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Gainesville Trust Lawyer | Lake City Trust Attorney

 

A trust established during the lifetime of the person creating the trust is referred to as a living trust. In contrast, a trust created at an individual’s death, in a Last Will and Testament, is referred to as a testamentary trust.

A grantor is the person creating the trust. When a living trust is established, a trustee must be appointed to manage and later distribute the trust assets to the beneficiaries. The beneficiaries are the individuals who ultimately receive the assets from the trust. This event normally occurs upon the death of the grantor. The living trust instructs the trustee how to manage the assets and when to distribute the assets to the beneficiaries named in the trust. The person creating the trust can also be a beneficiary of the trust during his or her lifetime.

The grantor may also serve as the trustee of the trust. In such event, a successor trustee is named in the trust to manage and distribute the trust assets if the grantor is subsequently incapable of serving as trustee as a result of the grantor’s disability, incapacity, or death.

Only assets transferred into the trust can be administered by the trustee who owns the legal title to the trust assets for the benefit of the beneficiaries. The person creating the trust must convey real property to the trust by a properly executed deed. Likewise, personal property must be transferred to the trustee by a properly executed bill of sale. Bank accounts, stock certificates, certificates of deposits, and other intangible assets must be re-titled in the name of the trustee. Trust funding, especially when retirement accounts are concerned, are easy to mismanage. Consulting with an Elder Law attorney before transferring assets into a Trust in strongly recommended.

Assets that are not conveyed or transferred to the trustee prior to or at death, will be subject to the probate process. A pour-over will is used to distribute assets not owned by the trustee when the grantor dies. These assets are then administered and distributed to the beneficiaries named in the trust, if there are assets remaining after all estate creditors have been paid and claims are satisfied.

Revocable Trust

A trust established during the lifetime of the grantor can be either revocable or irrevocable. A revocable trust permits the grantor to revoke the trust, alter the terms of the trust, or withdraw some or all of the assets from the trust. A revocable trust becomes irrevocable, by operation of law, upon the death of the grantor.

Since the grantor of a living trust retains control of assets through his or her power to revoke or alter the trust, there are no gift, income, and estate tax consequences when assets are conveyed to a revocable trust. The grantor continues to report the earnings of the trust assets on his or her personal income tax return if the grantor is the trustee and he uses his own social security number to report the income.

A Revocable Living Trust is an excellent tool to plan for the administration of assets in the event of a disability. A successor trustee can be named to administer the trust assets if the grantor’s incapacity occurs. The trust instrument normally states that when the written opinions of licensed physicians (the grantor’s and another physician) certify that the grantor is physically or mentally incapable of managing his or her property, the grantor’s right to continue to serve as the trustee during that period of incapacity is suspended. The trust document may also require other family members to have a say in determining the grantor’s capacity. The trust document also typically reserves the right of the grantor to request a court to determine the question of incapacity or capacity to manage the trust assets, if needed. Once the grantor is incapacitated, the successor trustee (a family member or professional) will manage the trust assets during the period of the grantor/trustee’s incapacity.

The need for a Revocable Living Trust is based on many factors, including the amount of the assets, the ability of the spouse to continue to manage assets acquired during the marriage, and the health of the husband and wife, estate tax issues, and the positions of the beneficiaries (whether they are disabled, have creditors, anticipate creditors), etc. Though it is best to consider a Revocable Living Trust as soon as the circumstances warrant one, the need for a Revocable Living Trust should certainly be evaluated upon the death of a spouse.

The assets placed in a living trust are not typically subject to a probate proceeding. However, these assets must be administered after the death of the grantor and are subject to a Trust Administration. The successor trustee must collect the trust assets, pay the grantor’s final bills, be responsible for the federal estate tax apportioned to the trust, and make distribution of the remaining assets according to the trusts instructions. Creditors in a probate proceeding must file claims against probate assets within three months of the first publication of a notice to creditors in the newspaper. Since there is no similar publication procedure to shorten the claim period for a trust, a successor trustee cannot distribute the trust assets to beneficiaries free of potential creditor claims for two years from the date of the grantor’s death. This is because the statute of limitations period within which creditor claims must be asserted extends for two years from the date of the grantor’s death. However, a summary probate administration can be filed in conjunction with the Trust Administration. This procedure allows publication in the newspaper of a notice requiring that all creditors file their claims within three months of the date of first publication. If claims are not filed during that time period, they will be barred. This limits the time period that creditors can file claims so that the trustee can safely make final distributions to trust beneficiaries prior to the two (2) year claims bar.

Irrevocable Trust

Another type of trust is an irrevocable trust. An irrevocable trust cannot be amended or altered. The assets conveyed to an irrevocable trust cannot be withdrawn or returned to the grantor (except in certain circumstances). An irrevocable trust is normally created for estate tax purposes. A person may transfer assets to an irrevocable trust to avoid having to include the fair market value of these assets in his or her taxable estate at death. It is important to remember that a transfer of an asset to an irrevocable trust constitutes a gift. Accordingly, the fair market value of the asset on the date of the transfer to the trust must be reported to the Internal Revenue Service as a gift by April 15 after the year of the transfer. The taxpayer’s estate or gift tax unified credit will be applied to the gift taxes due as a result of this transfer. The advantage of transferring assets to an irrevocable trust is that the appreciation in the value of these assets will not be subject to federal estate taxes upon the taxpayer’s death. As of January 1, 2011, the estate tax exemption for 2011 and 2012 was set at $5 million (meaning that estates in excess of $5 million will owe federal estate taxes to the Internal Revenue Service (IRS) for estate assets in excess of $5 million).

Another use of the irrevocable trust is for the purchase of life insurance; this is known as an ILIT, or Irrevocable Life Insurance Trust. Since the life insurance policy is owned by the trustee and not the taxpayer, the proceeds paid on the taxpayer’s death are not included in his or her gross estate. The payment of the premium for the life insurance during the taxpayer’s life is normally made from annual contributions by the taxpayer to the trustee of the irrevocable trust. Since there is presently a $13,000.00 per donee annual exclusion for federal gift tax purposes, there is no gift tax owed when these annual contributions to the irrevocable trust are made if the beneficiaries of the trust are granted the unrestricted right to withdraw these contributions during the year in which they are paid to the trustee. The withdrawal right for each beneficiary is usually limited to the amount of annual gift tax exclusion, which is presently $13,000.00 per donee.

The proceeds of an existing life insurance policy transferred to an irrevocable trust will be included in the estate of the grantor if he fails to survive for three years after the date of the transfer. Also, these trusts must be strictly administrated and require that Crummey letters be sent annually in order to be a valid estate planning tool. An Elder Law attorney should be consulted regarding the drafting and administration of Irrevocable Life Insurance Trusts.