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Estate planning is one of the best ways to ensure your loved ones are looked after when you pass. One crucial element of estate planning is establishing trusts. Whether you want to protect your assets while you are living or ensure their proper distribution after you pass, trusts are a great way to add an extra layer of protection around your estate.
However, estate planning is a complex process and a lot to take on yourself. The Lopez Law Group is well-versed in estate planning and can help you create trust funds that will keep your assets safe from creditor attacks and excess taxes.
What is a Trust?
A trust is a legal agreement between two parties: one who puts assets into a trust and another who oversees those assets.
The primary purpose of a trust is to offer an individual more security and control over their wealth than they would have with a traditional will. While trusts are often created to benefit a third party such as a child or grandchild, trusts can also serve to protect wealth while an individual is still living.
In addition to more control over asset distribution, trusts can help save money on inheritance and estate taxes and avoid complicated probate affairs.
Who Can Benefit from a Trust?
Establishing a trust sounds daunting, and there is no shortage of misconceptions surrounding them. A common belief is that trusts only exist to serve a third-party beneficiary once the grantor has passed.
The truth is that trusts can serve many different purposes, including benefitting the grantor while they are still alive. Certain types of trusts allow grantors to act as their own trustees or beneficiaries. The purpose of a trust, in this case, is to safeguard the grantor’s assets from creditor claims and heavy taxes.
Others may believe that trusts are reserved for people with exorbitant amounts of wealth or assets. However, most people can benefit from a trust, regardless of their circumstances.
How Does a Trust Work?
To establish a trust, the person who owns assets, also known as the grantor, must designate another party to be the trustee. The trustee is responsible for managing the trust’s assets and has the power to use or invest the assets. The trustee is also responsible for distributing the
trust’s assets according to the grantor’s wishes once the grantor has passed. The conditions of the trust will vary based on which type of trust you choose to create.
As mentioned, a grantor can be the beneficiary of their own trust; this is commonly known as a self-settled trust. Note that only certain types of self-settled trusts offer protection from judgment creditors.
Types of Trusts
While trusts exist in many forms, they fall into two main categories in Florida: living trusts and testamentary trusts.
A living trust is created while the grantor is still alive, while a testamentary trust is written into a person’s will and only takes effect once the grantor has died. Because assets in a testamentary trust must go through a will, they are subject to probate.
Revocable and Irrevocable Trusts
Another condition that can be applied to both living and testamentary trusts is whether that trust is revocable or not. A revocable trust can be changed or revoked at any time, while an irrevocable trust cannot. A living trust can be revocable or irrevocable, but a testamentary trust is only revocable so long as the grantor remains alive.
Revocable Living Trusts
Revocable living trusts are one of the most frequently used types of trust. The grantor can create a revocable trust as a way to better manage their assets during their lifetime. A revocable trust also offers the grantor more control over how their assets are distributed after their death.
As with any trust, a revocable living trust requires a trustee to look over the assets; however, the grantor may be the trustee of their own revocable living trust.
As the trust is revocable, the grantor can alter or terminate the trust at any point in their life, so long as they are not incapacitated. If a person other than the grantor is appointed trustee, they are responsible for managing the trust property and investing assets. While the grantor does not oversee the assets, most trusts allow them to withdraw as much money as they like at any given time.
If the grantor becomes incapacitated, the trustee takes on responsibility for the grantor’s assets, bill payments, and investments, avoiding the need for a court-appointed guardian.
When the grantor dies, the trustee assumes responsibility for any unpaid claims and taxes and must distribute the trust’s assets according to the terms set out by the grantor.
One major perk of a revocable trust is that it side-steps the need for probate. Probate is the court-supervised process of distributing an individual’s estate after their death. Probate ensures that all creditor claims, taxes, and expenses are dealt with before the distribution of assets to beneficiaries. It’s always best to avoid probate if possible, as the process is long and complicated.
A revocable trust bypasses probate by transferring assets directly to a trustee. As the assets are transferred while the grantor is living, there is no need for probate after they pass; the trustee already has the authority to distribute the assets after the grantor’s death.
Note that to successfully avoid probate, the trust must be properly funded, meaning that any assets that may be subject to probate in a will must be transferred to the trust before death. If you wish to transfer assets to a trust after your death, you will need to create what is known as a pour-over will.
