Designing Trust Systems for Florida Residents: Planning Strategies, Things You Should Know, and Traps for the Unwary
Revocable and irrevocable trusts are commonly used as the primary platforms for estate and financial planning for individuals, married couples, and families in general. While most Floridians use trusts to avoid probate and facilitate holding assets so that they can be protected from misuse, creditors, divorce, and estate taxes, there are a myriad of combinations of estate planning techniques that are not commonly used, but nevertheless will be advisable for a number of reasons. Additionally, individuals or married couples may rush into funding a trust simply to avoid probate, without fully understanding the practical and tax implications of the particular trust structure.
This article discusses different trust systems, strategies, revocable trust choices, and primary considerations advisors should evaluate in designing and recommending such arrangements, but we cannot cover these in great detail and will not cover them with significant technical jargon.
Unmarried Persons
It is typical for an unmarried individual to choose to hold assets under a revocable trust to avoid probate and guardianship exposure, while maintaining control over the assets in the trust. Many trust drafting systems and estate planning lawyers now use revocable trusts as the mainstay of most estate plans that they draft, even for clients who will not fund the trust during their lifetime.
In certain situations, it is best not to fund a revocable trust, such as where creditor protection is a key objective, because the Florida statutes do not clearly provide creditor protection for certain assets held under a revocable trust that are otherwise protected when owned individually or in other trust vehicles.
Such assets include annuity contracts,[1] life insurance policies,[2] and possibly even homestead property.[3] These creditor exempt assets will typically be owned by the single individual and may be made payable to the trust in the event of death by use of beneficiary designations for life insurance and annuity contracts and enhanced life estate deeds (also known as “lady bird” deeds) for homestead.[4]
In addition, individuals who derive savings from pension, IRA, and Social Security payments may place these monies into bank accounts that are protected from creditors under Florida law.[5] Under federal law, courts have previously found a limitation to this protection, whereby Social Security benefits were only protected to the extent needed for retirement, this limitation also applied to Social Security proceeds placed in a bank account in In re Lazin, 217 B.R. 332, 336 (Bankr. M.D. Fla. 1998).[6] However, this is no longer the case after the U.S. Supreme Court ultimately ruled that bankruptcy courts are precluded from requiring a debtor to turn over the Social Security payments received in to his or her savings account, despite not having any present need to use the funds for living expenses.[7]
Safety Latches
Another question for both married and unmarried individuals is whether the revocable trust agreement or agreements should have safety latch provisions that prevent amendments or significant withdrawals unless it is verified that the grantor/beneficiary is in good mental capacity and not subject to undue influence.
The unfortunate circumstances that a great many elderly or infirm individuals and families face is a significant economic burden and hardship caused by the flaws of human nature. For example, maintaining an individual in an end-stage condition can cost upwards of $7,000 per month or more in personal care expenses and may also become a significant economic burden on the family. For this reason, having a trust provision that prevents the amendment of a revocable trust without verification from two or more trusted family members or medical or mental-health professionals can provide a significant degree of protection and awareness. This type of trust provision should be carefully drafted to avoid having the IRS claim that a completed gift has been made due to the settlor’s limited ability to amend or revoke the trust.[8]
Such a provision could become applicable immediately upon signing, in the event of verification of dementia, upon reaching of a certain age, or upon the occurrence of an event, such as if and when the grantor is cohabitating in a romantic relationship, remarried, or before any benefit could be bestowed upon a particular family member or other individual who constitutes a threat, such as a child who has a tendency to be aggressive and is not self-supporting. This may be the very child who moves in with the grantor when he or she becomes ill or infirm, and who may be likely to attempt to exert undue influence over the testator.
Creditor Planning
It is noteworthy that F.S. §736.0505(1)(a) specifically permits creditors of the settlor of a revocable trust to reach assets within a revocable trust during the settlor’s lifetime to the extent the property would not otherwise be exempt by law if owned directly by the settlor. It is a common misconception that because a revocable trust avoids probate, that it also protects the trust assets from the debts of settlor and the estate of the settlor. This is not the case. Revocable trusts, although not subject to probate administration, will typically be accessible to creditors to satisfy a judgment debt. It is well settled that assets in a revocable trust are included in the settlor’s gross estate for federal estate tax purposes,[9] and F.S. §733.707 permits creditors to reach assets that pass through an individual’s estate.
