If you’re thinking of setting up a trust and you’ve never done it before, you probably have a lot of questions. How do you do it? Who needs to be involved? How do they work? Are they worth it?
In this post, we’re going to try to cover several of those questions to help you understand what goes into a trust and whether it is the right decision for you. First, let’s dive into some of the key parties that make up a trust.
Understanding the Difference Between Personal Representatives, Trustees, and Guardians
Put simply, a personal representative is someone in charge of settling your affairs when you pass away. Your personal representative will have to:
- Hire an attorney
- Identify assets, beneficiaries, and creditors
- Pay your debts, bills, and taxes from your estate
- Generally, be the point person for taking your will through the process of probate
After these affairs are settled, your personal representative will be responsible for distributing your assets according to the instructions in your will — all subject to judicial approval, of course.
You should name someone you trust as a personal representative — someone you believe will settle your affairs honestly and efficiently. Close relatives, spouses, and adult children are usually chosen for this role. Your personal representative may hire the services of realtors, brokers, CPA, and so on to deal with complex estate issues.
This person should be named in your will. However, if no person is named or there is no will, the courts will appoint someone to serve as your personal representative.
A trustee is the individual who manages a trust. For example, if you created a trust for the benefit of your children, your trustee would be responsible for managing the assets in that trust.
During their lifetime, many people choose to be their own trustee or share this responsibility with their spouse as co-trustees. In this scenario, if one spouse dies, the surviving spouse can continue to manage the trust with no additional judicial action required.
The trustee you name in your will is sometimes called a successor trustee. This person will step in to manage your will when you are no longer able to do so due to incapacity or death. Adult children could be named as trustees. So could a close relative or trusted friend. A corporate trustee, such as a bank or trust company, is also a possibility. Some choose to use a combination of all these options.
There are several different types of guardians — or at least several different roles they can play.
Guardian for you. In the event you become incapacitated, a personal guardian can be appointed to take care of you since you can no longer care for yourself.
Guardian for your children. If you pass away before your children become adults, you can name a guardian for them in your will. This individual will then be called upon to step in and raise your minor children in the event you pass away and are not survived by another parent. They will be responsible for the education, healthcare, and developmental needs of your children.
Guardian for your children’s property. It is also possible to name a guardian of the property of minor children. This individual’s role is to ensure their property is adequately maintained until the children come of age and are able to take over this role themselves.
Can a Personal Representative and Trustee Be the Same Person?
Yes. But should they be the same person? That’s a more important question. Why?
Your trustee, guardian, and personal representative may all be one individual. In fact, you may already have a person in mind for all three of these roles. However, as you can probably glean from the information above, each of these jobs has a great deal of power and responsibility attached. Moreover, someone with a good skillset for one of them might not be the best choice for another.
Because of this, it’s important to remember that, in many situations, it’s probably a good idea to distribute these important responsibilities among and between several different people.
In short, the question “Can a personal representative and trustee be the same person?” (not to mention guardian) is less of a legal question and more an issue of whether you believe one single individual is the best person for all of these roles. No matter who you choose – or how many people – make sure you have absolute trust in them.
Next, we’ll tackle the question of why someone might want a trust by covering some of the most important benefits in a video I made as part of our Bite-Sized Bits of Knowledge series.
Benefits of Setting Up a Trust
Hi, this is Barry Haimo. Thanks for tuning in for another dose of Bite-Sized Bits of Knowledge, where we give you meaningful information in a short amount of time. Today, we’re going to continue with our discussion of trusts. We’re going to talk about the advantages of them. Predominantly, we’re talking about revocable trusts.
And I’ll touch on irrevocable trust in a moment, as well, briefly. So, the advantages start with the pluses – first pluses of trusts.
Number one: you’re going to get all your assets in an organized fashion, consolidated into one entity instead of all over the place. That actually translates to saving a lot of dollars later, because someone’s going to have to clean it up later.
Number two: you’re going to have the assets be responsibly managed by somebody for the benefit of your beneficiaries or a trustee for the benefit of your beneficiaries.
