a trust that can’t be changed without permission from trusted family members or doctors. This can help keep their money safe from people who might try to take advantage of them. It’s important to know that even if someone has a trust, their debts can still be paid from the trust’s money. So it’s important to plan carefully to make sure that their money is protected. In Florida, there’s a misconception that the trustee of a revocable trust has to give notice to creditors, but they only need to give a notice of the trust if required by law. Creditors have two years to file a claim against the trust after the person dies. It can be helpful to also open a probate estate to limit the time for creditors to file claims. Assets with pay on death or transfer on death designation go directly to the named beneficiary and are not available to creditors. A “scrivener protector” provision ensures that any mistakes in the trust can be fixed by a chosen person or law firm. For married couples, choosing the right kind of trust can be tricky. There are different options like a joint trust, a JEST trust, a community property trust, a revocable trust, or separate revocable trusts. It’s important for planners to carefully review the trust documents to make sure everything is clear. The most common trust for married couples with smaller estates is the tenancy by the entireties trust, which can protect assets from the creditors of each spouse. However, there are some confusing legal issues with this type of trust. In Florida, married couples have special protection for their property called tenancy by the entireties. This means that if one spouse owes money, creditors can’t take assets owned by both spouses. These assets include things like real estate, bank accounts, and contracts. To make sure a revocable trust qualifies for this protection, it’s important to draft it carefully. Some judges have made decisions that make it seem like a trust can’t hold property this way, but there is still a possibility for it to work. The court made a mistake in the Givans case by saying that a trust can never hold property as tenants by the entireties. This caused confusion, but some states have laws that allow trusts to hold property this way. Florida doesn’t have this law, so there’s still uncertainty about it in the state. A married couple can use a legal arrangement to make sure their property goes to the right people when they die. They can set up a company to own their stuff and then make a plan for what happens to the company when they die. They can also sign a paper saying who should get the company after they die. This helps make sure their property doesn’t get stuck in a legal process called probate. A joint trust for a married couple can be a good way to protect assets for the surviving spouse and other beneficiaries. It can also help with estate taxes and protect the assets from creditors. It’s also possible to set up separate trusts for each spouse to make sure the assets go where they are supposed to and are protected from creditors and taxes. In Florida, many wealthy couples set up separate trusts for each spouse as part of their estate plan. When one spouse dies, their trust becomes irrevocable and moves assets into a credit shelter trust, which can benefit the surviving spouse without being taxed. This also protects assets from creditors and divorce, and allows for assets to benefit descendants without being taxed when they pass away. However, it can be tricky to balance assets between the trusts. Some couples use a joint trust to avoid this issue, but it can be unclear how the assets are divided after one spouse dies. If one spouse dies holding a power of appointment over assets in a trust that were contributed by the surviving spouse, the assets won’t get a step-up in basis. But a special type of joint trust, called a Joint Exempt Step-Up Trust (JEST), can provide a full step-up in income tax basis for all trust assets, to eliminate capital gains tax. This trust is designed to make sure each spouse owns a designated share of the trust assets, and provides protection from creditors and estate taxes for the surviving spouse. The JEST trust allows a dying spouse to control the assets of the surviving spouse after they pass away. It has three main advantages over other types of trusts: it can help the surviving spouse avoid paying high taxes, it can protect assets from creditors, and it can ensure that the surviving spouse benefits fully from the trust. When one spouse dies and leaves assets to the surviving spouse, it’s important to plan carefully so the surviving spouse doesn’t lose eligibility for Medicaid. Transferring assets to a trust for the surviving spouse may not work to preserve eligibility, and there’s a rule that looks back 60 months at transferred assets. However, using the right language in a will or trust established under a will can provide the surviving spouse with extra support without affecting Medicaid eligibility. If a spouse in Florida needs Medicaid, they may be worried about losing benefits if their partner passes away. A way to protect Medicaid eligibility is to set up a special needs trust in a will. This trust can be funded with a portion of the deceased spouse’s estate, which will not count as a Medicaid asset for the surviving spouse. Another option is to use a credit shelter trust, which can also help with Medicaid eligibility. Either way, it’s important to plan ahead to make sure the surviving spouse can keep their benefits. For people who move to Florida from community property states, it’s important to understand the pros and cons of leaving their assets in the community property mode. Lawyers can help set up a joint community property trust to hold these assets, and make sure that when one spouse passes away, their share of the trust goes to the right place. It’s best to work with lawyers who understand both Florida law and community property law. For most people, it’s a good idea to set up separate revocable trusts for each spouse, in addition to the joint community property trust, to make sure everything is taken care of properly. In 2021, Florida passed a law allowing married couples to create a community property trust, which divides assets equally and protects them from the debts of one spouse. This is different from other states with similar laws, making it less likely to get a tax benefit. Other states have different rules for protecting assets from debts. In Florida, irrevocable trusts don’t always protect assets from creditors, but there are some exceptions. For example, if the trust is created for a spouse or for income