October 20, 2017
Considerations for Using a Trust
By Jeffrey S. Goethe, Esq.
Trusts are legal documents based upon complex laws and legal principals. One trust form does not work for everyone. Only an attorney can provide legal advice concerning the need for a trust, the specific trust terms appropriate for a particular client, and the legal requirements for transferring assets to the trust. Attorneys are guided by strict ethical rules to act in their client’s best interests. Many who are not subject to these rules market trust forms, online forms, software, or kits which may not be in the customer’s best interest. As a result of marketing efforts, many myths about trusts have developed.
Myth #1: Trusts avoid the delays of probate.
The Reality: The probate process is not the cause of delay.
Trusts Have to Be Administered. The probate process is the orderly gathering of a decedent’s assets, paying creditors with valid claims, and distributing the balance according to the decedent’s wishes. Sometimes this is a very simple process and sometimes it is not. The administration of a trust upon the death of the person who set up the trust is very similar to the administration of a will in probate court. The primary difference is that the administration of a trust usually does not involve the court system and the oversight of a probate judge. However, this difference is not the real source of delay.
Creditor Claims Period. One of the primary delays in probate is the creditor claim period. Under Florida law, a notice to creditors is published, giving creditors three months to file a claim with the court. The personal representative (or executor) is required to provide notice to known creditors. If the known creditors are notified and a notice is published, a creditor cannot enforce a claim filed after the three month deadline.
Creditors have three months to file a claim if a notice is published in conjunction with a probate proceeding. Without probate, creditors have two years to file a claim. Therefore, a trust administration actually takes longer to handle creditor claims. Because the administration of a trust does not involve court supervision, there is no process to impose a three month deadline for creditors, so creditors have up to two years to file a claim. Florida law provides that the assets in a revocable trust are subject to the claims of creditors. Therefore, a trustee who distributes assets before the second anniversary of the decedent’s death, does so without protection from the claims of creditors. A trustee could possibly be held personally responsible for creditor claims that might have been paid from the trust assets distributed too early. Probate actually shortens the claim period and protects the person in charge of administering the estate.
Estate Taxes. One common cause for delay is the filing and review of an estate tax return. Florida law ordinarily allows one year to complete a probate administration, but allows up to two years to complete the administration when a federal estate tax return must be filed. After the IRS has reviewed and accepted the estate tax return, the trustee or personal representative can distribute assets, assured that they won’t be needed to pay estate taxes. The trustee or personal representative can be held personally responsible for estate taxes if they are distributed without paying the estate taxes. The time to prepare and file the tax return, and for the IRS to review and accept the return are no shorter when a revocable trust is used. The tax planning that can be accomplished for married couples using a revocable trust can also be accomplished with a will.
Post-Mortem Tax Planning. Trusts do not avoid the estate tax planning that should be implemented when a spouse or family member dies. With the new “portability” feature available under federal law, an estate tax return is required on the first spouse’s death, whether or not a trust is utilized.
Disputes Between Beneficiaries. Another cause for delay is disputes among beneficiaries over who will administer the estate and whether the will or trust is valid. Florida law now requires notice to the trust beneficiaries, including a copy of the will or trust and notice as to who will serve as trustee or personal representative. The probate laws actually provide a shorter period of time for someone to object. Often, trustees are not aware of the steps they need to take to shorten the time in which beneficiaries may object, leaving them vulnerable to challenges or objections for a much longer period of time. One slight advantage to a trust is that a beneficiary must file a lawsuit to make objections concerning a trust, but that is probably offset by allowing them a much longer period of time to raise the objections. At the same time, lawsuits involving trusts are governed by the Florida Rules of Civil Procedure, rather than the Florida Probate Rules. Most litigation attorneys are more familiar with the Rules of Civil Procedure.
Sale of Assets. Probate and trust administrations offer many of the same options for handling assets. A properly drafted will or trust can allow the personal representative or trustee to sell assets needed to pay claims and taxes. Both can allow the assets to be distributed directly to the beneficiaries.
Myth #2: Trusts keep your affairs private.
The Reality: Revocable Trusts often contain information that is available to others. In many ways, the administration of a trust entitles trust beneficiaries to the same information that would be available to them in a probate proceeding.
Notice of Trust. Florida law requires that when a person dies, a notice must be filed with the court to provide the name of the trust, and the name and address of the trustee. This is similar to a Notice of Administration required in a probate proceeding.