Number three: you’re going to avoid probate and guardianship during life, which, again, saves dollars. It saves time, energy, frustration. It alleviates conflict, which saves dollars.
I think I’m on… Number five: there’s an asset protection component of trust. I want to make it very clear that revocable trusts are still on the hook for a person who’s passed away, deceased or decedent claims, or creditors’ claims – they are not protected from claims. Revocable trusts provide zero asset protection benefits. Zero. Doughnut. No asset protection.
If you’ve heard otherwise, disregard it – it’s wrong. After you pass away, after your creditors are addressed at that point, then there’s an asset protection component for the interests that remain in trust for your beneficiaries.
That’s where the asset protection component comes in. Really? It’s an asset protection component for your beneficiaries, not you.
While I’m talking about asset protection, just so you know, irrevocable trusts are commonly referred to or commonly used because of their asset protection, but they’re very limited in what they can do. And if you do them wrong, they are absolutely accessible to creditors. So you got to be careful to make sure that your irrevocable trusts are actually doing what you think they’re doing, because very commonly we get these questions, and we hate being the bear of bad news. But it’s unfortunate. If you put something into an irrevocable trust thinking it does one thing it does not do, then you’re going to unwind it.
And that’s more wasted money to fix it, if you can even fix it at all.
All right. So, advantages of trust. You got your organization, you got your management, you got the asset protection probe avoidance, guardianship avoidance. There’s a lot of benefits there.
I would say one last thing would be you’re ensuring that what you want to have happen with your assets and your beneficiaries will happen well beyond your lifetime because your trustee, who has a fiduciary duty, is obligated to do it. Okay. So you really can make sure that money is available to supplement rather than support your beneficiaries. And to whatever degree you want to do that, you can do that, and you can customize any way you want. For the most part, in your trust agreement, we get very granular with our clients.
We really understand our clients’ needs, what their goals are, and how to tailor these agreements to their circumstances. It’s one of our favorite things to do.
All right. On the negative side – on the negative side… Trusts, I think, it’s important to always share, be transparent what the disadvantages are… Because there are some, and it might not be worth it for you, or you might just not want to deal with it. So negatives of trust.
Number one: taxes, income taxes, trust. The tables that the federal income tax apply to trusts are adverse. Usually, the highest personal rate on the tables is triggered at only 12,500 in income. 12,500 triggers, like a 40% tax.
So you must be thinking, why the heck aren’t we even talking about this? Why the heck are there so many trusts created?
The answer is that you can avoid or eliminate that tax. You just got to be smart with how you’re going to administer the trust. The trustee will have to understand how to do this. There are a lot of ways to minimize the taxes, to push them out to the beneficiaries, to their personal rates, which are most likely going to be much lower than the trust.
For example, for an extreme example: say you have a beneficiary, two beneficiaries. One is a doctor and one’s a janitor. If there’s income, and you’re going to distribute it out, those two people are going to pay very different taxes, because it’s going to be picked up on their personal returns. The alternative is leaving in the trust and getting taxed much more heavily, which may or may not be a good idea.
That leads us to number two: to make decisions about how to administer the trust, the trustee is going to have to consult with professional advisors.
They’re going to have to pay for attorney fees and pay for CPA fees to do the tax returns, because they are a standalone taxpayer once you pass away. So, there’s administrative fees, there’s legal fees, there’s counting fees.
The last thing I’ll say is: there’s compensation. This is a job in dealing with beneficiaries and asking for money or requests or being on top of the management of the trust and making sure that everything is in order – is a job.
And as a result, under Florida law, at least trustees are entitled to reasonable compensation. Reasonable compensation. So you can always waive that, but those are really the downfalls. You got your fees, expensive administrative costs, and compensation. So put it all together.
At least have a discussion about it in your planning, And I hope that you found this helpful. Thank you for stopping by and stay tuned for more. Bye.
Have you considered the benefits of a trust for your estate?
While they are not a perfect solution, trusts can provide enormous flexibility and control to the creator’s wishes with respect to the devise of trust property to the creator and his or her beneficiaries, including: who receives it, when they receive it, how they receive it, and under what conditions they receive it – all of which can happen both during the creator’s life and after death.