As mentioned, an irrevocable trust cannot be modified or terminated by the grantor after it has been established. The grantor may not take back any property put into the trust. Once assets are in an irrevocable trust, they are seen as a permanent gift to beneficiaries. Only the trust’s beneficiaries may make changes to the trust’s terms.
While an irrevocable living trust may seem like a lesser option than a revocable trust, the loss of control over assets is offset by the perk of not being subject to estate taxes. Once you put assets in an irrevocable trust, you no longer legally own them, meaning you are no longer liable to pay estate taxes or income taxes as the assets appreciate.
Another upside to irrevocable trusts is that they may be immune to claims from creditors of the trust’s beneficiaries. When you pass away, any assets not stored in a trust may be sold off to creditors. Putting assets in an irrevocable trust can prevent this and ensures your estate will go to people of your choosing, like family or friends. This is generally achieved by including a spendthrift clause in the trust’s terms and conditions.
Trusts for Minors
Establishing a trust fund is crucial for anyone with children who are minors. By putting assets in a trust, the parent has more say in when their child will receive an inheritance, and to some degree, what they can spend it on.
While the child is a minor, money is generally set out for their education and medical expenses to ensure they are covered. Once the child becomes an adult or achieves a desired level of education, they may begin receiving funds from the trust to spend of their own accord.
Special Needs Trusts
Special needs trusts are designed explicitly to protected people with mental or physical disabilities. If a disabled person inherits a significant amount of wealth, it can disqualify them from receiving Supplemental Security Income (SSI) and Medicaid benefits.
If your child has special needs, it is crucial you put their inheritance in a special needs trust to allow them to continue receiving government assistance. Assets in a special needs trust are seen as a supplement to government benefits rather than a replacement.
The special needs trust aims to offer disabled individuals security and a better quality of life. Special needs trusts are controlled to prevent the beneficiary from spending funds on services already covered under government assistance. Special needs trusts generally allow disabled individuals to maintain personal grooming, access dry cleaning services, purchase electronic goods, and musical instruments, and pay for housekeeping and cooking assistance, in addition to other services.
Special needs trusts can be created by a third-party or by the beneficiary themselves. However, it is typical for a special needs trust to be created by a third party such as a parent or guardian. In a third-party trust, someone other than the beneficiary contributes the assets. Parents or grandparents usually establish third-party special needs trusts as part of their overall estate plan.
Both types of trust exist to maintain a disabled individual’s eligibility for government benefits. However, self-settled trusts are generally created by an individual who has just come into significant wealth and wants to maintain access to SSI and Medicaid assistance.
Credit Shelter Trust
In Florida, married couples can take advantage of a credit shelter trust. Credit shelter trusts help protect a couple’s estate from excess taxes should one spouse pass away before the other.
The credit shelter trust allows the testator to avoid federal estate taxes when passing on an inheritance to beneficiaries. Upon the testator’s death, assets are transferred directly to the trust’s beneficiaries. A unique feature of a credit shelter trust is that the surviving spouse will retain their right to manage to trust’s assets and any income they generate.
Generation-skipping trusts are generally used as a wealth-preservation method for individuals with significant wealth or property.
As the same suggests, generation-skipping trusts allow grantors to leave an inheritance to their grandchildren, effectively “skipping” a generation. By skipping their child’s generation, the grantor bypasses estate taxes that would generally apply if their children inherited the assets directly after their death.
While beneficiaries of a generation-skipping trust are most commonly the grantor’s grandchildren, anyone can be named the beneficiary of a generation-skipping trust, provided they are at least 37½ years younger than the grantor.
Asset Protection Trusts
High-value estates often come under attack from creditors or lawsuits. One of the best ways to safeguard your wealth from such claims is to store it in a trust. Florida asset protection trusts are generally self-settled trusts that protect an individual’s wealth from judgment creditors under Florida statute.
Creating an asset protection trust is incredibly complex. If possible, have an attorney create an asset protection trust for you to avoid any complications such as the trust failing. An attorney will know how to tailor the trust to your precise needs.
Florida Estate Planning Attorneys
Creating trusts is crucial in planning for your family’s future, and it’s never too soon to begin. To get started, call The Lopez Law Group at 727-933-0015 for a case evaluation.
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