As a Florida Estate Planning Attorney, the most common type of Trust I work with is a Revocable Living Trust. Living, because it exists during the creator’s lifetime, and Revocable, because it can be revoked and modified by the creator. There are many types of trusts allowed by the law, but this is the most common.

What is a Trust?

Simply put, a Trust is an agreement where one person holds property for another. This type of arrangement has been around since the Roman Times. There are three parties involved in a Trust. The Settlor, sometimes known as a Grantor or Trustor, is the person who sets up the Trust and adds property to it. The Trustee is the person who has legal title to and manages the property. Lastly, the Beneficiary is the person for whom the property is held and for whom the benefit of the property is intended. Any one of these positions can be held by more than one person.

Revocable Trust vs. Irrevocable Trust

As mentioned before, a Revocable Trust is one where the Settlor may revoke, or modify the Trust Agreement. Under this arrangement, they may also move property in and out of the Trust as they wish. An Irrevocable Trust, as the name implies, may not be easily revoked. Note, it can still be revoked and modified, but not freely as with a Revocable Trust. Irrevocable Trusts are often used to release some control for Tax or Benefit Planning; however, this type of use does require relinquishing enough control that it can not be considered owned by the Settlor for the purpose for which it is being used. A common use of Irrevocable Trusts is Irrevocable Life Insurance Trusts. This Trust allows Life Insurance to be owned by someone other than the insured thus preventing the death benefit from being included in the insured’s gross estate for Estate Tax purposes.

Living Trust vs. Springing or Testamentary Trusts

Again, a Living Trust exists during the Settlor’s lifetime. The advantage of this is that it can hold property or be the beneficiary of financial accounts or life insurance. This can help avoid probate as property held in the Trust does not need to be transferred through the Probate process as would property held in an individual’s name. The alternative to a Living Trust is a Springing Trust, also referred to as a Testamentary Trust. This type of Trust is established through a person’s Will. In other words, it springs up from their Probate Estate. While this type of Trust does not avoid Probate, it can be useful for holding property for beneficiaries who may not be able to manage property for themselves such as minors.

Uses of a Living Revocable Trust

These types of Trusts are very useful for avoiding Probate while maintaining control of your property during your lifetime. They are also tax-neutral entities. The types of Trusts we work with are Grantor Trusts under the IRS code which means they are disregarded entities and all trust property continues to be taxed directly to the Settlor under their social security numbers.

Another common use is to have property held for beneficiaries who should not receive property directly. Most commonly, this is for minors or young adults; but it can also be used for incapacitated adults, adults with addictions or the inability to manage finances, and to keep undesirable persons such as ex-spouses and questionable in-laws from gaining control of your property by controlling if for one of your beneficiaries. You can establish that the property is to be held until a particular age or ages, for a lifetime or to be distributed at certain milestones such as graduation, marriage, or any other lifetime event you think appropriate.

Another benefit to these types of trust is the ability to freely choose who will manage your property when you die. You can indeed nominate whomever you wish to serve as executor or personal representative under your will, in Florida, to qualify, the nominated person must be either a relative or a resident of the State of Florida. Trustees do not have these requirements, so you have much more flexibility in choosing who will manage your estate.

Common Questions Regarding Trusts:

For whom are living trusts most appropriate? What are the pros and cons?

Living trusts are useful estate planning tools, and they have an important place in many people’s estate plans. If you find any one of the following benefits appealing, then a living trust may be appropriate for you.

Benefit #1: No Probate. When a person dies, most properties pass either under a person’s Will or under a living trust. Some properties–such as life insurance, IRAs, and certain types of bank and brokerage accounts–pass directly to named beneficiaries. If the property passes under a Will, then the Will must be probated at the courthouse. Probate entails hiring a lawyer, filing several papers with the court, attending one or more hearings, and providing a written inventory to the court valuing the properties that passed under the Will.

Some people don’t want this type of involvement with the court, so they opt for a living trust. By transferring all properties that would otherwise pass under your Will to a living trust, you can avoid the probate proceeding. For estates that owe no estate taxes, there is usually less work for the lawyers, and that translates into reduced estate administration costs.

Court involvement is not eliminated, however. Florida now requires the trustee of a living trust to file a notice of the trust with the appropriate court containing information about the person who created the trust and the trustee. Also, in certain circumstances, the trustee may be required to pay the expenses of administering the decedent’s estate as well as the claims of creditors against the decedent’s estate.

Benefit #2: More Privacy. As mentioned above, when a person dies with a Will, an inventory must be filed with the court. You may not want your friends, neighbors, or the media to be able to read a listing of what you own and what it is worth. After all, an inventory is a public record. With a living trust, your properties and their values remain private.

Benefit #3: Plan For Future Incapacity. You may be worried that one day you won’t be able to manage your finances, and you may want to name someone to handle these types of matters for you. You can address this potential problem with a power of attorney or with a living trust. A power of attorney will usually be accepted by banks, title companies, and the like, but there is always the risk that an institution’s legal department will reject it. The same person who may be denied the ability to use a power of attorney will likely be allowed to do anything he or she wants when acting as trustee of a living trust.

