What is an irrevocable trust?
A trust can either be revocable or irrevocable. A revocable trust is a trust that can be revoked or amended by the settlor of the trust. An irrevocable trust is a trust that cannot be revoked or amended by the settlor. Ordinarily a trust instrument will indicate whether the trust is revocable or irrevocable. A trust created after July 1, 2007 is revocable unless the terms of the trust expressly provide that the trust is irrevocable. An irrevocable trust can be modified or reformed by a court under certain limited circumstances.
How is an irrevocable trust created?
There are three common ways a trust can be made irrevocable:
- The settlor can establish a trust and designate the trust as an irrevocable trust upon creation.
- A revocable trust becomes irrevocable when the settlor of the revocable trust dies.
- An irrevocable trust can be created under the terms of a will. This type of trust is called a “testamentary trust.”
What is a trustee?
A trustee is the person or authorized entity designated by the settlor to take possession of the property of the trust and administer the trust for the benefit of the beneficiaries of the trust. There can be more than one trustee of a trust. Any property owned by the trust is titled in the name of the trustee, who holds the property for the benefit of the trust’s beneficiaries and administers the property according to the terms of the trust and the Florida Trust Code.
What powers does the trustee of an irrevocable trust have?
In general, a trustee has any powers granted to the trustee by the terms of the trust, and any other powers conferred by the Florida Trust Code. The powers that can be granted to a trustee under the terms of a trust are limited by the Florida Trust Code. Additionally, a trustee must exercise any powers they have subject to the trustee’s fiduciary duties under the Florida Trust Code and applicable Florida Law.
What is a fiduciary duty?
A trustee is a fiduciary, and the Florida Trust Code and Florida law impose certain duties on a trustee. Some fundamental fiduciary duties of a trustee include:
- Duty to Administer Trust: The duty to administer the trust in good faith, in accordance with its terms and purposes and the interests of the beneficiaries, and in accordance with the Florida Trust Code.
- Duty of Loyalty: A trustee must administer a trust solely in the interests of the beneficiaries of the trust. This duty prohibits a trustee from self-dealing or conducting other transactions that are affected by a conflict between the trustee’s personal interests and interests as trustee.
- Duty of Impartiality: The trustee must act impartially when administering a trust for two or more beneficiaries, while giving regard to the beneficiaries’ respective interests in the trust.
- Duty of Prudent Administration: A trustee must administer the trust as a prudent person would, by exercising reasonable care, skill, and caution.
- Expenses of Administration: A trustee must only incur expenses that are reasonable under the circumstances.
- Control of Trust Property: A trustee must take reasonable steps to take control of and protect trust property.
- Duty to Inform and Account: A trustee has a duty to keep the beneficiaries reasonably informed of the trust and its administration. This duty includes a duty to provide the qualified beneficiaries with fiduciary accountings of the trust at least annually.
The list above is not exhaustive. Additionally, some, but not all, fiduciary duties of a trustee can be modified or eliminated under the terms of a trust.
What information is the trustee required to give me?
For a trust governed by Florida law, a trustee has a duty to keep the qualified beneficiaries of an irrevocable trust reasonably informed of the trust and its administration.
The determination of who is a qualified beneficiary can be complex, as it hinges on the terms of the trust and varies according to when the determination is being made. A trustee of an irrevocable trust is required to notify the qualified beneficiaries of its acceptance of the trust, the full name and address of the trustee, and that the fiduciary-lawyer client privilege applies with respect to any attorney employed by the trustee.
After the trustee acquires knowledge of an irrevocable trust, the trustee has a duty to notify the qualified beneficiaries of the trust’s existence, the identity of the settlor or settlors, the right to request a copy of the trust instrument, the right to trust accountings and that the fiduciary lawyer-client privilege applies with respect to the trustee and any attorney employed by the trustee.
Upon reasonable request, the trustee must provide a qualified beneficiary with a complete copy of the trust agreement.
