Table of Contents:
- What Is Probate?
- What Is A Will?
- Who Is Involved In The Probate Process?
- What Is A Personal Representative, And What Does The Personal Representative Do?
- What Are The Estate’s Obligations To Estate Creditors?
- What Are The Rights Of The Decedent’s Surviving Family?
- How Long Does Probate Take?
- What If There Is A Revocable Trust?
WHAT IS PROBATE?
Probate is a court-supervised process for identifying and gathering the assets of a deceased person (decedent), paying the decedent’s debts and distributing the decedent’s assets to his or her beneficiaries. In general, the decedent’s assets are used first to pay the cost of the probate proceeding, then are used to pay the decedent’s funeral expenses, then the decedent’s outstanding debts, and the remainder is distributed to the decedent’s beneficiaries. The Florida Probate Code is found in
Chapters 731 through 735 of the Florida Statutes, and the rules governing Florida probate proceedings are found in the
Florida Probate Rules, Part I and Part II (Rules5.010-5.530).
There are two types of probate administration under Florida law: formal administration and summary administration. This pamphlet will primarily discuss formal administration.
There is also a non-court-supervised administration proceeding called “Disposition of Personal Property Without Administration.” This type of administration applies only in limited circumstances.
WHAT ARE PROBATE ASSETS?
Probate administration applies only to probate assets. Probate assets are those assets that were owned in the decedent’s sole name at death, or that were owned by the decedent and one or more co-owners and lacked a provision for automatic succession of ownership at death. For example: A bank account or investment account in the sole name of a decedent is a probate asset, but a bank account or investment account owned by the decedent and payable on death or transferable on death to another, or held jointly with rights of survivorship with another, is not a probate asset. A life insurance policy, annuity contract or individual retirement account that is payable to a specific beneficiary is not a probate asset, but a life insurance policy, annuity contract or individual retirement account payable to the decedent’s estate is a probate asset. Real estate titled in the sole name of the decedent, or in the name of the decedent and another person as tenants in common, is a probate asset (unless it is homestead property), but real estate titled in the name of the decedent and one or more other persons as joint tenants with rights of survivorship is not a probate asset. Property owned by spouses as tenants by the entirety is not a probate asset on the death of the first spouse to die, but goes automatically to the surviving spouse. This list is not exclusive but is intended to be illustrative.
WHY IS PROBATE NECESSARY?
Probate is necessary to pass ownership of the decedent’s probate assets to the decedent’s beneficiaries. If the decedent left a valid will, unless the will is admitted to probate in the court, it will be ineffective to pass ownership of probate assets to the decedent’s beneficiaries. If the decedent had no will, probate is necessary to pass ownership of the decedent’s probate assets to those who are to receive them under Florida law.
Probate is also necessary to wind up the decedent’s financial affairs. Administration of the decedent’s estate ensures that the decedent’s creditors are paid if certain procedures are correctly followed.
WHAT IS A WILL?
A will is a writing, signed by the decedent and witnesses, that meets the requirements of Florida law. In a will, the decedent can name the beneficiaries whom the decedent wants to receive the decedent’s probate assets. The decedent also can designate a personal representative (Florida’s term for an executor) to administer the probate estate.
If the decedent’s will disposes of all of the decedent’s probate assets and designates a personal representative, the will controls over the default provisions of Florida law. If the decedent did not have a valid will, or if the will fails in some respect, the identities of those who will receive the decedent’s probate assets, as well as who will be selected as the personal representative of the decedent’s probate estate, will be as provided by Florida law.
WHAT HAPPENS IF THERE IS NO WILL?
