On top of the obvious reasons for estate planning – controlling the descent of your wealth and planning for the support of loved ones after your death – there are two primary objectives that seem to be of primary concern for many people: avoiding probate and avoiding creditors. The two are often conflated, but different estate planning tools are used to accomplish these two distinct objectives while still providing for the prudent and intended management of one’s wealth.
This page will cover the most well-known tools of estate management, wills and trusts, but there are as many different legal instruments (and combinations thereof) as there are individuals to dream them. In fact, trusts alone can be established, modified, and managed to accomplish nearly any imaginable goal. By way of example, a somewhat recent phenomenon (and one I can assist with) is known as a “gun trust”: a way of holding and managing large collections of valuable and often rare firearms in such a way that their distribution to family members avoids certain laws and regulations that might otherwise prohibit the creator of the trust from passing the firearms from one person to the next.
The basic lesson of this example is that no two estate plans are, or should be, anything alike. Instead, they should be tailored to meet the particular objectives of each individual in light of their personal values and known, foreseeable, and unforeseeable events – and that is the approach that I take when drafting estate plans for clients.
Wills are the best-known and most common tool of estate planning. It is true that wills must be taken through the probate process upon a person’s death, and some see this as a drawback. However, in certain situations it might not matter that probate is necessary. Perhaps you are leaving your estate to a large charity or church that won’t need immediate access to the assets. In this case it may not be worth it to draft a complicated trust document; you can simply leave your estate in a will. One other potential drawback is that probate proceedings are public record, so that family and friends might be privy to information that you’d rather have kept private.
It is important that a will be very carefully drafted in order to avoid mistakes, ambiguities, and legally incongruous provisions. They must also be executed pursuant to very strict formalities under Florida law. I emphasize to most people that online form software such as LegalZoom should be avoided for this very reason: by the time the mistakes in a LegalZoom will come to light, you will be far too dead to do anything about it. This caution has nothing to do with a lawyerly desire to avoid competition; in fact, such wills inevitably create more legal proceedings on the back end, in the form of will challenges. Instead, it is simply good and prudent legal advice: even a simple will is best drafted by an attorney who is familiar with relevant law and can ensure that the wording and execution comply with the testator’s wishes and the applicable statutory requirements.
A will might establish a trust within its own terms. This is deemed a “testamentary trust,” and it must be taken through probate and is subject to open records laws. The will may also contain “pour over” trust provisions whereby certain assets of the state that are not specifically devised and distributed pour over into a trust for the benefit of a trust beneficiary.
REVOCABLE LIVING TRUSTS
These are the most common types of trusts. Trusts are financial arrangements whereby a settlor (or “grantor” or “creator”) places assets in the trust to be managed by a trustee for the benefit of a beneficiary. Self-settled trusts are those in which one person serves all three roles, but these tend not to carry the same creditor protections and legal benefits. Instead, the set up should generally include at least two entities, if not three separate entities serving as the creator, trustee, and beneficiary.
In a revocable living (or “inter vivos”) trust, the settlor, during his or her lifetime, places assets in the trust for the benefit of a beneficiary but reserves the right to revoke the terms of the trust at any time. If the settlor dies while the trust is still in existence, the trust becomes irrevocable and usually contains provisions about how and for whom the trust principal is to be used thereafter.
Revocable living trusts avoid probate. They do not, however, avoid creditors (entirely). The settlor essentially has control over the assets during his or her life, since he or she can simply revoke the trust at any time, so it is generally the position of the law and courts that the settlor’s estate can still be held responsible for the debts incurred when the settlor had such control (during his or her lifetime). During a probate proceeding, if the now-deceased settlor’s estate is not enough to cover all of his or her debts, there is a statutory provision that explicitly allows creditors to pursue the funds in what had been a revocable trust during the settlor’s lifetime.
Irrevocable trusts are those in which the trust funds vest to the beneficiary upon creation and cannot be revoked or modified by the settlor of the trust without the agreement of the beneficiary. While irrevocable trusts avoid probate as revocable trusts do, they also provide more tax benefits and better creditor protections than revocable trusts, precisely because the settlor is not the owner of trust funds once the trust is established.
When funds “vest” under the law, that does not mean the beneficiary automatically has control or possession of them; instead, the beneficiary has a legal interest in the funds. With a trust, the settlor can create conditions under which the income and principal of the trust are distributed by the trustee over time to the beneficiary. In the context of irrevocable trusts for children, usually the principal of the trust will be distributed upon the child reaching a certain age in order to preserve certain tax benefits (see Minor Trusts below).
Asset protection is a catch-all term for the placement and management of assets in such a way that maximally avoids legal and tax liabilities. In other words, it is about safeguarding your wealth. Estate planning is a sub-category of asset protection, but the broader term includes instruments and actions that protect a person’s estate while he or she is still alive. For obvious reasons, this is an endeavor that should be completed with the assistance of legal counsel and accountants working together. For an excellent and readable breakdown of the history of asset protection techniques, legal issues surrounding their creation, and current considerations, see the fantastic book by Gary Forster, JD, LLM: Asset Protection for Professionals, Entrepreneurs, & Investors (http://assetprofl.com/index.php)
COMMON SPECIFIC TYPES OF TRUSTS
Minor (2503(c)) Trusts – These trusts allow a parent to place monies in an irrevocable trust for the benefit of a child until he or she reaches a certain age, usually 21 (although this can be extended to 25 in certain circumstances), at which point the corpus of the trust is distributed to the child. The benefit is that the parent can place the maximum amount each year of the federal gift tax exemption (currently $14,000) in order to avoid paying gift tax on the trust funds, despite that the funds do not technically qualify as a “gift” (since they aren’t actually given to the child, but instead placed in a trust for the child’s future benefit and enjoyment). The trust must be drafted to require that the principal be distributed in full to the child upon a certain age (21 or 25); otherwise, the tax benefits are lost. These are the most common and popular types of trusts for children, as they are simple, straightforward, and do not require large contributions in order for the parent to see a tax benefit.