A second common misconception is that the trustee of a Florida revocable trust is required to file a “notice to creditors,” as provided under F.S. §733.2121.[10] In fact, and while it may be just semantics to some, the trustee of a Florida revocable trust is only required to file a “notice of trust,” if and when required under F.S. §736.05055.[11] The time frame for a creditor to file a claim against a revocable trust in the decedent’s estate is two years after the date of the decedent, as provided under Florida’s nonclaim statute, F.S. §733.710. However, it is often advantageous for clients to open a probate estate in addition to the trust administration to take advantage of Florida’s probate claim system, where the law generally limits the time for creditors to file claims against the estate to three months from the date of a notice to creditors as provided under F.S. §§733.2121 and 733.702.[12]
There is no comparable statute that provides creditors with the right to receive assets that have passed by pay on death (POD) or transfer on death designation (TOD), these assets avoid probate because they automatically vest in the designated beneficiary of the POD or TOD account upon the death of the decedent, and are not available to creditors of the decedent’s estate to satisfy any debts that the estate cannot sufficiently pay. The authors are not aware of any case law that would allow a creditor to reach such assets, so pay on death and transfer on death accounts have a possible advantage over revocable trusts. Some clients who have revocable trusts may be better off owning their accounts individually and having them “pay on death” by beneficiary trust designation to the trust.
Scrivener Protection Provisions
Our office always uses a “scrivener protector” provision, which indicates that our law firm or another law firm chosen by the client will have the power to correct clerical errors or other issues to assure that the intentions of the grantor are carried out. Typically, the provision indicates that the scrivener protector can only act with the consent of one or more individuals named in the provision.
Married Couples
Married couples pose a greater challenge with reference to choosing what kind of trust or trusts may be the best fit for them. Choices that we will review below include: 1) a joint revocable trust that may be treated as a tenancy by the entireties arrangement with full right of survivorship and control in the surviving spouse; 2) a JEST[13] trust that may lock all trust assets up irrevocably on the death of the first dying spouse for the surviving spouse and provide a new fair market value date of death income tax basis for the JEST trust assets; 3) a community property trust that is also designed to enable the couple to receive a fair market value income tax basis on the death of one spouse; 4) a revocable trust that may hold community property that was acquired when a couple resided in a community property state to obtain a new income tax basis on the first death while allowing the first dying spouse’s one-half share of a community property to be held in a protective trust for the surviving spouse; 5) or separate revocable trusts, which are the most common, but not always the best arrangement for affluent married couples.
Planners are strongly urged to carefully review joint trust documents before they are sent to a client or signed to make sure that there is clarity with respect to what rights each spouse has while both spouses are living, and after one spouse dies and the other survives. There is commonly a significant amount of confusion when trusts are drafted haphazardly or inconsistently and it not clear what the rights are responsibilities of each spouse will be during their joint lifetimes, and during the lifetime of the surviving spouse.
TBE Joint Trust
The most common joint trust for married couples with non-taxable estates should probably be the tenancy by the entireties trust, to assure a married couple that the assets placed in the trust would be protected from the creditors of each spouse as long as the creditor does not have a judgment against both spouses. However, confusion, drafting difficulties and lack of clarity in the Florida caselaw casts a cloud over what should be a common and easy to draft planning vehicle.
Most readers know that Florida is one of the few states[14] that provides “pure protection” for all kinds of tenancy by the entireties assets. Meaning general creditors owed money by one spouse cannot reach tenancy by the entireties assets, which can include real estate, physical objects, and intangible assets such as bank accounts, brokerage accounts, and contracts. Tenancy by the entireties assets are those that possess the following six “unities:” 1) unity of possession; 2) unity of interest; 3) unity of title; 4) unity of time; 5) survivorship; and 6) unity of marriage. These six unities can be somewhat complicated and may present traps for the unaware.