Unless waived by the qualified beneficiary, the trustee has a duty to provide trust accountings to each qualified beneficiary at least annually and on termination of the trust or on a change of trustee. A trust accounting must show the trust investments, distributions, expenses and the like.
Upon reasonable request, the trustee is required to provide a qualified beneficiary with relevant information about the assets and liabilities of the trust and the particulars relating to administration.
When is the trustee required to give me notice?
The trustee must provide information to the qualified beneficiaries regarding the trust and their right to receive certain information within 60 days after accepting appointment as trustee, within 60 days after the trustee acquires knowledge of the creation of an irrevocable trust, or within 60 days after the trustee acquires knowledge that a revocable trust has become irrevocable.
In addition, the trustee must give notice to the qualified beneficiaries if it intends to take certain actions affecting the trust and its administration. Other situations that require notice include a trustee’s resignation and court proceedings involving trust construction, modification, or termination.
If a trustee intends to limit the time available to a beneficiary to bring a lawsuit regarding matters disclosed in a “trust disclosure document,” the trustee may provide a beneficiary with a “limitation notice” regarding the trust disclosure document. A beneficiary is barred from bringing an action against a trustee for breach of fiduciary duty with respect to a matter that was adequately disclosed in a trust disclosure document unless the beneficiary initiates a lawsuit to assert the claim within 6 months after receiving the trust disclosure document or a limitation notice that applies to that disclosure document, whichever is received later. The terms “trust disclosure document” and “limitation notice” are technical terms with specific definitions under Florida law. If you have questions about a document you received in relation to a trust, you should consult an attorney as soon as possible.
What happens if the trustee refuses to give me information?
If a trustee fails to keep the beneficiaries of the trust reasonably informed about the trust and its administration, the trustee may be in breach of their fiduciary duties. In such a situation, a beneficiary should consult with an attorney to seek legal recourse. The attorney can formally request the information in writing, and if the trustee still does not comply, the attorney can ask the court to intervene. The court has the power to compel the trustee to provide the information and, in some cases, may impose penalties or even remove the trustee from their position if they find that the trustee has violated their fiduciary duties.
However, the duty to keep the beneficiaries of the trust reasonably informed is owed only to those who are qualified beneficiaries of a trust. If someone who is not a qualified beneficiary requests information about a trust, the trustee typically is not required to provide any information to that person. An individual who is not a qualified beneficiary typically has no legal right to compel information. Nonetheless, there are circumstances where someone who is not a qualified beneficiary might have a right to information, such as when one has a legal claim against the trust that would give them a legal interest.
Your attorney can advise you regarding whether you have rights to information about a trust and its administration and whether a trustee is fulfilling all obligations.
Is the trustee entitled to charge a fee for their services?
Yes, a trustee is generally entitled to receive “reasonable compensation” for their services, although a trustee may waive compensation. This is in recognition of the responsibilities and duties that come with managing a trust, which can be quite complex and time-consuming. When the terms of a trust document specify the trustee’s compensation, a court may allow more or less compensation, depending on what is reasonable. Likewise, when a trust document does not specify the trustee’s compensation, the Florida Trust Code grants trustees the right to receive reasonable compensation.
What is considered reasonable will vary depending on, for example, the size of the trust, the complexity and time spent managing the assets, the professional expertise required to manage the trust effectively, the customary rate for trustee compensation, and the unique circumstances of the trust. Determining what is reasonable may lead to disputes between trustees and beneficiaries.
What expenses can the trustee pay from the trust?
In administering a trust, the trustee shall only incur expenses that are reasonable in relation to the trust property, the purposes of the trust, and the skills of the trustee. Within that limitation the trustee of an irrevocable trust has broad power to pay expenses reasonably incurred in the administration of the trust. This broad power includes:
- Paying or contesting any claim by a creditor of the trust;
- Paying taxes and assessments arising from the trust’s ownership of property;
- Paying reasonable compensation to lawyers, investment advisors, accountants, and other persons employed by the trustee;
- Paying reasonable compensation to the trustee;
- Paying for insurance premiums for the trust assets.
