The original purpose of trusts was to authorize a third person to manage property for the benefit of the grantor and beneficiaries, in accordance with the terms of the trust document or agreement.   Today, trusts are still used for that purpose but are also for other purposes such as avoidance of probate and reduction of estate taxes.

A trust is a tool that enables a grantor to entrust a property to another person (called a trustee) and authorize that person to manage and distribute property for the benefit of the beneficiaries, thereby relieving the grantor of the burden of management.  Depending on the choice of trustee, this can enable the grantor to obtain professional assistance in the investment and management of the property of the trust.  (Under Florida law, the grantor can also be the trustee of the trust.)

A “revocable trust” is a trust in which the grantor reserves the right and power to revoke the trust, to change the terms of the trust agreement, and to withdraw any or all of the property from the trust.  This means that the grantor retains ultimate control over the property of the trust and can change any or all terms of the trust agreement.

In contrast, an “irrevocable trust” is a trust in which the grantor has no right or power to revoke the trust or to change the terms of the trust agreement or to withdraw property from the trust. Once the property is transferred to the trust, the grantor loses control over that property.

A trust agreement is a special type of agreement in which a trustee is appointed to manage and handle the property of the trust for the benefit of the beneficiaries of the trust in accordance with the terms of the trust and the governing law in the state in which the trust is situated. The trustee is a fiduciary. This means that the law requires the trustee to act in accordance with the terms of the trust and in the best interests of the beneficiaries.  Fiduciary duties include the duties of loyalty, obedience to the terms of the trust, diligence, to use good judgment, impartiality, prudence, and to account for property with which the trustee has been entrusted. The trustee is called to live up to a high standard of conduct, and if the trustee breaches those duties, it can be liable for damages.

Advantages of Revocable Trust

For people who have substantial property and do not want to be burdened with the management of that property, trusts are useful as the person can obtain professional management of the property by established the trust and appointing a professional trustee, such as the trust department of a bank or brokerage company, to invest and manage the property. Trust departments employ employees who are skilled at investing property, accounting for it, filing income tax returns, and handling the other tasks associated with property, thereby relieving the grantor and beneficiaries of those responsibilities.  That type of professional management is generally limited to people with significant property.

Sometimes trusts are used for minors and for family members who, in the judgment of the grantor, do not have the judgment or maturity to handle substantial amounts of property. The property is managed by the trustee and distributed to the beneficiary at determined intervals.  However, the use of a trust for an immature person can have unintended consequences, and there is a phrase used in the trust world to describe the unintended consequences:  “trust babies.”  This phrase refers to an adult beneficiary who, as a result of becoming dependent on the income from the trust, never has to deal with life and never becomes a mature adult.  The child receives enough money from the trust that he or she never has to deal with the hard issues of life and perpetually remains as a child.

Some people use trusts to avoid probate.  If one transfers his property to a trust and provides in the trust agreement that the property will be used for his benefit during his lifetime and then, on his death, will be distributed to the other beneficiaries of the trust, that property can be distributed to the beneficiaries after the person’s death without the need of probate.

Trusts provide no real advantage for some people, as a person can accomplish certain purposes, such as avoiding probate and obtaining assistance in handling property, in less expensive ways.  One can avoid probate through the use of joint accounts, POD (pay on death) designations, TOD (transfer on death) designations, and beneficiary designations. One can obtain assistance in the handling of property by the use of a durable power of attorney.  These can be less expensive and are all that some people need.

In the past, trusts were used as a tool to reduce estate taxes. Today, the exemption amount for estate taxes is high enough that, together with certain other changes in the laws governing estate taxes, estate taxes are not an issue for most people.  The use of trusts to minimize estate taxes may become important again if the exemption amount is lowered and other estate tax laws changed, but for now, most people do not need to be concerned about estate taxes.

Disadvantages of Revocable Trusts

Trust agreements are usually complex, which increases the cost of drafting the trust agreement and the cost of transactions.   If the trust agreement needs to be amended, the drafting attorney will need to review the terms of the trust agreement.  If the agreement is lengthy and complex, this takes time, which increases the cost. If the trust sells real property, the title company needs to know certain terms of the trust agreement.  When the trustee opens an account at a bank or brokerage company, the institution needs to know certain terms of the trust agreement.  This means more work is required when handling a transaction involving a trust than handling a transaction with an individual.

However, Florida law authorizes the use of a document called a “certification of trust,” which can help minimize the work associated with a transaction involving a trust.  The certification of trust states certain key information about the trust (such as the identity of the trustee or trustees, the name of the grantor, whether the trust is revocable or irrevocable, and the power and authority of the trustee), and third parties are entitled to rely on the information stated in the trust certification.  In that way, the third party is not required to review the entire trust document. The use of certification of trusts enables brokerage companies, banks, and title companies to handle transactions involving a trust without being required to review the entire trust document.  But, in general the more complex an agreement or transaction is, the higher the costs associated with the agreement or transaction, which is a disadvantage of trusts.

Another disadvantage is that, once the person dies, a revocable trust generally becomes irrevocable.  Once a trust is irrevocable, it becomes a separate taxpayer.  This means the trust must obtain a tax identification number and file income tax returns. If the trust earns income, income tax returns will need to be filed, and the trust may be required to pay income taxes.  Because the tax rates for trusts are compressed, a modest amount of income can result in the trust being taxed at a tax rate of forty percent (40%).  If the grantor and the trustee do not plan carefully, the income taxes imposed on the income can be significantly higher for a trust than for an individual taxpayer.

Importance of Consulting an Attorney

It is not easy to draft a good trust agreement.  There are many issues that need to be considered, and most people do not have the knowledge and experience to recognize and address the issues that will arise during the term of a trust.  As one continually deals with trusts, one starts to learn the issues that can cause problems, and one learns to think through and foresee issues that can arise ten (10) or twenty (20) years in the future.

One example of this is the manner in which a trust agreement is executed.  In Florida, most trust agreements must be executed in the same way that a will is executed.  This means that the grantor must sign the trust agreement at the end thereof in the presence of two witnesses who then sign the trust agreement in the presence of the grantor. If the execution of the trust agreement by the grantor does not comply with these requirements, the trust may not be valid.

In conclusion a trust is a complex agreement with complex requirements and issues. That is the reason it is better for most people to engage an attorney who is knowledgeable and experienced in dealing with trusts.

(This blog is designed to provide general information regarding this topic.  It is provided with the understanding that the publisher and the author are not rendering legal, accounting, or other professional services or advice.  This publication should not be utilized as a substitute for the use of an attorney, and if legal advice is required, the services of a licensed attorney should be obtained.)