The beneficial ownership interest of a married couple in a revocable trust is an intangible that should be capable of qualifying as a tenancy by the entireties asset with proper drafting. The authors believe that the best way to draft a tenancy by the entireties revocable trust is to provide that the beneficial ownership interest of the married couple as grantors and sole lifetime beneficiaries is itself a tenancy by the entireties asset that will be completely owned and controlled by the surviving spouse.
While there is good authority for the proposition that a tenancy by the entireties revocable trust can exist, [15] the Florida caselaw has not been kind. In particular, a now retired bankruptcy judge in the Middle District of Florida has written opinions in joint trust where the trusts in question clearly did not qualify as tenancy by the entireties arrangements because the trusts became irrevocable and were held not only for the surviving spouse but also for the common children of the marriage. Such decisions have led some practitioners to incorrectly believe that a trust cannot hold property as tenants by the entireties.
In the case of In re Givans, 623 B.R. 635 (Bankr. M.D. Fla. 2020), the bankruptcy court concluded that a trust cannot hold real property as tenants by the entireties by using the following language in an opinion and a subsequent order: “Earlier, I found the debtor and his non-debtor spouse, Marna Givans, transferred a house to a joint revocable living trust they created. Because a trust cannot hold real property as tenants by the entireties, I sustained the Chapter 7 Trustee’s objection to exemption of the real property.”[16]
As mentioned above, the specific holding in Givans was correct, because the trust provided that on the death of one spouse the surviving spouse would receive income and the children would have a vested remainder interest, thereby violating the principle that both spouses must own a 100% undivided interest in TBE property. However, the above language from the subsequent order significantly expanded upon the court’s original treatment of the trust in In re Givans, and reads as a hard-and-fast rule applicable to all trusts. The memorandum opinion in the Givans case has led many practitioners to incorrectly believe that no trust can hold property as tenants by the entireties.
These jurisprudential errors on the part of the court will doubtlessly cause years of confusion in this area. Indeed, Florida remains a backwater state in this area of the law. While bankruptcy court decisions are like trial court decisions in that they are subject to appeal to federal district courts, bankruptcy court decisions are nonetheless published and bankruptcy court judges are generally very knowledgeable on debtor-creditor matters, but not always correct. Nonetheless, the authors believe that a properly drafted joint trust may qualify for tenancy by the entireties ownership.
States have begun eliminating the uncertainties regarding TBE property in trust by statute. Tennessee, Delaware, Virginia, Illinois, and Missouri all have statutes that generally provide that assets placed in a joint trust by a married couple can qualify as tenancy by the entireties assets pursuant to the laws of those states, but Florida does not have a similar statute.[17] The conflicting holdings in In re Givans and In re Romagnoli, 631 B.R. 807 (Bankr. S.D. Fla. 2021), have left Floridians in limbo.
Married couples who would like to be assured tenancy by the entireties treatment and avoidance of probate may consider using a Florida, Delaware, or Wyoming limited liability company to own assets, and a joint revocable trust that could receive ownership of the LLC on the death of the surviving spouse by a provision in the operating agreement of the LLC to provide for a “pay on death transfer” upon the second death. In Blechman v. Est. of Blechman, 160 So. 3d 152 (Fla. 4th DCA 2015), a pay-on-death transfer under the operating agreement of a New Jersey LLC was found to operate in this manner by a Florida court. There, the court held that by virtue of a provision in the controlling operating agreement of the New Jersey LLC, the decedent’s membership interest in the LLC immediately vested in his children upon his death, so that the interest was not a part of the probate estate.[18]
A belt and suspenders backup arrangement to the above can be facilitated by having the married couple sign an assignment of ownership Interest to be held in escrow and delivered only after the death of the surviving spouse. The document should clearly state that it will have no force and effect until after the death of the surviving spouse to transfer the LLC interest to the revocable trust at that time.
Similarly, certain assets such as the ownership of a professional corporation or PLLC stock that are subject to underlying operating agreements or articles of organization that limit the transfer of ownership may also become payable to a revocable trust upon the death or incapacity of the grantor by having a conditional assignment held in escrow or providing for transfer upon death under the operating agreement.
