When setting up a revocable living trust, many people assume that one of the primary benefits to the trust is protection from creditor claims. While there are trusts that may be used to accomplish this goal, in Florida, a revocable trust does not provide protection to the trust settlor from creditors, Medicaid expenses, and more. (Contrastingly, significant asset protection can be provided to trust beneficiaries after the settlor’s death.) This is not to say that revocable trusts have no place in effective estate planning; they do, and they are incredibly useful as a wealth transfer tool. But, it is important to review the trust regularly to ensure it is meeting the settlor’s specific goals. Let’s look at some situations where a revocable trust does not protect settlor assets.
A revocable trust is not set up to shield assets from legal claims against the settlor’s estate. In fact, Florida law requires that upon death, assets in a revocable (now irrevocable by virtue of death) trust are available to satisfy claims against the settlor’s estate. Trusts that are created to be irrevocable from inception, however, can provide significant protection against claims. Also, a revocable trust, upon the death of the settlor, can provide for a beneficiary’s inheritance to be held in a further trust designed to offer substantial asset protection from the beneficiary’s creditors, spouse/ex-spouse, and other legal claims.
If the settlor holds income-generating assets within a revocable trust, the tax consequences will generally be the same as if the assets were owned in a personal name. The income generated will be taxed at the personal tax rate and claimed on personal tax returns.
There are other estate planning vehicles, e.g. tax-qualified retirement accounts and annuities, some life insurance products, Section 529 plans, and some irrevocable trusts, that can be designed to minimize the effect of income taxes.
One alternative to a revocable trust in Florida that offers some significant asset protection advantages is a “tenancy by the entireties” (or “TBE”), which is a form of joint ownership available only to spouses. Florida is one of just a handful of states that offers this type of protection. Assets held in TBE form are exempt from the claims of a creditor of either spouse individually (but not jointly). This offers a much greater degree of protection than a revocable trust and many of the same benefits, which is why it is frequently recommended to married couples.
Revocable trusts are an excellent component of many estate plans, but they should be used only with the guidance of an experienced estate planner. If you would like to learn more about revocable trusts, or if you want to see if a revocable trust is a good idea, please contact us to discuss the situation. You can also read a past blog where we explain why revocable living trusts need to be reviewed on a regular basis.
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