Copies of the Trust. The law also requires that certain beneficiaries are entitled to a copy of the trust and information about the assets and accountings. If the trust holds real estate, there are some cases when portions of the trust must be recorded in the land records to clear the title. Also, beneficiaries under the trust are entitled to a copy of the trust upon request. It is best to provide the beneficiaries with a copy of the trust and a notice advising them that they have only 6 months to bring a suit to challenge the validity of the trust. Otherwise, they could wait up to twenty years to challenge the trust.
Disclosure of Information to Beneficiaries. The Florida Trust Code entitles “qualified beneficiaries” to information about the trustee, the trust document, and the assets, expenses and liabilities of the trust. Qualified beneficiaries include those who are entitled to the trust assets and income, as well as those who would be entitled to assets or income in the event a beneficiary died. Depending upon the terms of the trust, a surviving parent could be required to provide detailed financial information annually to their children, the deceased spouse’s children, or others who qualify as “qualified beneficiaries” of the deceased spouse’s trust.
Privacy of Asset Information. Florida law provides that the Inventory in a probate proceeding is confidential and only those persons affected by the Inventory may review a copy. The Probate Code also treats the probate accounting as a confidential document. This offers the same degree of privacy as a trust.
Myth #3: Trusts Avoid the Costs of Probate
The Reality: The costs of trust administration are lower.
The Initial Costs. The initial cost of a will is typically much less than the cost of a properly prepared trust. If the trust is not prepared properly, or if assets are not properly transferred to the trust, probate may still be required. Many individuals will decide that it is appropriate for the estate beneficiaries to pay the cost of settling the estate, rather than paying a significant amount to establish and implement a trust.
Administration Fees. When a person dies, the administration of their trust is very similar to the probate process. The Florida Statutes provide a guideline for the fees due to a personal representative and the estate’s attorney. The personal representative and the attorney are each entitled to a fee of 3% of the value of the assets passing through probate. The trust statutes do not provide a guideline for trustee fees, but provide that the trustee’s attorney is normally entitled to a fee equal to 2.25% of the value of the assets in the trust. The fees for trust administration or probate can be adjusted up or down, depending upon the circumstances.
The fee guidelines established by the legislature take into account the responsibilities and obligation of a personal representative or trustee and their attorney. The chart on the following page illustrates varying rates applied for taxes and professional services. In comparison, the legal fees are a small portion of the potential taxes and fees applicable to trusts and estates.
It is also important to remember that many assets like life insurance proceeds pass outside of probate. It is possible that a majority of an estate is not subject to a personal representative’s fee, trustee’s fee, or attorney fee.
Administration Expenses. The costs involved in probate generally include a court filing fee, fees to publish a notice to creditors and, when required, a probate bond. These can generally be as low as a total of $700. While this is not insignificant, it is well worth the benefits gained by shortening the time for creditors to make claims and for the protection of the beneficiaries’ interests through court supervision. Also, the personal representative is protected in many ways by following the procedures in the Florida Trust Code.
Myth #4: Having a Trust Always Avoids Probate
The Reality: Even with a trust, probate is sometimes necessary or advantageous.
The Importance of a Properly Drafted Trust. A trust must first be drafted in accordance with state law. It must take into account the rights of certain persons, such as the surviving spouse. Probate can still be required in many instances:
- The trust was not executed properly;
- The trust did not dispose of all of the assets in the trust;
- Assets were not transferred into the trust;
- The trust failed to provide for the surviving spouse as required by Florida law;
- The trust failed to properly dispose of homestead real property; or
- The trust failed to provide for enough contingent beneficiaries or alternate trustees.
Only a licensed attorney can advise a client about the application of Florida law to an individual’s particular circumstances. Often, what seems to be a simple situation turns out to be very complex. It can be more expensive and involve more delay when probate is required for an improperly drafted trust.
Assets Left Out of the Trust. Many people mistakenly believe that once they sign a trust, everything they own is covered by the trust. Others mistakenly believe that by listing assets on a “Schedule A” to the trust, they are transferring assets to the trust. Signing the trust is only the beginning. Deeds must be executed and recorded to transfer ownership to the trust. Proper paperwork must be obtained from financial institutions and investment brokers to re-title the accounts in the name of the trust. Each of these documents must be prepared correctly or they might not be effective. This process must be repeated every time a new asset is acquired. There are a few specific types of assets which should not be transferred to a trust, but others should be included to avoid probate.
The Importance of a Will. Even with a revocable trust, a will is an essential part of your plan. In case assets are not transferred to the trust prior to death, the will makes sure the assets become part of the trust. Probate will be required to pass the assets into the trust after death. Without a will, an asset not in the trust would pass according to the intestate laws, which may not be the same as the trust provisions.
Myth #5: A Revocable Trust Provides Asset Protection
The Reality: A revocable trust has limited asset protection features.