Benefit #4: Harder to Challenge. If you are planning to disinherit one of your children or grandchildren, you may be better off with a living trust because there is nothing filed at the courthouse. Also, it is a little harder to contest a living trust than a Will. Many people are interested in doing as much as possible to prevent a successful challenge to their estate plan.

Benefit #5: Avoid Out-of-state Probate. If you own property in another state, you can avoid a costly probate proceeding in that state by transferring the property to a living trust.

Before you establish a living trust you need to understand the downsides, which include the following:

Disadvantage #1: Time-consuming to Set Up. Depending on how many different types of properties and accounts you own, it can take quite some time to switch everything over to the name of your living trust.

Disadvantage #2: Complicated. Wills are usually shorter and simpler to understand than living trusts. Also, with a Will, you can sign it and forget about it. But with a living trust, you need to put your property into the trust and run your life out of it for as long as you live. For many people, this downside outweighs all the potential benefits.

Disadvantage #3: Time-consuming to Revoke. A year after you set up the living trust, you may decide you don’t want it anymore. At this point, you will need to return to every bank and brokerage house and undo everything you had done to establish the trust. You can expect more lawyers’ fees too.

Disadvantage #4: Post-Death Costs Not Eliminated. If you have a taxable estate (which is generally an estate over $12,060,000 as of 2022), there will be a lot of work to be done after death regardless of whether probate is required. Typically, there are tax returns to file, trusts to establish, assets to value, and more. Avoiding probate will only marginally reduce the cost of administering a taxable estate.

Disadvantage #5: May Still Need to Probate Will. If you leave just one bank account or one piece of real estate out of the trust, probate will still be necessary. And probate takes about as long when there is one asset as when there are twenty.

What is the difference between a Living Trust and a Bypass Trust?

A Living Trust is a revocable trust created while a person is alive, whereas a Bypass Trust is typically an irrevocable trust created at death. A Bypass Trust can be created by a Living Trust or by a Will. (Yes, a Living Trust can create a Bypass Trust, but a Bypass Trust would never create a Living Trust.)

A Living Trust is simply an ownership arrangement where property is held in the name of a “trustee” rather than in the name of the person who owns the property. People almost always create Living Trusts for their benefit, with the goals of avoiding probate, addressing the possibility of future incapacity, and keeping matters private.

Normally, the person who creates a Living Trust names himself or herself as trustee and as beneficiary. Upon that person’s death, all or a portion of the property that remains in the Living Trust passes according to the terms specified in the trust agreement.

Bypass Trusts are most often created when a spouse dies to save taxes when the other spouse passes away. When a married person dies and leaves everything to his or her spouse, that surviving spouse may then be too wealthy to pass everything to their beneficiaries tax-free. Being “too wealthy” typically means the married couple is worth over $12,060,000. The Bypass Trust is a way to shelter the first spouse’s $12,060,000 exemption from taxation when the surviving spouse dies, thereby doubling the amount that can be left tax-free to $24,120,000.

Bypass Trusts do have non-tax benefits though, and for some people, saving taxes is not the motivating factor in creating one. For instance, Bypass Trusts protect the trust property from creditors’ claims, and they allow the deceased spouse to direct where the trust property passes when the other spouse dies.

There are some exceptions to the statements contained in this answer. For instance, Bypass Trusts are not always created at death. Some wealthy people create them during life, and other people use their estate tax exemptions for different purposes rather than the creation of a Bypass Trust. Also, in answering your question, I have assumed that when you said “Living Trust,” you meant the standard type of revocable trust people across the country regularly create and not another unusual type of trust that may be created while someone is living.

What are the tax advantages of setting up an irrevocable trust to own an insurance policy?

Although life insurance is generally not subject to income taxation upon the death of the insured, it is subject to estate taxes if the insured owns the policy (or has other ownership rights).

Owning a life insurance policy results in all or a portion of the insurance proceeds being included in the insured’s estate and therefore taxed when death occurs, thereby substantially defeating the purpose of buying the life insurance.

While it is true that life insurance which is received by a spouse is not subject to estate or inheritance taxes because of the unlimited marital deduction (assuming the surviving spouse is a citizen of the United States), those same proceeds will be included in the spouse’s estate later on when he or she dies. Therefore, life insurance trusts are often a good idea even when there is a surviving spouse to receive the proceeds.

Life insurance trusts offer several significant advantages over outright ownership. For starters, the trust will insulate the proceeds from the claims of creditors and from spouses in a divorce.

Also, life insurance trusts can be written to last for children’s lifetimes and then pass without estate taxes to additional trusts for grandchildren. This is a feature commonly referred to by estate planning lawyers as “generation-skipping planning.” Your children shouldn’t be alarmed by the words “generation-skipping” because you are not skipping them. Your children can serve as trustees of their trusts, and they can be given the power to make distributions to themselves or their children according to fairly liberal standards. Normally, trusts like the ones being described would allow your children to make distributions for their health, education, maintenance, and support. And your children would be the ones determining how much money it takes to maintain and support themselves. Even though the life insurance proceeds will be held in a trust, your children will not be prevented from using the trust funds.