Someone who dies without a valid will is “intestate.” Even if the decedent dies intestate, the probate assets are almost never turned over to the state of Florida. The state will take the decedent’s assets only if the decedent had no heirs. The decedent’s “heirs” are those who are related to the decedent and described in the Florida statute governing distribution of the probate assets of a decedent who died intestate. If the decedent died intestate, the decedent’s probate assets will be distributed to the decedent’s heirs in the following order of priority (found in Part I, Chapter 732 of Florida Statutes): If the decedent was survived by a spouse but left no living descendants, the surviving spouse receives all of the decedent’s probate estate. A “descendant” is a person in any generational level down the descending line from the decedent and includes children, grandchildren, parents and more remote descendants.
If the decedent was survived by a spouse and left one or more living descendants (all of whom are the descendants of both the decedent and the spouse), and the surviving spouse has no additional living descendants (who are not a descendant of the decedent), the surviving spouse receives all of the decedent’s probate estate.
If the decedent was survived by a spouse and left one or more living descendants (all of whom are the descendants of both the decedent and the spouse), but the surviving spouse has additional living descendants (at least one of whom is not also a
descendant of the decedent), the surviving spouse receives one-half of the probate estate, and the decedent’s descendants share the remaining half.
If the decedent was not married at the time of death but was survived by one or more descendants, those descendants will receive all of the decedent’s probate estate. If there is more than one descendant, the decedent’s probate estate will be divided among them in the manner prescribed by Florida law. The division will occur at the generational level of the decedent’s children. So, for example, if one of the decedent’s children did not survive the decedent, and if the deceased child was survived by that child’s own descendants, the share of the decedent’s estate that would have been distributed to the deceased child will instead be distributed among the descendants of the decedent’s deceased child.
If the decedent was not married at the time of death and had no living descendants, the decedent’s probate estate will pass to the decedent’s surviving parents, if they are living, otherwise to the decedent’s brothers and sisters.
Florida’s intestate laws will pass the decedent’s probate estate to other, more remote heirs if the decedent is not survived by any of the close relatives described above.
The distribution of the decedent’s probate estate under Florida’s intestate laws, as discussed above, is subject to certain exceptions for homestead property and exempt personal property, and a statutory allowance to the surviving spouse and any descendants or ascendants whom the decedent supported. Assets subject to these exceptions will pass in a manner different from that described in the intestate laws. For example, if the decedent’s homestead property was titled in the decedent’s name alone, and if the decedent was survived by a spouse and descendants, the surviving spouse will have the use of the homestead property for his or her lifetime only (or a life estate), with the decedent’s descendants to receive the decedent’s homestead property only after the surviving spouse dies. The surviving spouse also, however, has the right to make a special election within six months of the decedent’s death to receive an undivided one-half interest in the homestead property in lieu of the life estate provided certain procedures are timely followed. The spouse’s right to homestead property does not take into consideration whether the surviving spouse has one or more living descendants who are not also a descendant of the decedent.
WHO IS INVOLVED IN THE PROBATE PROCESS?
Depending upon the facts of the situation, any of the following may have a role to play in the probate administration of the decedent’s estate: Clerk of the circuit court in the county in which the decedent was domiciled at the time of the decedent’s death.
Circuit court judge. Personal representative (or executor). Attorney providing legal advice to the personal representative throughout the probate process. Those filing claims in the probate proceeding relative to debts incurred by the decedent, such as credit card issuers and health care providers. Internal Revenue Service (IRS), as to any federal income taxes that the decedent may owe, any income taxes that the decedent’s probate estate may owe and, sometimes, federal gift, estate or generation-skipping transfer tax matters.
WHERE ARE PROBATE PAPERS FILED?
The custodian of a will must deposit the original copy of the will with the clerk of the court having venue of the estate of the decedent within 10 days of receiving information that the testator is dead. (S. 732.901, Florida Statutes.) There is no fee to deposit the will with the clerk of court. However, a filing fee must be paid to the clerk upon opening a probate matter. The clerk then assigns a file number and maintains an ongoing record of all papers filed with the clerk for the administration of the decedent’s probate estate. In the interest of protecting the privacy of the decedent’s beneficiaries, any documents that contain financial information pertaining to the decedent’s probate estate are not available for public inspection.