Special (or Supplemental) Needs Trusts – These are irrevocable trusts created for the benefit of persons with mental or physical disabilities or chronic or acquired illnesses or medical conditions. The advantage of such a trust is that a settlor can place monies in the trust without adding to the beneficiary’s income for the purpose of qualifying him or her for supplemental government benefits like Social Security Disability Insurance, Medicaid, or subsidized housing. (Put differently, if such funds were counted toward the beneficiary’s income, he or she may be disqualified from receiving certain government benefits; placing the funds in trust avoids this outcome).
Spendthrift Trusts – Originally, these were trusts created for the benefit of individuals who have a personal history of being unable to responsibly save and spend money. In recent years, however, they have become a kind of catch-all in which the distinguishing feature is simply that the trustee has complete control over how the trust funds are used to the benefit of the beneficiary, the funds cannot be attached by a creditor, and the beneficiary is often someone who has or may have a significant amount of personal debt. They allow the beneficiary to have funds on which to live that cannot be accessed by a creditor. One thing to note about spendthrift trusts is that once a distribution from the trust is made to the beneficiary, and he or she has the money in hand, then it is possible for a creditor to pursue those funds. For this reason, it is particularly important that the trustee use caution in how spendthrift trust monies are distributed.
Domestic Asset Protection Trusts (DAPT) – You may have heard of DAPTs, and they are included here to illustrate how different states have different asset protection and trust laws. DAPTs are a relatively new phenomenon, having first been created about two decades ago, and they are not viable in the state of Florida (and are quite controversial elsewhere). These trusts create a way to avoid federal estate taxes while also providing creditor protection, but they are in essence a form of self-settled trust (meaning the settlor is both the trustee and the beneficiary); a DAPT is a trust created by a debtor for the debtor’s own benefit. For this reason, they are not recognized in Florida as valid estate planning tools, and they are only allowed by statute in 16 states to date.
Qualified Terminable Interest Property (QTIP) Trust – This is a type of inter vivos (living) marital trust that creates valuable spousal benefits, and it’s often used by individuals who have children from a previous marriage. The settlor can create a trust that provides for a spouse while still controlling how the trust funds are used after the settlor dies; for example, the surviving spouse never has power of appointment over the trust, so it cannot be used for the benefit of a new spouse if the surviving spouse remarries later. While the spouse is alive, he or she receives payments from the income of the trust (not the principal), and the payments terminate upon his or her death. The principal of the trust is then distributed to named beneficiaries. An added perk of a QTIP trust is that if the beneficiary spouse dies first, such that the property reverts back to the estate of the settlor spouse, the property is still unavailable to creditors of the settlor spouse’s estate (see Section 736.0505(3), Florida Statutes (2010)).
Qualified Personal Residence Trust (QPRT) – This type of trust allows the settlor to place his or her residence in trust for a term of years. If the settlor is still alive at the end of the term, the residence vests irrevocably to the beneficiary, but if the settlor dies prior to the end of the term or chooses to revoke the trust before the term of years expires, the residence reverts back to the settlor’s estate or possession (respectively). The settlor retains the right to sell the property during the term of years and reinvest the funds in another residence, but otherwise, the property is under the control of the trustee. The advantage of this type of trust is that is helps reduce the size of the settlor’s taxable estate for federal estate tax purposes (since a person’s home is often his or her most valuable asset) while still allowing the settlor to bequeath the property for the use and enjoyment of his or her children. The reduction in taxes occurs because the property is valued for tax purposes at fair market value minus the actuarial value of the owner’s ability to use and occupy the property for that term of years. In other words, the value of the property is discounted by the amount of time the owner is expected not to possess and enjoy the home after the term expires, as far as federal taxing authorities are concerned.
Charitable Trusts (Remainder Annuity, Lead Annuity, Remainder Unitrust, Lead Unitrust, Sharkfin) – These trusts allow the settlor to donate to charity in various ways. This is by no means an exhaustive list, but one can:
- Place a large amount in trust with the income going as payments to the settlor during his or her lifetime and the principal transferred to the charity upon the settlor’s death;
- Permit the interest on income of a trust to be paid to a charity while other beneficiaries receive the principal and/or income;
- Provide a fixed percent during a fixed term of the trust to designated beneficiaries, with the remainder going to charity after the term expires; or
- Simply give a variable amount annually for a term of years, with the remainder going back to the settlor after the term expires.
There are many different types of charitable trust instruments with different distribution and management schemes that allow individuals to donate however they see fit. And as with charitable trusts, there are dozens more relatively common trust instruments not listed above that allow a person to manage and control their assets, with varying legal and tax benefits that can be tailored to adapt to each person’s objectives and circumstances. If you are interested in safeguarding your assets and protecting your loved ones in the future, please call or fill out the contact form to request a consultation about your (many) options.