TBE Problem
A joint trust that does not provide for right of survivorship can be an important arrangement for a married couple to assure that trust assets, and assets that may pass to the trust after the death of one spouse, can be held safely for the surviving spouse and certain beneficiaries. For example, this planning tool may be of particular use for funding a credit shelter trust on the death of the first spouse, so that the trust assets can be protected from creditors, federal estate tax, and any propensity to transfer ownership to a new spouse or others.[19]
It is possible for such a trust to be held for the health, education, maintenance, and support of the surviving spouse without being subject to the creditor claims of the surviving spouse to the extent that such a trust is funded with assets owned by the first dying spouse.[20]
Section 736.0502 generally provides that a “third-party settled trust” established and funded during the lifetime or upon the death of an individual or individuals can benefit a debtor and not be available to the creditors of the debtor if the debtor’s access is limited by an “ascertainable standard” spendthrift provision.[21]
Separate Revocable Trust for Each Spouse
One advantage of a married couple having separate revocable trusts is to clearly establish who owns the assets of each trust so that these assets can pass to a separate trust for the health, education, maintenance, and support of the surviving spouse that will not be accessible to the surviving spouse’s creditors, or subject to federal estate tax in the surviving spouse’s estate.
Most Florida estate plans for the wealthy involve having separate revocable trusts for each spouse. Each trust becomes irrevocable on the death of the grantor spouse and becomes, or empties assets into a credit shelter trust that can provide benefits for the surviving spouse without being subject to federal estate tax. This method also offers creditor protection, protection from divorce of a subsequent spouse, and the ability to leave assets into trusts that can benefit descendants without being subject to federal estate tax upon the subsequent death of such descendants, which are also known as “generation skipping trusts.”
Unfortunately, having separate trusts requires a balancing act with respect to assets between the spouses. Normally there will be a step up in income tax basis and the funding of a credit shelter trust only on assets held under the revocable trust of the first dying spouse.
While it is possible to give the first dying spouse a general power of appointment over the revocable trust of the surviving spouse, as explicitly approved for the funding of a credit shelter trust in Private Letter Ruling 200403094, the use of such powers of appointment are unusual but certainly worthy of consideration.[22]
The Joint Exempt Step-Up Trust
With a joint trust, it can be unclear as to whether the assets are passing from one spouse to a trust for the other spouse, and whether half of the assets in the trust were funded to the protective trust after the first death by contribution of the surviving spouse.
In T.A.M. (technical advice memorandum) 9308002, the Service ruled that when one spouse dies holding a power of appointment over assets in a trust that were contributed by the surviving spouse to a trust for the health, education, maintenance and support of the surviving spouse, no step-up in basis with respect to such assets will occur, due to I.R.C. §1014(e).[23] Therefore, in the event spouses create and equally contribute to a trust that provides the first spouse to die with a general power of appointment over all trust assets, and the spouse with the general power of appointment dies before exercising the power, the portion of the trust assets that were contributed to the trust by the decedent spouse will not receive a step-up in basis. This outcome is due to the fact that the surviving spouse would be considered to have made a gift of such property to the decedent by transfer of a testamentary power of appointment over such property.[24] For this reason, joint trusts are considered by many practitioners to be planning vehicles that do not result in a step-up in basis for all property held in the trust. However, through restricting the exercise of the power of appointment by the first dying spouse and requiring advanced approval by non-adverse parties of the exercise of the power, a full step up on the joint trust may be achieved, as described below.
The Joint Exempt Step-Up Trust (JEST) is a hybrid form of joint trust that is designed to provide a new fair market value income tax basis for all trust assets to eliminate capital gains tax to the extent of the appreciation in assets up through the date of the first dying spouse’s death. With a tenancy by the entireties trust or a joint trust where the spouses have equal ownership and no specially situated powers of appointment only one half of a step-up to fair market value occurs.
The JEST trust is designed to provide a full step-up in income tax basis for all trust assets, and to specifically delineate that each spouse owns a designated share of the trust assets, which will usually be a 50% undivided ownership interest held by each spouse to allow for the first dying spouse’s share of trust assets to be held under a protective HEMS standard trust for the surviving spouse in a creditor proof and estate tax proof manner.