WHO SUPERVISES THE PROBATE ADMINISTRATION?
A circuit court judge presides over probate proceedings.
The judge will rule on the validity of the decedent’s will, or if the decedent died intestate, and will consider evidence to confirm the identities of the decedent’s heirs as those who will receive the decedent’s probate estate.
If the decedent had a will that nominated a personal representative, the judge will also decide whether the person or institution nominated is qualified to serve in that position. If the nominated personal representative meets the statutory qualifications, the judge will issue “Letters of Administration,” also referred to simply as “letters.” These “letters “are important evidence of the personal representative’s authority to administer the decedent’s probate estate. If any questions or disputes arise while administering the decedent’s probate estate, the judge will hold a hearing as necessary to resolve the matter in question. The judge’s decision will be set forth in a written direction called an “order.”
WHAT IS A PERSONAL REPRESENTATIVE, AND WHAT DOES THE PERSONAL REPRESENTATIVE DO?
The personal representative is the person, bank or trust company appointed by the judge to be in charge of the administration of the decedent’s probate estate. In Florida, the term “personal representative” is used instead of such terms as “executor, executrix, administrator and administratrix.” The personal representative has a legal duty to administer the probate estate pursuant to Florida law. The personal representative must: Identify, gather, value and safeguard the decedent’s probate assets.
Publish a “Notice to Creditors” in a local newspaper in order to give notice to potential claimants to file claims in the manner required by law. Serve a “Notice of Administration” to provide information about the probate estate administration and notice of the procedures required to be followed by those having any objection to the administration of the decedent’s probate estate.
Conduct a diligent search to locate “known or reasonably ascertainable” creditors, and notify these creditors of the time by which their claims must be filed. Object to improper claims, and defend suits brought on such claims. Pay valid claims. File tax returns and pay any taxes properly due. Employ professionals to assist in the administration of the probate estate; for example, attorneys, certified public accountants, appraisers and investment advisers. Pay expenses of administering the probate estate.
Pay statutory amounts to the decedent’s surviving spouse or family. Distribute probate assets to beneficiaries.
Close the probate estate. If the personal representative mismanages the decedent’s probate estate, the personal representative may be liable to the beneficiaries for any harm they may suffer.
WHO CAN BE A PERSONAL REPRESENTATIVE?
The personal representative can be an individual, or a bank or trust company, subject to certain restrictions.
To qualify to serve as a personal representative, an individual must be either a Florida resident or, regardless of residence, a spouse, sibling, parent, child or other close relative of the decedent. An individual who is not a legal resident of Florida, and who is not closely related to the decedent, cannot serve as a personal representative. Individuals are not qualified to act as a personal representative if they are either under the age of 18 years, or mentally or physically unable to perform the duties, or have been convicted of a felony. A trust company incorporated under the laws of Florida, or a bank or savings and loan authorized and qualified to exercise fiduciary powers in Florida, can serve as the personal representative.
WHOM WILL THE COURT APPOINT TO SERVE AS PERSONAL REPRESENTATIVE?
If the decedent had a valid will, the judge will appoint the person or institution named by the decedent in that will to serve as personal representative, as long as the named person or bank or trust company is legally qualified to serve.
If the decedent did not have a valid will, the surviving spouse has the first right to be appointed by the judge to serve as personal representative. If the decedent was not married at the time of death, or if the decedent’s surviving spouse declines to serve, the person or institution selected by a majority in interest of the decedent’s heirs will have the second right to be appointed as personal representative. If the heirs cannot agree among themselves, the judge will appoint a personal representative after a hearing is held for that purpose.
WHY DOES THE PERSONAL REPRESENTATIVE NEED AN ATTORNEY?
