The old adage goes, “If you want to make God laugh, tell him your plans.” The same could not be said of financial beneficiaries. When it comes to estate planning, the more plans, the better. An attorney would be hard pressed to come up with a situation in which establishing a trust turned out to a poor financial decision. That said, estate planning and trust institution is a difficult topic for a number of reasons, not the least of which is the sheer quantity of available options and the fear of picking the wrong one.
In Florida, there are more options than you can shake a stick at. Attorneys in this state must deal with the reality of a seemingly endless list of choices for estate planners to sort through before finding the one that is best for them and their spouse and their ultimate beneficiaries. With that said, let’s take a look at a glossary of sorts, breaking down each one of the primary trust alternatives in turn and considering the advantages and disadvantages of each.
To keep things simple, I’ve selected ten trusts that are common in the state of Florida that attorneys can implement for their clients during estate planning. Each one has its own peculiarities and intricacies, but we will focus on giving each one a straightforward treatment for the benefit of attorneys and clients alike.
Of all trusts, the most straightforward is probably the Totten trust. Totten trusts have a rather odd name that comes by way of the 1904 decision in a New York case, In re Totten. The particulars of the case aside, Totten trusts are basically just payable-on-death (POD) accounts set up at a bank by a benefactor for some specified beneficiary that is payable to that individual upon the benefactor’s death. The beneficiary is named, and they inherit the money when the benefactor dies. It doesn’t belong to them in any legal or financial respect until that point. For the ultimate in simplicity, this is the best choice.
The second simplest (though very different) is perhaps the Charitable Trust. According to the IRS, “A charitable trust…is a trust that is not tax exempt, all of the unexpired interests of which are devoted to one or more charitable purposes, and for which a charitable contribution deduction was allowed under a specific section of the Internal Revenue Code.” That’s a lot of jargon to say that this kind of trust is intended for philanthropy, but that is not exempt from taxes from the organization that receives it. That said, it could save the benefactor’s untold discounts on their own taxes, which is an incentive for wealthy individuals to donate some of their wealth upon their death. And in Florida (as in New York and California), there is no state estate tax, which is a major tax benefit of residing in those states.
Revocable Living Trust vs. Irrevocable Life Insurance Trust
Next is the Revocable Living Trust. This is a kind of agreement, often established in writing, by which a trustee maintains and presides over the assets of the grantor on behalf of the beneficiary. These trusts are frequently instituted in order to dodge the issue of probate regarding the estate of the grantor. On the opposite side of things lies the Irrevocable Life Insurance Trust, within which either one or several life insurance policies are managed. The Grantor of the Irrevocable Life Insurance Trust is able to shift policies that are already in existence into the trust itself or finance the trust through infusions of cash or even buy policies in the trust’s name. In order to ensure that this type of policy does not become the victim of perilous estate taxes, the Grantor should refrain from being its trustee and not hold ownership to any degree.
Spendthrift, Generation-Skipping, and Discretionary Trusts
As is already clear, these trusts can get tricky in a hurry. In the following three cases, there is some major overlap, which can make things more complicated, yet also provide a sense of uniformness in the difficult explanatory process attorneys must go through. Spendthrift, Generation-Skipping, and Discretionary trusts all work in a similar way, but they achieve different aims. Thankfully, they are also both exactly what they sound like. These two trusts limit the ability of the benefactor’s inheritors to access all of the inheritance, but they do it in separate ways.
Spendthrift trusts disable the beneficiary (spouse, child, grandchild, etc.) from accessing all the money or other assets to protect them from using it all in a way befitting the name of the trust itself. Generation-Skipping trusts also limit access to the assets, but not for the same reasons: this trust allows the grandchildren of the deceased to inherit the trust, while the benefactor’s children are granted access to income on aspects such as the dividends. Again, they work to a similar effect but work to realize wholly different objectives.
Discretionary trusts, by comparison, enable trustees to essentially dispense with their wealth and assets however they wish and to whomever they desire. Hence, the term discretionary to describe this particular trust. According to Trust Counsel, “When individuals in Florida choose a discretionary trust for flexibility in asset protection planning, they should be aware of the limitations these tools impose.” Though this is not the space to enumerate them, Trust Counsel does go on to clarify that these trusts are at times susceptible “to certain claims, and individuals should consider the risks when it’s time to create or modify a trust” of this nature.
Qualified Terminal Interest Properties Trust vs. Qualified Personal Residence Trust
A very popular trust all around the country is the QTIP trust. Qualified Terminal Interest Properties trusts allow affluent couples to diminish what could otherwise be a substantial tax burden while providing financially for their surviving spouse and beneficiaries. QTIPs become utilized as do nearly all others when one spouse passes away. Assets of the deceased spouse are then available to the surviving spouse; once they have also died, the ultimate beneficiaries of the benefactor’s assets receive the assets themselves. Notably, the surviving spouse is limited to controlling the trust’s profits, while the ultimate beneficiaries can utilize the principle investments along with the income.
Though it may appear somewhat similar, a QPRT trust is actually quite different from a QTIP trust. A QPRT, or Qualified Personal Residence Trust, is a form of trust that enables a benefactor to extricate personal residential property from the rest of the estate in order to diminish the tax burden on his or her beneficiaries. According to Investopedia, QPRTs also permit the benefactor to reside at the home for a specified duration with “retained interest” in the property; after that time has run its course, the remaining interest gets shifted to their beneficiaries as “remainder interest.”
Finally, we have Constructive Trusts. Constructive trusts aren’t predominantly used for estate planning. Rather, they are often used and established at the discretion of the courts for one party to have unlawful property removed from them while it’s overseen and protected by another party (such as purloined items). That said, it is important for attorneys to know all the different varieties of trusts that are available.
As you can see, Floridians have a veritable arsenal of trusts to choose from when planning for the distribution of their estates. Benefactors are able to select who receives the wealth and how they are able to manage it, as well as insulate them and their beneficiaries from undue tax burdens in the process.