The JEST trust works by providing the first dying spouse with a power of appointment that is exercisable over the share of the surviving spouse in favor of creditors of the estate of the first dying spouse, which may be exercisable only with the approval of friends of the family who would not be expected to allow an exercise that would be harmful to the surviving spouse.
The assets constituting the share of the surviving spouse that the power is exercisable over will typically go into a separate trust that will not be accessible to the surviving spouse unless or until certain events occur which make the trust accessible. Normally the trust provides that the surviving spouse will benefit from the trust established from the share of the first dying spouse before any distributions would be received from the trust established from the share of the surviving spouse in order to receive a fair market value income tax basis.[25]
The JEST trust has three advantages over separate revocable trusts or a tenancy by the entireties revocable trust:
1) The step-up in income tax basis on the first death that can enable the surviving spouse to benefit from 100% of the sales proceeds from the assets of the trust if sold immediately after the first death.
2) A spouse having high liability exposure can own a very small share of the JEST, such as 1%, notwithstanding that a full step-up in basis may be achieved upon the first death.
3) 100% of the JEST trust assets may be used to fund credit shelter trusts that can benefit the surviving spouse without being subject to federal estate tax on the second death. For example, a couple having $12 million in assets in a JEST may have the entire $12 million pass to a credit shelter trust on the first death. If the couple had $6 million each in separate revocable trusts, only $6 million can be held under a credit shelter trust on the first death.
Medicaid Planning for Married Couples
In certain situations, when one spouse dies and assets are left to the surviving spouse, careful planning is required to ensure that the surviving spouse does not lose eligibility from public benefits programs, such as Medicaid. Unfortunately, a disposition funded directly from a revocable trust of a deceased spouse to a trust for the benefit of the surviving spouse may not work to preserve eligibility, because the Medicaid statute specifically indicates that an individual is considered to have established a trust that constitutes a countable asset for purposes of determining Medicaid eligibility “if assets of the individual were used to form all or part of the corpus of the trust and if any of the following individuals established such trust other than by will: 1) the individual, 2) the individual’s spouse….” [26]
It is also important to note that federal law provides a 60-month “look-back” rule, whereby assets transferred during the look-back period are treated as countable resources for eligibility purposes.[27] However, when assets are left by last will and testament or disposition to a trust established under such will, appropriate language can be used to facilitate providing the surviving spouse with additional support without jeopardizing eligibility for Medicaid or other public benefits such as supplement security income (SSI).
One concern is whether the surviving spouse could exercise the elective share and does not do so. A Medicaid recipient is treated as owning, or having an ownership interest in, anything the recipient is entitled to receive by inheritance, including the elective share, therefore, the elective share right can potentially result in loss of Medicaid eligibility and other public benefits for the surviving spouse.[28] Although Florida law does not require the surviving spouse to claim the elective share, Medicaid will view the refusal of the right to the elective share as a triggering event for a transfer penalty.[29]
This may be avoided by having the spouse of the Medicaid applicant establish a qualified special needs trust under their last will and testament. By funding this trust with a minimum of 30% of the deceased spouse’s estate, the trust satisfies Florida’s spousal elective share requirements while maintaining Medicaid eligibility for the surviving spouse, as funds in such a trust are not considered a countable asset. Additionally, this arrangement necessitates the appointment of a third party, such as a child or another relative, to act as the trustee of the qualified special needs trust.[30]
One question is whether cautious practitioners should always provide for the funding of a credit shelter trust by a trust established under the first dying spouse’s last will and testament, to keep the door open for Medicaid eligibility. It is noteworthy that a disposition from the revocable trust of a deceased spouse to a testamentary trust established under the last will and testament of that spouse will generally need only limited probate court involvement.[31]
It is important to mention that a JEST may also benefit the surviving spouse for his or her lifetime without having to be spent down, notwithstanding the fact that the surviving spouse may qualify for Medicaid and receive nursing home or at-home benefits, except that the federal statute provides that such trust must be funded from the probate estate of the first dying spouse.[32] For this reason, a revocable trust may state that assets in the revocable trust will pass to the probate estate of the first dying spouse, and then from the probate estate back into the revocable trust to fund a credit shelter trust to satisfy F.S. §409.9101.[33] However, as described above, the simpler alternative is to have the special needs trust established under the last will and testament, the only downside to this approach is that the spouse establishing such a testamentary special needs trust for the benefit of their spouse must pass-away in order for the trust to become effective.