A personal representative should always engage a qualified attorney to assist in the administration of the decedent’s probate estate. Many legal issues arise, even in the simplest probate estate administration, and most of these issues will be novel and unfamiliar to non-attorneys. The attorney for the personal representative advises the personal representative on the rights and duties under the law, and represents the personal representative in probate estate proceedings. The attorney for the personal representative is not the attorney for any of the beneficiaries of the decedent’s probate estate.
A provision in a will mandating that a particular attorney or firm be employed as attorney for the personal representative is not binding. Instead, the personal representative may choose to engage any attorney.
WHAT ARE THE ESTATE’S OBLIGATIONS TO ESTATE CREDITORS?
One of the primary purposes of probate is to ensure that the decedent’s debts are paid in an orderly fashion. The personal representative must use diligent efforts to give actual notice of the probate proceeding to “known or reasonably ascertainable” creditors. This gives the creditors an opportunity to file claims in the decedent’s probate estate, if any. Creditors who receive notice of the probate administration generally have three months to file a claim with the clerk of the circuit court. The personal representative, or any other interested persons, may file an objection to the statement of claim. If an objection is filed, the creditor must file a separate independent lawsuit to pursue the claim. A claimant who files a claim in the probate proceeding must be treated fairly as a person interested in the probate estate until the claim has been paid, or until the claim is determined to be invalid.
The legitimate debts of the decedent, specifically including proper claims, taxes and expenses of the administration of the decedent’s probate estate, must be paid before distributions are made to the decedent’s beneficiaries. The court will require the personal representative to file a report to advise of any claims filed in the probate estate, and will not permit the probate estate to be closed unless those claims have been paid or otherwise disposed of.
HOW IS THE INTERNAL REVENUE SERVICE (IRS) INVOLVED?
The decedent’s death has two significant tax consequences: It ends the decedent’s last tax year for purposes of filing the decedent’s federal income tax return, and it establishes a new tax entity, the “estate.”
The personal representative may be required to file one or more of the following returns, depending upon the circumstances:
The decedent’s final Form 1040, U.S. Individual Income Tax Return, reporting the decedent’s income for the year of the decedent’s death. One or more Forms 1041, U.S. Income Tax Return for Estates and Trusts, reporting the estate’s taxable income.
Form 709, U.S. Gift Tax Return(s), reporting gifts made by the decedent prior to death. Form 706, U.S. Estate Tax Return, reporting the decedent’s gross estate, depending upon the value of the gross estate. The personal representative also may be required to file other returns not specifically mentioned here.
The personal representative has the responsibility to pay amounts owed by the decedent or the estate to the IRS. Taxes are normally paid from probate assets in the decedent’s estate, and not from the personal representative’s own assets; however, under certain circumstances, the personal representative may be personally liable for those taxes if they are not properly paid.
The estate will not have any tax filing or payment obligations to the state of Florida; however, if the decedent owed Florida intangibles taxes for any year before the repeal of the intangibles tax as of Jan. 1, 2007, the personal representative must pay those taxes to the Florida Department of Revenue.
WHAT ARE THE RIGHTS OF THE DECEDENT’S SURVIVING FAMILY?
The decedent’s surviving spouse and children may be entitled to receive probate assets from the decedent’s probate estate, even if the decedent’s will gives them nothing. Florida law protects the decedent’s surviving spouse and certain surviving children from total disinheritance. For example, a surviving spouse may have rights in the decedent’s homestead real property. A surviving spouse also may have the right to come forward to claim an “elective share” from the decedent’s probate estate. The elective share is, generally speaking, 30 percent of all of the decedent’s assets, including any assets that are non-probate assets. A surviving spouse and/or the decedent’s children also may have the right to a family allowance to provide them with funds before final distribution of the estate assets, and rights in exempt property that will be paid to them instead of to creditors in satisfaction of claims against the probate estate. It is important to note that a spouse may waive rights to an elective share, family allowance and/or exempt property in a valid pre-marital or post-marital agreement. In addition, if the decedent married, or had children, after the date of the decedent’s last will, and if the decedent neglected to provide for the new spouse or children, an omitted family member may nevertheless be entitled to a share of the decedent’s probate estate. The existence and enforcement of these statutory rights require knowledge about the applicable laws and procedures and are best handled by an attorney.
