In Florida, you generally have two options regarding what operates as the main vehicle of your estate plan: (1) a Last Will & Testament vs. (2) a Revocable Trust
. Revocable Trusts
are also known as “Living Trusts” and sometimes referred to as “Family Trusts.”
Revocable Trusts Avoid Probate
The primary advantage of having a Revocable Trust
vs. a Will is that assets titled in the name of the Revocable Trust avoid probate upon your death. Wills, on the other hand, do not avoid probate. To read more about Wills, click here: Top 5 Key Ingredients in Will Preparation
. For a comprehensive discussion on probate avoidance techniques, click here: Estate Planning Myth: Wills Avoid Probate
Most of my clients want to avoid probate for the following reasons:
- The Personal Representative (or “PR” for short, also known as the “Executor”) in a probate proceeding must wait for the court to grant “Letters of Administration” in order to access estate assets, whereas the Successor Trustee named in a Revocable Trust can access trust assets immediately without court supervision or interference. Thus there is virtually no time delay in a trust scenario, whereas a probate proceeding typically takes anywhere from nine months to a year or more.
- In probate proceedings, the PR is required to notify “reasonably ascertainable” creditors and publish a legal “Notice to Creditors” in a newspaper, thereby providing an open forum for potential creditors to make claims against the estate. On the other hand, the Trustee of a Revocable Trust has no affirmative duty to notify creditors regarding the nature and value of trust assets. A creditor seeking to access trust assets would need to file a separate lawsuit in order to subpoena this information. In short, the Trustee of a Revocable Trust has much more leverage in dealing and negotiating with potential creditors after the person who created the Revocable Trust dies.
- Both probate and trust administration involve fees and costs. In probate administration, the fees tend to be higher. This is because Florida law provides that certain percentage fees charged by the PR and his or her attorney are presumed to be reasonable. For example, the PR and his or her attorney each can charge a 3% commission on the first $1 million of probate assets, and then 2.5% commission on the next several million, with the percentage fee gradually decreasing as probate asset values increase. For example, a $2 million probate estate would entitle the PR to a $55,000 commission, as well as the attorney for the PR a $55,000 commission = $110,000.00+ in fees, not to mention court costs. This example is illustrated as follows:
|$2 Million Probate Estate Example
||Fee / Cost Amount
|PR 3.00% Commission on 1st $1,000.000.00
|PR 2.50% Commission on 2nd $1,000.000.00
|PR’s Attorney’s 3.00% Commission on 1st $1,000,000.00
|PR’s Attorney’s 2.50% Commission on 2nd $1,000,000.00
|Probate Court Filing Fee – Formal Administration
|Estimated Personal Representative Annual Bond Premium
|Publication of Notice to Creditors
|Miscellaneous Costs (mail, copies, certified orders, etc.)
|Estimated Total Fees & Costs on $2 Million Probate
As you can see, probate administration is not cheap. In contrast, there are no statutory percentage fee entitlements in trust administration; rather, Florida law provides that Trustees are entitled to “reasonable compensation under the circumstances.” However, most corporate fiduciaries do charge a percentage fee between 1.00-1.50% of assets under management to serve as Trustee. Knowing what corporate fiduciaries charge to act as Trustee can serve as a guide in determining what is reasonable for an individual Trustee to be paid.
Parties to the Trust
A Trust always has at least three parties:
||This is the person who establishes the trust. Sometimes the Settlor is called the “Grantor” or “Trustor.”
||This is the person or entity that manages and oversees the trust assets for the benefit of the beneficiaries. The Trustee holds legal title to trust assets.
||The beneficiaries are the persons or entities (such as a charity) who receive distributions from the trust. Beneficiaries have a beneficial interest in trust assets.
When you first establish a Revocable Trust
, typically you fill all three roles: you are the Settlor, the initial Trustee, and the primary beneficiary during your lifetime. If you become incapacitated, the Trust names one or more “Successor Trustees” to continue to manage and apply the trust assets for your benefit. Following your demise, the Successor Trustee will manage and apply the trust assets for the beneficiaries you named in the trust document.
Power to Modify and Revoke
A Revocable Trust is revocable, so as long as you are alive and have the requisite mental capacity, you can revoke or amend it at any time.
Income Tax Effect of Revocable Trust
While you are living, a Revocable Living Trust is a pass-through entity for income tax purposes, meaning it will not affect your income tax filing. You can simply utilize your social security number as the Tax ID (Employer Identification Number or “EIN”) for the Trust, and all items of income, depreciation, deduction, and credit continue to pass through to you on your personal Form 1040.
Choosing a Successor Trustee
Your chosen Successor Trustee will manage trust assets in two situations: (1) if you are alive but become incapacitated, and (2) following your demise, the Trustee will distribute trust income and assets to your beneficiaries in accordance with the terms of the trust instrument. The ideal Successor Trustee is organized, detail-oriented, honest, loyal, emotionally and financially stable, impartial, available, and reliable. For additional guidance on selecting a Successor Trustee, please read my blog: HOW TO CHOOSE A TRUSTEE
Structuring Your Beneficiaries’ Inheritance
How you structure the manner in which your beneficiaries receive their inheritance is a personal decision based on your values and wishes, as well as any special circumstances of a particular beneficiary. For example, beneficiaries with special needs, addiction issues, or a history of poor financial decisions require special planning considerations. Your estate planning attorney should help you identify any special issues and provide creative solutions to safeguard your legacy and promote the success and safety of your individual beneficiaries. If you are charitably inclined, there are a number of ways to incorporate gifts to charity that can be custom-tailored to your individual wishes in a tax-efficient manner.
Funding the Trust
In order to fully reap the probate avoidance features of your Revocable Trust, you must coordinate your assets with the Trust. This process is called “Trust Funding.” Your estate planning attorney should assist you by preparing deeds and related transfer documents to fund your trust with the majority of your assets, including: real estate holdings, business interests, and tangible personal property. Additionally, you also must coordinate the bulk of your financial assets with the Trust. Your estate planning attorney should provide guidance and best practices for coordinating bank accounts, brokerage accounts, retirement accounts, life insurance policies, annuities, and other financial assets with your Revocable Trust. This ensures that your estate plan is executed according to your wishes and minimizes the chance of any assets having to go through probate.
In determining whether a Will or a Revocable Trust is the right choice for you, please read my blog: Trust vs. Will – Which is right for you?