What is an irrevocable trust in Florida?
A Florida irrevocable trust is an estate planning tool where a grantor transfers ownership of assets into a trust, effectively removing them from their taxable estate. Despite relinquishing control, irrevocable trusts offer valuable estate planning advantages. These include reducing estate taxes for those subject to federal estate taxes, avoiding probate for the transferred assets, and protecting assets in the trust from future creditors. Once established, the trust becomes irrevocable- the grantor cannot revoke or modify the terms of the trust. A designated trustee manages the trust assets for the benefit of designated beneficiaries in accordance with the trust document. Florida irrevocable trust laws are found in the Florida Trust Code, specifically Chapters 736 through 739.
Understanding irrevocable trust requirements in Florida
Contributions to irrevocable trusts are considered current gifts, and the trust itself does not require the same formalities as a will. However, if the trust has testamentary provisions (meaning it distributes trust property upon the grantor’s death), Florida law Section 736.0403 requires will execution formalities. Florida irrevocable trust execution requirements typically involve signing the trust in the presence of two witnesses and a notary and often include a self-proving affidavit. A self-proving affidavit is a sworn statement attached to the trust document, signed by the grantor and witnesses, and it attests to the validity of the grantor’s signature. While a self-proving affidavit is optional, it can expedite the probate process by eliminating the need for witnesses to appear in court to verify the signing.
How to modify an irrevocable trust in Florida?
Revocable trusts such as revocable living trusts can be freely altered or canceled by the grantor. However, irrevocable trusts are designed to be just that – irrevocable. Every irrevocable trust agreement expressly states that the terms cannot be modified. Like other types of irrevocable trusts, Irrevocable Life Insurance Trusts (ILIT) also cannot be modified or revoked post-creation.
Is a revocable or irrevocable trust right for you? Our Trust Planning article explores the difference between revocable and irrevocable trusts and types of trusts in Florida and can help you decide.
Florida law provides for the modification of irrevocable trusts in certain limited situations. There are four main ways to change an irrevocable trust in Florida.
Reformation: This is a judicial action allowed by Florida statutes to fix errors or modify ambiguous terms in the original trust document to reflect the grantor’s true intent. The grantor or any interested party can make an application to the court and demonstrate by clear evidence that the grantor’s original intent is affected by a mistake of law or fact in the trust document.
Nonjudicial Settlement Agreement: The grantor and trust beneficiaries can execute a nonjudicial settlement agreement to modify the trust. An irrevocable trust can be amended even after the trustmaker’s passing with the unanimous consent of the trustee and all beneficiaries. This is explained in section 736.0412 of the Florida Statutes.
Judicial Modification: Either the trustee or a qualified beneficiary can petition to court to modify the trust’s terms or even terminate the trust altogether. The court permits modification or termination of the trust, where the trust’s original purposes have already been achieved, or if fulfilling them becomes illegal, impossible, wasteful, or impractical.
Decanting: Fla. Stat. § 736.04117 allows an authorized trustee—who possesses the discretion to distribute principal—to transfer all trust assets to a newly created trust with terms that are more favorable for the beneficiaries. This procedure is known as decanting. Decanting effectively replaces the original trust agreement with a new one. Done correctly, decanting does not trigger any taxes.
How to Terminate a Florida Irrevocable Trust?
An irrevocable trust can terminate on a predetermined date, upon the occurrence of a specific event, or once all the trust assets and trust income have been fully distributed. Upon termination, any remaining trust property will be distributed to the beneficiaries in accordance with the terms outlined in the trust instrument, and the trust will be formally dissolved.
A trust may be dissolved if its purpose has been fulfilled, according to Section 736.04113. Section 736.04113 also specifies that a trust can be modified or terminated if the purpose of the trust ceases to exist, becomes illegal, impossible, impracticable, or wasteful. If a trust holds assets totaling less than $50,000, the court will dissolve the trust under Section 736.0414 of the Florida Statutes if the assets within the trust are insufficient to justify the cost of administration. While the statutes do not explicitly mention termination due to the trust being created under undue influence, fraud, duress, or mistake, Florida courts have terminated trusts under such circumstances.
What is an irrevocable trust homestead exemption in Florida?
Florida’s homestead tax exemption can extend to properties held in an irrevocable trust, but the trust needs to be set up correctly. To qualify for the exemption, you must have a “present possessory interest” in the property for your lifetime or own the property outright. This is found in the 196.041(2) of the Florida Statutes. The irrevocable trust must explicitly grant the right to fully use, occupy, and possess the homestead real estate for life and a grant for a fixed term of years would not suffice. To set up your trust correctly, it is advisable to consult with a Florida estate planning attorney who is experienced in drafting trusts and knowledgeable about Florida homestead laws.
Florida’s homestead exemption can save you thousands of dollars on property taxes each year. If your trust estate qualifies for estate tax exemption, up to $50,000 of the first $75,000 in value can be exempted from property taxes. The first $25,000 of your property’s value is completely exempt from property taxes. The next $25,000 (from $25,001 to $50,000) is taxable. However, the subsequent $25,000 (from $50,001 to $75,000) is exempt again.
Florida irrevocable asset protection trust
The Florida Asset Protection Trust is an irrevocable trust created by the grantor, typically for the benefit of a spouse, children, or other family members. Where the trust agreement includes a spendthrift clause, a beneficiary’s interest in the trust is protected from their creditors. This clause prevents beneficiaries from assigning their trust interest to any third party. Once the trustee distributes funds to a beneficiary, those funds will no longer be protected by the spendthrift clause, and become vulnerable to creditors. However, Florida law prohibits trustees from withholding distributions to a beneficiary solely to shield them from creditors. Special types of creditors, like child support creditors, have the right to pursue claims against assets within a spendthrift trust to a beneficiary. A “self-settled asset protection trust” where the grantor is also the beneficiary can help protect real estate, bank accounts, life insurance, and other property from future creditors.
Florida irrevocable trust asset Medicaid
An irrevocable trust can shield your assets from being counted when applying for Medicaid. Once you transfer assets into an irrevocable trust, Medicaid cannot access them, and their value will not affect your eligibility. Most states, including Florida, have a “look-back period” that examines asset transfers made in the preceding 60 months (five years). If you transfer assets to a trust within this timeframe, Medicaid may impose a penalty period during which you’d be ineligible for benefits. Consulting with an elder law attorney is crucial to ensure the trust is established correctly and outside the look-back window.
Planning for Medicaid in Florida? Learn about Medicaid eligibility and enrollment with our MUST-READ guide: 5 Things You Must Know About Florida Medicaid Planning.
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