WHAT RIGHTS DO OTHER POTENTIAL BENEFICIARIES HAVE IN THE DECEDENT’S PROBATE ESTATE?
Except as provided in the immediately preceding section, a Florida resident has the right to entirely disinherit anyone. It is not necessary to give the disinherited beneficiary a nominal gift of, for example, $1.00.
HOW LONG DOES PROBATE TAKE?
It depends on the facts of each situation. For example, the personal representative may need to sell real estate before settling the probate estate, or resolve a disputed claim filed by a creditor or a lawsuit filed to challenge the validity of the will. Any of these circumstances would tend to lengthen the process of administration. Even the simplest of probate estates must be open for at least the three-month creditor claim period; it is reasonable to expect that a simple probate estate will take about five or six months to properly handle. If the estate does not have to file a federal estate tax return, the final accounting and other documents necessary to close the probate estate are first due within 12 months after the court issues Letters of Administration to the personal representative. This period can be extended if necessary. If the estate is required to file a federal estate tax return, the return is initially due nine months after the date of the decedent’s death; however, the time for filing the return can be extended for another six months. If a federal estate tax return is required, the final accounting and other documents to close the probate administration are due within 12 months from the date the estate tax return, as extended, is due. This date can also be extended if necessary.
HOW ARE THE PERSONAL REPRESENTATIVE’S COMPENSATION AND PROFESSIONAL FEES DETERMINED?
The personal representative, the attorney and other professionals whose services may be required in administering the probate estate (such as appraisers and accountants) are entitled by law to reasonable compensation.
- The personal representative’s compensation is usually determined in one of five ways:
- As set forth in the will.
- As set forth in a contract between the personal representative and the decedent.
- As agreed among the personal representative and those who will bear the impact of the personal representative’s compensation.
- The amount presumed to be reasonable as
- calculated under Florida law, if the amount is not objected to by any of the beneficiaries.
- As determined by the judge.
The fee for the attorney for the personal representative is usually determined in one of three ways:
As agreed among the attorney, the personal representative and those who bear the impact of the fee.
The amount presumed to be reasonable calculated under Florida law, if the amount is not objected to by any of the beneficiaries.
WHAT ALTERNATIVES TO FORMAL ADMINISTRATION ARE AVAILABLE?
Florida law provides for several alternate abbreviated probate procedures other than the formal administration process.
“Summary Administration” is generally available only if the value of the estate subject to probate in Florida (less property, which is exempt from the claims of creditors; for example, homestead real property in many circumstances) is not more than $75,000,and if the decedent’s debts are paid, or the creditors do not object. Those who receive the estate assets in a summary administration generally remain liable for claims against the decedent for two years after the date of death. Summary administration is also available if the decedent has been dead for more than two years and there has been no prior administration.
Another alternative to the formal administration process is “Disposition Without Administration.” This is available only if probate estate assets consist solely of property classified as exempt from the claims of the decedent’s creditors by applicable law and non-exempt personal property, the value of which does not exceed the total of (1) the amount of preferred funeral expenses; and (2) the amount of all reasonable and necessary medical and hospital expenses incurred in the last 60 days of the decedent’s final illness, if any.
WHAT IF THERE IS A REVOCABLE TRUST?
