Designing Trust Systems for Florida Residents: Planning Strategies, Things You Should Know, and Traps for the Unwary.

• Date: 01 July 2023
• Author: Gassman, Alan S.

Revocable and irrevocable trusts are commonly used as the primary platforms for estate and financial planning for individuals, married couples, and families in general. While most Floridians use trusts to avoid probate and facilitate holding assets so that they can be protected from misuse, creditors, divorce, and estate taxes, there are a myriad of combinations of estate planning techniques that are not commonly used, but nevertheless will be advisable for a number of reasons. Additionally, individuals or married couples may rush into funding a trust simply to avoid probate, without fully understanding the practical and tax implications of the particular trust structure.

This article discusses different trust systems, strategies, revocable trust choices, and primary considerations advisors should evaluate in designing and recommending such arrangements, but we cannot cover these in great detail and will not cover them with significant technical jargon.

Unmarried Persons

It is typical for an unmarried individual to choose to hold assets under a revocable trust to avoid probate and guardianship exposure, while maintaining control over the assets in the trust. Many trust drafting systems and estate planning lawyers now use revocable trusts as the mainstay of most estate plans that they draft, even for clients who will not fund the trust during their lifetime.

In certain situations, it is best not to fund a revocable trust, such as where creditor protection is a key objective, because the Florida statutes do not clearly provide creditor protection for certain assets held under a revocable trust that are otherwise protected when owned individually or in other trust vehicles.

Such assets include annuity contracts, (1) life insurance policies, (2) and possibly even homestead property. (3) These creditor exempt assets will typically be owned by the single individual and may be made payable to the trust in the event of death by use of beneficiary designations for life insurance and annuity contracts and enhanced life estate deeds (also known as "lady bird" deeds) for homestead.(4)

In addition, individuals who derive savings from pension, IRA, and Social Security payments may place these monies into bank accounts that are protected from creditors under Florida law. (5) Under federal law, courts have previously found a limitation to this protection, whereby Social Security benefits were only protected to the extent needed for retirement, this limitation also applied to Social Security proceeds placed in a bank account in In re Lazin, 217 B.R. 332, 336 (Bankr. M.D. Fla. 1998). (6) However, this is no longer the case after the U.S. Supreme Court ultimately ruled that bankruptcy courts are precluded from requiring a debtor to turn over the Social Security payments received in to his or her savings account, despite not having any present need to use the funds for living expenses. (7)

Safety Latches

Another question for both married and unmarried individuals is whether the revocable trust agreement or agreements should have safety latch provisions that prevent amendments or significant withdrawals unless it is verified that the grantor/beneficiary is in good mental capacity and not subject to undue influence.

The unfortunate circumstances that a great many elderly or infirm individuals and families face is a significant economic burden and hardship caused by the flaws of human nature. For example, maintaining an individual in an end-stage condition can cost upwards of $7,000 per month or more in personal care expenses and may also become a significant economic burden on the family. For this reason, having a trust provision that prevents the amendment of a revocable trust without verification from two or more trusted family members or medical or mental-health professionals can provide a significant degree of protection and awareness. This type of trust provision should be carefully drafted to avoid having the IRS claim that a completed gift has been made due to the settlor's limited ability to amend or revoke the trust. (8)

Such a provision could become applicable immediately upon signing, in the event of verification of dementia, upon reaching of a certain age, or upon the occurrence of an event, such as if and when the grantor is cohabitating in a romantic relationship, remarried, or before any benefit could be bestowed upon a particular family member or other individual who constitutes a threat, such as a child who has a tendency to be aggressive and is not self-supporting. This may be the very child who moves in with the grantor when he or she becomes ill or infirm, and who may be likely to attempt to exert undue influence over the testator.

Creditor Planning

It is noteworthy that F.S. [section]736.0505(l)(a) specifically permits creditors of the settlor of a revocable trust to reach assets within a revocable trust during the settlor's lifetime to the extent the property would not otherwise be exempt by law if owned directly by the settlor. It is a common misconception that because a revocable trust avoids probate, that it also protects the trust assets from the debts of settlor and the estate of the settlor. This is not the case. Revocable trusts, although not subject to probate administration, will typically be accessible to creditors to satisfy a judgment debt. It is well settled that assets in a revocable trust are included in the settlor's gross estate for federal estate tax purposes, (9) and F.S. [section]733.707 permits creditors to reach assets that pass through an individual's estate.

A second common misconception is that the trustee of a Florida revocable trust is required to file a "notice to creditors," as provided under F.S. [section]733.2121. (10) In fact, and while it may be just semantics to some, the trustee of a Florida revocable trust is only required to file a "notice of trust," if and when required under F.S. [section]736.05055. (11) The time frame for a creditor to file a claim against a revocable trust in the decedent's estate is two years after the date of the decedent, as provided under Florida's nonclaim statute, F.S. [section]733.710. However, it is often advantageous for clients to open a probate estate in addition to the trust administration to take advantage of Florida's probate claim system, where the law generally limits the time for creditors to file claims against the estate to three months from the date of a notice to creditors as provided under F.S. [section][section]733.2121 and 733.702. (12)

There is no comparable statute that provides creditors with the right to receive assets that have passed by pay on death (POD) or transfer on death designation (TOD), these assets avoid probate because they automatically vest in the designated beneficiary of the POD or TOD account upon the death of the decedent, and are not available to creditors of the decedent's estate to satisfy any debts that the estate cannot sufficiently pay. The authors are not aware of any case law that would allow a creditor to reach such assets, so pay on death and transfer on death accounts have a possible advantage over revocable trusts. Some clients who have revocable trusts may be better off owning their accounts individually and having them "pay on death" by beneficiary trust designation to the trust.

Scrivener Protection Provisions

Our office always uses a "scrivener protector" provision, which indicates that our law firm or another law firm chosen by the client will have the power to correct clerical errors or other issues to assure that the intentions of the grantor are carried out. Typically, the provision indicates that the scrivener protector can only act with the consent of one or more individuals named in the provision.

Married Couples

Married couples pose a greater challenge with reference to choosing what kind of trust or trusts may be the best fit for them. Choices that we will review below include: 1) a joint revocable trust that may be treated as a tenancy by the entireties arrangement with full right of survivorship and control in the surviving spouse; 2) a JEST (13) trust that may lock all trust assets up irrevocably on the death of the first dying spouse for the surviving spouse and provide a new fair market value date of death income tax basis for the JEST trust assets; 3) a community property trust that is also designed to enable the couple to receive a fair market value income tax basis on the death of one spouse; 4) a revocable trust that may hold community property that was acquired when a couple resided in a community property state to obtain a new income tax basis on the first death while allowing the first dying spouse's one-half share of a community property to be held in a protective trust for the surviving spouse; 5) or separate revocable trusts, which are the most common, but not always the best arrangement for affluent married couples.

Planners are strongly urged to carefully review joint trust documents before they are sent to a client or signed to make sure that there is clarity with respect to what rights each spouse has while both spouses are living, and after one spouse dies and the other survives. There is commonly a significant amount of confusion when trusts are drafted haphazardly or inconsistently and it not clear what the rights are responsibilities of each spouse will be during their joint lifetimes, and during the lifetime of the surviving spouse.

TBE Joint Trust

The most common joint trust for married couples with non-taxable estates should probably be the tenancy by the entireties trust, to assure a married couple that the assets placed in the trust would be protected from the creditors of each spouse as long as the creditor does not have a judgment against both spouses. However, confusion, drafting difficulties and lack of clarity in the Florida caselaw casts a cloud over what should be a common and easy to draft planning vehicle.

Most readers know that...