taxes, it might have more protection. It’s important to be aware of these rules when setting up a trust. Additionally, Florida has a 10% cap on property taxes for certain types of commercial property. The 10% cap on property tax can be lost if there is a change in ownership or control of the property. This means selling the property or transferring more than 50% of ownership to someone else. The same applies to the 3% cap for homestead properties. There are some exceptions for transfers, like between married couples and for certain family situations. It’s important to talk to an estate planner before making any transfers of property. In Florida, there are laws that protect your home from big increases in property taxes and provide a tax exemption of up to $50,000. This exemption can apply to property held in a trust, but the person applying for the exemption needs to have the right to use and possess the home. When setting up a trust, it’s important to think about how it will affect taxes and other practical matters. Married couples may have even more things to consider when setting up a trust. It’s a complex area, and there isn’t a one-size-fits-all solution. It’s important to carefully think about the practical and tax implications before setting up a trust. Annuity contracts and life insurance policies are generally safe from creditors in Florida. Summary: In Florida, there are laws that protect certain assets, like life insurance proceeds and homestead property, from creditors. However, there has been some uncertainty about whether homestead property in a revocable living trust can be taken by a judgment creditor. Some court cases and opinions from the attorney general have given conflicting answers to this question, so it’s not completely clear if homestead property in a revocable trust is always protected. Florida has a law that protects a person’s main home from being taken by creditors, as long as the person lives there and plans to make it their permanent home. This protection applies to a certain amount of land, depending on whether the home is in a city or not. There’s also a law that protects people’s retirement accounts from creditors after they die. If you receive Social Security benefits, they are usually protected from creditors and bankruptcy. But some court cases have said that there are exceptions to this rule. One way to make sure your assets are protected is to create a trust that includes a special power for you to control where the money goes. Also, if you owe money when you die, the person in charge of your estate has to let your creditors know so they can try to get their money. When someone who made a trust passes away, a notice of the trust needs to be filed with the probate administration. This is required by law. The notice of trust lets the probate administration know about the trust. In Florida, creditors have up to two years to file a claim against the trust, which is longer than the time allowed for filing claims in a regular probate process. Some states have a joint exempt step-up trust, which is a type of trust that has special benefits. Florida is one of the states that has this type of trust. Other states that have it include Alaska, Arkansas, Delaware, and others. In a recent court case, it was ruled that when a couple transfers their property to a joint trust, it still has protection from creditors. This is because the property can’t be sold or used without both spouses agreeing. The court referred to previous cases to support this ruling. There are different ways for married couples to protect their assets. For example, they can set up a joint trust called Marital Asset Protection Trust. It’s important to make sure that the legal documents are clear and specific, so there’s no confusion about what happens to the assets if one person passes away. Another tool is a credit shelter trust, which helps with estate planning and taxes. It’s also important to have a spendthrift provision in place to protect trust assets from creditors. If one spouse dies and they have a trust, the surviving spouse may have to pay gift taxes on the assets they contributed to the trust. Also, if someone gives property as a gift to someone who dies within a year of receiving it, the property won’t get a step-up in basis for tax purposes. When a married couple sets up separate trusts, the trust for the deceased spouse becomes permanent when they die, and the surviving spouse has limited control over the assets. The trust may only allow the surviving spouse to use the assets for health, education, maintenance, and support. This helps protect the trust’s assets and prevents the beneficiary from having unrestricted access to them. A special needs trust can be created before or after someone dies, but if it’s made while the person is alive, it might be considered as their own asset. If it’s made in their will, it won’t be counted as their asset. This kind of trust can help a person with disabilities qualify for government assistance. If a spouse receives Medicaid benefits and their partner dies, the surviving spouse might have to give up their Medicaid benefits if they take a share of the deceased spouse’s assets. Even if they don’t take the share, the state could still claim the money. To prevent this, the deceased spouse can set up a special trust before they die. This trust will fulfill the requirement for the surviving spouse to receive a share, keep their Medicaid benefits, and provide extra money for things not covered by Medicaid. After someone dies, their property and assets (estate) may be used to pay back the costs of their Medicaid health care. Florida law ensures that this happens during the probate process, which is the legal process of distributing a deceased person’s assets. However, there are ways to protect some assets from being used for this purpose, such as setting up a special needs trust. This trust can help ensure that certain assets are used to take care of a person with special needs, instead of being used to pay back Medicaid. Florida law has specific rules for these trusts, so it’s important to understand how they work to make sure they are set up properly. Fla. Stat. §196.041 says that if you have a life estate in a property, you can still get a homestead tax exemption. This means you can get a tax break on the property even if you don’t own it outright. This exemption applies whether you got the life estate before or after the law was passed.

Source: https://www.floridabar.org/the-florida-bar-journal/designing-trust-systems-for-florida-residents-planning-strategies-things-you-should-know-and-traps-for-the-unwary/