If the decedent had established what is commonly referred to as a “Revocable Trust,” a “Living Trust” or a “Revocable Living Trust,” in certain circumstances, the trustee may be required to pay expenses of administration of the decedent’s probate estate, enforceable claims of the decedent’s creditors and any federal estate taxes payable from the trust assets. The trustee of such a trust is always required to file a “Notice of Trust” with the clerk of the court in the county in which the decedent resided at the time of the decedent’s death. The notice of trust gives information concerning the identity of the decedent as the grantor or settlor of the trust, and the current trustee of the trust. The purpose of the notice of trust is to make the decedent’s creditors aware of the existence of the trust and of their rights to enforce their claims against the trust assets. All of the tasks that must be performed by a personal representative in connection with the administration of a probate estate must also be performed by the trustee of a revocable trust, though the trustee generally will not need to file the same documents with the clerk of the court. Furthermore, if a probate proceeding is not commenced, the assets making up the decedent’s revocable trust are subject to a two-year creditors claim period, rather than the three-month non-claim period available to a personal representative. The assets in the decedent’s revocable trust are a part of the gross estate for purposes of determining federal estate tax liability.
The Revocable Trust in Florida
What Is A Revocable Trust?
What Is Probate?
Are All Assets Subject to Probate?
How Does A Revocable Trust Avoid Probate?
How Do I Know If My Assets Are Properly Titled to My Revocable Trust?
Can the Trust Hold Title to My Homestead?
Do I Benefit by Avoiding Probate?
How Are Creditors Satisfied?
Does the Trust Provide Protection from Creditor Claims?
Does the Trust Provide Protection from The Elective Share?
Who Pays Federal Income Tax on Trust Income?
Does A Revocable Trust Save Estate Taxes?
What Are the Trustee’s Responsibilities?
Who May Act as Trustee or Successor Trustee?
How Do I Know What I Need?
The revocable, or “living,” trust is often promoted as a means of avoiding probate and saving taxes at death and is governed by Chapter 736, Florida Statutes. The revocable trust has certain advantages over a traditional will, but there are many factors to consider before you decide if a revocable trust is best suited to your overall estate plan.
WHAT IS A REVOCABLE TRUST?
A revocable trust is a document (the “trust agreement”) created by you to manage your assets during your lifetime and distribute the remaining assets after your death. The person who creates a trust is called the “grantor” or “settlor.” The person responsible for the management of the trust assets is the “trustee.” You can serve as trustee, or you may appoint another person, bank or trust company to serve as your trustee. The trust is “revocable” since you may modify or terminate the trust during your lifetime, as long as you are not incapacitated.
During your lifetime, the trustee invests and manages the trust property. Most trust agreements allow the grantor to withdraw money or assets from the trust at any time, and in any amount. If you become incapacitated, the trustee is authorized to continue to manage your trust assets, pay your bills, and make investment decisions. This may avoid the need for a court-appointed guardian of your property. This is one of the advantages of a revocable trust.
Upon your death, the trustee (or your successor if you were the initial trustee) is responsible for paying all claims and taxes, and then distributing the assets to your beneficiaries as described in the trust agreement. The trustee’s responsibilities at your death are discussed below.
Your assets, such as bank accounts, real estate and investments, must be formally transferred to the trust before your death to get the maximum benefit from the trust. This process is called “funding” the trust and requires changing the ownership of the assets to the trust. Assets that are not properly transferred to the trust may be subject to probate. However, certain assets should not be transferred to a trust because income tax problems may result. You should consult with your attorney, tax advisor and investment advisor to determine if your assets are appropriate for trust ownership.
WHAT IS PROBATE?
Probate is the court-supervised administration of a decedent’s estate. It is a process created by state law to transfer assets from the decedent’s name to his or her beneficiaries. A personal representative is appointed to handle the estate administration. The probate process ensures that creditors, taxes and expenses are paid before distribution of the estate to the beneficiaries. The personal representative is accountable to the court as well as the estate beneficiaries for his or her actions during the administration. For probate estates having less than $75,000 of non-exempt assets, Florida law provides a simplified probate procedure, known as summary administration.
ARE ALL ASSETS SUBJECT TO PROBATE?