Homestead. The Florida constitution provides that creditors cannot force the sale of your home to pay them. Mortgages, construction liens, and property taxes are the only exceptions in the constitution. An extra layer of protection is added when a husband and wife own property (called tenancy by the entireties), making the property exempt from the claims of a creditor who has a judgment against only one spouse. At least one court has ruled that homestead protection is lost when property is titled in a trust, although the majority of Florida courts have ruled otherwise. There is also some question as to whether tenancy by the entireties protection is lost when joint property is transferred to a trust.
Other Trust Assets. In general, Florida law provides that if you establish a trust, reserve the right to amend the trust, and keep control over your assets, the trust assets are available to your creditors. A statute specifically provides that creditors can make a claim in probate court against the trust assets. In short, revocable trusts are not a means to protect assets from creditors.
Myth # 6: A person with a trust should transfer all of their assets to their trust.
The Reality: Some assets should not be transferred to a trust.
Homestead. Based upon one bankruptcy court decision, the protection against creditor claims might be lost if homestead is transferred to a trust, at least in a bankruptcy proceeding. Holding homestead property in a trust might also jeopardize the owner’s eligibility for Medicaid and the property tax exemption for the spouse of a disabled veteran. Many Florida attorneys advise that homestead should be titled in the name of the husband and wife and only transferred to a trust after the first spouse dies. Also, some homeowner’s associations prohibit the ownership of a residence in a trust, or impose strict rules for the trust provisions.
IRA’s. Because the tax laws require that an individual retirement account be owned by an “individual” a trust cannot be the owner. A trust could be a beneficiary, but the tax laws make it very difficult for a trust to comply with the rules that allow beneficiaries to take advantage of income tax savings available when the beneficiary spreads the IRA payments out over a long period of time.
Other Assets. Many attorneys advise against transferring an automobile to a trust out of concern for liability issues. An attorney can also review the client’s ownership of assets and beneficiary designations to make sure they comply with the client’s overall estate plan. There may be reasons for some clients to keep particular assets out of a trust.
Myth #7: Trusts can be prepared, implemented and administered without an attorney.
The Reality: Trust preparation, implementation, and administration are complex legal procedures requiring competent legal advice.
The Legal Profession. Although it has become popular to criticize the legal profession, the majority of attorneys view their job as one of service to the public. Lawyers often don’t become involved in a situation until it becomes clear that legal advice is needed to solve a problem. Lawyers are called upon to fix problems concerning title to real estate, probate assets that were not transferred properly to a trust, and to help their clients resolve legal disputes with others. If lawyers were truly self-serving and greedy, they would encourage estate planning by non-lawyers because such work often needs to be corrected or implemented through legal procedures, generating more fees for lawyers. (Remember the mechanic’s line in the old Fram oil filter commercial: “You can pay me now, or you can pay me later.”) As with many things in life, it is less expensive to get it right the first time.
Diagnosing the Need for a Trust. Because it is necessary to first determine whether an individual even needs a revocable trust, the Florida Bar has ruled that preparing a living trust for another is the practice of law, subject to the rules and requirements established by the Florida Supreme Court. Not everyone needs a trust. The Florida Supreme Court has been very active in protecting a citizen’s access to the courts by overseeing the creation of hundreds of standard forms for use in family law cases, landlord-tenant disputes, and other routine matters. There is no standard trust form that works for everyone. Companies that offer “do-it-yourself” online trusts have been the subject of litigation, including actions by state bar associations to prevent the unlicensed practice of law.
Costs Charged by Non-Attorneys. Value should be the concern when documents as important as a will and trust are considered, not simply cost. In many cases, non-attorneys charge as much or more than an attorney to prepare a trust. Also, some trust preparers sell other financial products, so they receive additional compensation indirectly, and may be motivated by their own financial considerations. An attorney, on the other hand, has an ethical duty to charge reasonable fees and to perform only work that is appropriate for the client. Most attorneys will be candid about their fees and should discuss the fees at the beginning of the representation.
Is Self-Help the Answer? Just as a physician is required for the diagnosis of a patient’s illness and the prescription of the proper medications or other treatment for the condition, a lawyer is required to determine the need for a revocable trust and the proper implementation of that trust. The Florida Supreme Court has ruled that this process constitutes the practice of law. A license to practice law is required. Some medications do not require a prescription, while others do. A living trust is not like Tylenol. It is more like surgery which must be performed correctly, only when needed, and under the supervision of a trained, experienced, and licensed professional. You can buy a book about how to remove your appendix and buy the tools to perform the surgery, but it would be very unwise, and probably fatal, to actually perform the surgery on yourself.