Trusts enable you to protect assets and ensure they remain in the family. You can also provide for irresponsible beneficiaries as well as those with substance abuse or special needs.
Understanding the Benefits of Trusts vs. Wills
By creating a trust, you’ve appointed someone you trust to administer your assets on your behalf. You’ve also chosen who you want to inherit your property upon your death, you can control all aspects of how and when they get it – possibly like a will.
However, there are far more advantages to a trust than a will for you and your family. The consequence of not having a trust upon becoming incapacitated is that guardianship proceedings will commence, and a guardian over your property will be appointed by the court. You will have no choice in the matter. Taking advantage of a trust preserves your ability to remain in control of yourself and your property. In contrast, a will offers no such solution.
Avoids Probate. Trusts own property in their name instead of your name. Remember that property can include any type of thing you own. As a result of retitling your property into the name of your trust, there are no assets to go through probate upon your death. It saves your family an incredible amount of time, grief, and money. In my experience, the added time and grief associated with probate far outweighs the financial burden. Also remember that a will cannot own property – it merely documents your desired written instructions for how your property will be transferred to your beneficiaries, most notably, in probate.
Avoids Guardianship. As mentioned above, a trust owns property in its name instead of yours. This is extremely important in the event that you become mentally incapacitated. Being mentally incapacitated simply means that you lack the necessary (legal) amount of cognitive awareness of the consequences of what you’re attempting to do via your estate planning documents. It can happen by way of head injury or illness, such as dementia and Alzheimer’s. In such an event, there’s no need to open up a guardianship to handle your financial and personal affairs, because you don’t own any property in your name; it’s in the name of the trust.
Strength and Flexibility. As you can see, utilizing a revocable trust is more advantageous than a will for many reasons. Another advantage: it is executed and administered during life, whereas a will becomes effective only upon death. Unhappy beneficiaries and unscrupulous family members unfortunately end up contesting wills all of the time. They need only prove that their claims occurred at the time of execution. In the case of a trust, dozens of actions/decisions are taken on the part of the grantor/trustee after execution and before death, each of which solidifies the defense that he or she had the requisite mental capacity at the time of execution. This is an often overlooked advantage.
Provides control even after you’ve passed away. By comparison, a simple will generally:
- Appoint a personal representative or executor to administer your estate once you’ve passed
- Appoint a guardian over the person and property of minor children in the event that both parents pass away
- Provide instructions for who will inherit your estate and in what form of ownership they will receive it. Wills can include a testamentary trust, which takes effect only upon death.
However, that type of trust lacks a stronger defense against claims of undue influence and incapacity. Therefore, it’s better to use a living trust A.K.A. a “revocable trust.”
Protection and preservation of assets for generations. Another often overlooked benefit of trusts over simple wills is that beneficiaries’ inheritance is protected from their creditors – which will include former spouses! If structured properly, the beneficiaries’ inheritance will be protected from themselves, if financially irresponsible – or for any other reason that may place the assets at risk once you’re gone, and they are in under the control of your beneficiary. The point here is that you have two choices: protect and preserve the hard earned money you intend to give to your family – or don’t.
Like a will, utilizing a revocable trust enables you to control who will inherit your estate and in what form of ownership they will inherit. However, because trusts are private instruments, they allow for more conditions of receipt and more control over the timing, amount, and manner of distribution of assets.
Additionally, you can instill your legacy of values upon your beneficiaries by conditioning receipt of property upon going to college, marrying within the faith, or anything else that is important to you. You can even elongate the duration of trusts up to 360 years in Florida so they last many generations. Wills quite simply do not offer any such solutions.
Enlist an Attorney’s Help Now to Save Trouble in the Long Run
As you can probably see, there are a lot of moving pieces involved in creating a strong trust that works well for you and your loved ones. Ensuring you have named your relevant parties to a trust and understand their roles is crucial to protecting your assets.
We can help. Reach out to our office today to speak with an experienced Florida business planning attorney.
Originally published 05/16/2019. Updated 11/22/2023.
Barry E. Haimo, Esq.
Strategic Planning With Purpose®
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