No, only assets owned by a decedent in his or her individual name require probate. Assets owned jointly as “tenants by the entirety” with a spouse, or “with rights of survivorship” with a spouse or any other person will pass to the surviving owner without probate. This is also true for assets with designated beneficiaries, such as life insurance, retirement accounts, annuities, and bank accounts and investments designated as “pay on death” or “in trust for” a named beneficiary. Assets held in trust will also avoid probate.
HOW DOES A REVOCABLE TRUST AVOID PROBATE?
A revocable trust avoids probate by effecting the transfer of assets during your lifetime to the trustee. This avoids the need to use the probate process to make the transfer after your death. The trustee has immediate authority to manage the trust assets at your death; appointment by the court is not necessary.
The “funding” of a revocable trust is critical to successfully avoid probate. Those persons who do not fully fund their trusts often need both a probate administration for the non-trust assets as well as a trust administration to completely distribute the assets. Because the revocable trust may not completely avoid probate, a simple “pour over” will is needed to transfer any probate assets to the trust after death.
HOW DO I KNOW IF MY ASSETS ARE PROPERLY TITLED TO MY REVOCABLE TRUST?
The account statement, stock certificate, title or deed will make some reference to the trust or to you as trustee. You might also elect to fund your trust by naming the trust as a beneficiary of life insurance or other similar arrangements. Your attorney and financial advisor may assist you with the transfer of assets to your trust. If your trust will own real estate, then it is important to have the deed prepared by an attorney. The attorney will consider the impact of existing mortgages, title issues and homestead restrictions when the deed is prepared.
CAN THE TRUST HOLD TITLE TO MY HOMESTEAD?
In some situations, your homestead property can be transferred to your trust. Most Florida counties have special requirements to maintain the homestead tax exemption and special language may be required in the trust agreement and the deed. However, homestead property may lose its exemption from creditors when title is held in a revocable trust-the bankruptcy law on this point is unsettled. Your attorney can advise you on whether placing your homestead in your trust is appropriate, and if so, the requirements for a valid transfer.
DO I BENEFIT BY AVOIDING PROBATE?
Avoiding probate may lower the cost of administering your estate and time delays associated with the probate process. However, many of the costs and time delays associated with probate, such as filing a federal estate tax return, will also be necessary with a revocable trust. The administration of a revocable trust after death is similar to a probate administration. The trustee must collect and value the trust assets, determine creditors and beneficiaries, pay taxes and expenses, and ultimately distribute the trust estate. A trustee is entitled to a fee for administration of the trust, as is the personal representative of an estate. To the extent professional services of attorneys, accountants and estate liquidators are used to complete the process, the savings may be marginal.
On the other hand, avoiding probate in multiple states is a definite benefit. Because of the nature of real estate, probate is usually required in every state in which you own real estate. This can usually be avoided by transferring ownership of the real estate to your trust during your lifetime.
HOW ARE CREDITORS SATISFIED?
Florida’s trust law does not have a specific procedure for identifying and paying creditors at death. The creditors have up to 2 years from the decedent’s death to file claims against the estate. The trustee may be reluctant to distribute the trust assets to the beneficiaries until he or she is satisfied that all claims have been paid, and 2 years is a long time to wait. For this reason, some clients choose to open a probate estate in addition to the trust administration to take advantage of the probate claim process. The probate law limits the time for creditors to file claims against the estate (generally 3months from the date of notice), and also provides a process for objecting to claims.
DOES THE TRUST PROVIDE PROTECTION FROM CREDITOR CLAIMS?
In Florida, the trust assets are not protected from the claims of your creditors. During your lifetime, the assets in a revocable trust are treated as owned by you, and subject to the claims of your creditor as if you owned them in your personal name. If the trust assets remain in trust after your death, the interests of the beneficiaries may be protected from their creditors by a “spendthrift” provision in the trust agreement. Florida law provides special protection for many types of assets, including assets owned by a husband and wife as “tenants by the entirety.” Consideration should be given to these assets when you decide how to fund your revocable trust. Your attorney can advise you on the types of assets that offer creditor protection and the effect of funding your trust with them.