The expenses paid must be reasonable and must be incurred in connection with the administration of the trust.
A trustee may also advance money for the protection of the trust. A trustee is entitled to be reimbursed from trust property for reasonable expenses that were properly incurred in the administration of the trust.
When do I receive my share of the trust?
When you can reasonably expect to receive your share of a trust depends upon a variety of factors including:
- What are the terms of the trust? Are you entitled to an outright distribution or distributions over time?
- What are the assets of the trust? Does the trust contain assets such as real estate or business interests that are complicated or are the assets cash and securities?
- Is the estate required to file a federal estate tax return?
- Are there substantial claims or debts associated with the trust?
In addition, upon the occurrence of an event terminating or partially terminating a trust, the trustee has a duty to expeditiously distribute the trust property to the persons entitled to the property. The trustee may retain a reasonable reserve for the payment of debts, expenses, and taxes.
Am I required to sign any documents in exchange for receiving my share of the trust?
No. You are not required to sign any documents in exchange for receiving your share of the trust. However, it is not uncommon for the trustee of an irrevocable trust to request that you voluntarily execute not only a receipt but perhaps also a release and an indemnification agreement. Through a receipt, you acknowledge having received your share of the trust. By signing a release, you generally relieve the trustee of liability. An indemnification provision seeks to have you indemnify the trustee for third-party claims that may arise in the future. Sometimes a receipt, release, and indemnification can all be included in the same document. Before signing any document in exchange for a distribution, it is important you understand the scope of the liability for which you are releasing the trustee and the indemnification you are providing. If you have doubts or questions about any document that you are being asked to sign in exchange for receiving your share of the trust, you should seek advice from an attorney who practices trust law.
What should I do if I think the trustee did something wrong?
If you think the trustee did something wrong, you should consult with an attorney who practices in the field of trust litigation. Your attorney will help you to determine what the proper course of action should be. For example, initially, your attorney may make a written inquiry for documents and information to better ascertain the situation. If the trustee fails to provide the documents and information or if the documents and information received reflect wrongful actions or omissions, your attorney may bring a lawsuit on your behalf against the trustee. Trust actions are commenced by filing a complaint and they are governed by the Florida Rules of Civil Procedure.
What are the tax consequences of making a gift into an irrevocable trust?
Making a gift to an irrevocable trust could result in several tax consequences. The following are types of taxes that could be affected:
- Gift Tax: Generally, a taxable gift is made when there is a transfer of property for which the donor does not receive full value in return. Usually, transfers to an irrevocable trust constitute taxable gifts. However, the mere fact that a transfer is deemed a taxable gift does not necessarily mean a gift tax is owed. For example, such a transfer may qualify for the gift tax annual exclusion or use the donor’s unified credit.
- Estate Tax: The estate tax applies to property included in a decedent’s “taxable estate.” Transferring property to an irrevocable trust could affect whether the transferred property is includable in the taxable estate of a settlor or beneficiary.
- Generation Skipping Transfer Tax: The generation skipping transfer (“GST”) tax applies to transfers deemed to “skip” a generation. Transfers to an irrevocable trust could result in a GST tax on (i) the initial trust transfer, (ii) a future trust distribution, or (iii) the death of a beneficiary.
- Income Tax: There are no income tax consequences to the Settlor gifting property to an irrevocable trust. However, as the trust recognizes income on trust property over time, any of (i) the trust, (ii) the donor, or (iii) a beneficiary could be liable for paying the corresponding income tax depending on the terms and administration of the trust.
- The tax consequences resulting from the creation and administration of an irrevocable trust can be incredibly nuanced and complex. You should consult a lawyer or accountant to determine whether there are any tax consequences that could affect you.