Community Property Considerations
Many Floridians have moved to Florida after living in community property states where they have accumulated assets from earnings. Those individuals should be counseled on the advantages and disadvantages of leaving their assets in the community property mode, which is permitted under applicable caselaw, and also synthetically under the Uniform Disposition of Community Property Rights at Death Act, which was adopted by Florida in 1992.[34]
Many practitioners will form or continue the existence of a joint community property trust to hold such community property, and recognize that on the death of the first dying spouse the one-half share of such spouse can pass to a credit shelter trust to be formed and funded in a conventional manner, while the remaining half of the community property trust must pass to the surviving spouse or remain in the community property trust under the sole control of the surviving spouse.
Practitioners are well advised to consult with lawyers who are well versed with both Florida law and community property law, but they may most efficiently accommodate such situations by maintaining the existence of a joint community property trust that already exists or may be carefully formed and funded in addition to forming separate revocable trust for each spouse using their normal Florida forms. The separate revocable trusts may provide that the community property share of the first dying spouse that passes from the joint trust will pass to the revocable trust of the first dying spouse so that extensive customized drafting is not required.
Florida adopted the Florida Community Property Trust Act in 2021, which enables a married couple living anywhere in the world to establish a Florida community property trust that must have at least one Florida based trustee and must benefit only the married couple during their joint lifetime. In simulating traditional community property the Florida community property trust must provide that half of the assets will pass as if coming from the first dying spouse, and that the other half of the assets will be considered as owned by the surviving spouse. Unlike most community property jurisdictions, the creditors of one spouse, even on debts acquired during the marriage, may only reach that spouse’s half of the community property trust assets, making it less likely that a Florida community property trust will be respected as a mechanism to provide a full step-up of income tax basis on the death of the first dying spouse, according to one noted authority.[35]
Two of the other community property trust states (Alaska and South Dakota) allow the creditors to reach all the community property assets for debts acquired by one spouse during the marriage, this approach is closer to the approach in a traditional community property law state. Kentucky and Tennessee have similar creditor treatment as Florida under their respective community property trust acts.
Florida does not allow self-settled irrevocable trusts to be protected from creditors, in that the creditor of an irrevocable trust formed and funded by a Floridian is able to reach the maximum amount that the trustee of the trust would be able to give to the grantor. There are three notable statutory exceptions to this general rule:
1) First, a trustee may have the power to reimburse the grantor for income taxes paid by the grantor as the result of being considered to be the owner of an irrevocable trust for income tax purposes, even if such repayment occurs many years after the taxes are paid.[36]
2) Secondly, the grantor of a spousal limited access trust that benefits the grantor’s spouse who was married to the grantor at the time of funding of the trust for such spouse’s entire lifetime may become the beneficiary of that trust after the original spouse’s death, and the original spouse will be considered to be the contributor to that trust for creditor purposes.[37]
3) Similarly, the grantor of a lifetime income trust, also known as a QTIP trust will not be considered to be the contributor to that trust after the death of the life income spouse, even if the grantor spouse becomes a beneficiary of the trust at that time. Planners who represent married couples where one spouse has significant assets and the other has a short life expectancy may wish to consider establishing a SLAT and/or a lifetime QTIP for tax, creditor, and family protection purposes.
Additional Traps for the Unwary in Designing Trust Systems
Don’t lose the protection of Florida’s 10% and 3% valuation assessment caps. F.S. §§193.1554 and 193.1555 provide a “10% cap” on the assessed values of most types of commercial property, including non-homestead residential real property (i.e., apartments and other rental properties) and nonresidential property (i.e., commercial property and vacant land). The 10% cap means that the assessed value of the property cannot increase by more than 10% of its prior assessed value. The 10% cap applies automatically and does not apply to certain other real estate that already qualifies for favorable ad valorem tax treatment, such as agricultural or conservation property.