DOES THE TRUST PROVIDE PROTECTION FROM THE ELECTIVE SHARE?
Florida law provides that a surviving spouse is entitled to a minimum portion of the decedent’s estate. This elective share is equal to 30% of the estate, including certain assets passing outside of probate. Generally, assets held in a revocable trust will be subject to the elective share. There are some exceptions to the elective share, and the right to receive an elective share can be waived by the spouse. You should consult with your attorney regarding the application of the elective share to your particular situation.
WHO PAYS FEDERAL INCOME TAX ON TRUST INCOME?
In most instances, the revocable trust is ignored for federal income tax purposes during the grantor’s lifetime. The income and deductions are reported directly on your individual income tax return. The trust will use your social security number as its tax identification number.
A revocable trust becomes a separate entity for federal income tax purposes when it becomes irrevocable, or stops reporting income under your social security number for any other reason. The trustee is then required to file an annual fiduciary income tax return. Taxable income, deductions and credits are determined in much the same way as for an individual. Trusts are also allowed a deduction for distributions to beneficiaries. In this way, the trust passes on income and deductions to the beneficiaries to be taxed on their personal income tax returns. Income that is not distributed to the beneficiaries is taxable to the trust.
DOES A REVOCABLE TRUST SAVE ESTATE TAXES?
Revocable trusts are often credited with saving estate taxes, but this is not entirely accurate. Your retained interest and power over the trust assets will cause the trust to be included in your taxable estate at death. The trust can be drafted to minimize the effect of estate taxes, but the same estate planning techniques are available to persons who choose to use a will as those who choose a revocable trust.
WHAT ARE THE TRUSTEE’S RESPONSIBILITIES?
Serving as trustee is no simple task. While especially important, the prudent investment of trust assets is not a trustee’s only responsibility. Your trustee’s exact powers and duties will depend on the instructions in your trust agreement. But, in general, your trustee will:
- Hold trust property.
- Invest the trust assets.
- Distribute trust income and/or principal to the beneficiaries, as directed in the trust agreement.
- Make tax decisions concerning the trust.
- Keep records of all trust transactions.
- Issue statements of account and tax reports to the trust beneficiaries
- Answer any questions you and the beneficiaries may have concerning the trust.
- Your trustee may have broad powers or extremely limited powers. In either case, your trustee is a fiduciary and must follow a strict standard of care when performing trust functions.
WHO MAY ACT AS TRUSTEE OR SUCCESSOR TRUSTEE?
The choice of a trustee is extremely important, and may have tax consequences. You can name almost anyone as your trustee. Unlike the appointment of a personal representative of a probate estate, a trustee does not have to live in Florida or be related to you. You can name yourself or any other individual (subject to tax considerations), or a corporate trustee, such as a bank or trust company. The individual trustee can be a family member, friend or professional advisor. Many individuals appoint family members or friends as successor trustee, to assume responsibility for the trust management and distribution after their death. When a family member or friend is chosen, consideration must be given to the person’s qualifications, the potential for friction with other beneficiaries, and the potential burden you are placing on that individual. The trust agreement should allow these individuals to hire qualified professionals to assist them in their duties, such as attorneys, accountants and financial advisors.
HOW DO I KNOW WHAT I NEED?
This brochure is intended to give you a basic understanding of revocable trusts, but it cannot substitute for a thorough review with your estate planning attorney. A revocable trust must be implemented as part of an overall estate plan. Ownership of assets must be coordinated between the individual and the trust. Decisions must be made as to what assets are appropriate to fund the trust, the transfers must then occur, and the asset allocation should be periodically reviewed. Tax considerations must be discussed with qualified professionals. The trust agreement should reflect your family, economic and tax goals. A revocable trust can help you accomplish these goals when properly prepared and implemented.