The protection of the 10% cap can be forfeited when there is a change of ownership or control. A change of ownership or control is defined as “any sale, foreclosure, transfer of legal title or beneficial title in equity to any person, or the cumulative transfer of more than 50% of the ownership of the legal entity that owned the property when it was most recently assessed at just value.” Certain transfers between husband and wife are excluded under the statutes. For publicly traded companies, the cumulative transfer of more than 50% of the ownership of the entity that owns the property through the buying and selling of shares of the company on a public exchange will not be considered a change of ownership, except where such transfer is made through a merger with or an acquisition by another company.
Similarly, the Save Our Homes Amendment to the Florida Constitution provides a 3% cap on annual assessment increases for qualifying homestead property, and if certain changes in ownership occur in the homestead property, it can trigger loss of the cap, and a new assessed value following the change in ownership. Generally, there are four categories of excepted transfers; 1) Transfers between husband and wife, 2) transfers where the same person is entitled to the homestead exemption following the change, 3) transfers that occur by operation of Florida’s homestead laws, and 4) transfers upon the death of the homesteader to a dependent.[38] As a result, property owners contemplating the transfer of their homestead property, non-homestead residential property, or commercial property to anyone or anything should first get in touch with their estate planner before finalizing such transfers.
In addition to the 3% cap on increases to the assessed value of the homestead, Florida’s favorable homestead laws also provide that the property owner is eligible to receive a property tax exemption of up to $50,000. The first $25,000 applies to all property taxes, and the additional exemption of up to $25,000 applies to assessed valuations greater than $50,000 and only to non-school taxes.[39] Homestead property in a properly drafted trust will qualify for this exemption. [40] However, note that the homestead tax exemption may not be based upon the residence of a trust beneficiary who lacks a present possessory right in the property under the trust instrument.[41] Therefore, the individual applying for the exemption must in fact have the present right to use and possess the residence in order to properly qualify for the homestead tax exemption.[42]
Conclusion
A wide range of revocable and irrevocable trusts are commonly used for estate and financial planning to avoid probate, provide creditor protection, and clearly delineate where assets should go on death. However, it is important to carefully consider the practical and tax implications of a particular trust structure before establishment. Individuals should be aware of the limitations on revocable trusts regarding creditor protection, and what types of assets are best owned outright and paid on death by beneficiary designation to the trust. Trust system design for married couples can be more complicated and involve considering many options, including separate revocable trusts for each spouse, joint trusts, and community property trusts. Special issues may arise such as the need to maintain public benefits eligibility for the surviving spouse or to facilitate a full step-up in basis for certain assets owned by the married couple. This can be a very challenging area of practice, even for the experienced and specialized practitioner. The days of using almost the same form for almost every category of client are over.
[1] Fla. Stat. §222.14: “Under this statute, the cash surrender values of policies issued upon the lives of citizens or residents of the state and the proceeds of annuity contracts issued to [Florida citizens], upon whatever form, shall not in any case be liable to attachment, garnishment, or legal process in favor of any creditor….” According to this statute, annuity contracts and life insurance policies are generally safe from creditors.
[2] A similar statute, Fla. Stat. §222.13(1) provides similar creditor protections in the decedent context. Fla. Stat. §222.13(1) (2008). However, in that context, Florida courts have previously held life insurance proceeds payable to a revocable trust were not exempt from creditors of the estate. Morey v. Everbank, 93 So. 3d 482 (Fla. 1st DCA 2012). In Morey, a settlor opened up a life insurance policy, naming a revocable trust as the sole beneficiary of the policy. Id. at 484. The First District Court of Appeal found that the proceeds of the policy, payable to the revocable trust of the decedent, were not protected from creditor claims of the decedent’s estate. Id. at 486. Consequently, the Florida Legislature amended Fla. Stat. §733.808(4) in 2014, providing that unless specific reference is made to the statute in the trust agreement, declaration of trust, or will, life insurance proceeds payable to a revocable trust of the decedent are deemed not to be included in the decedent’s estate.
[3] There has been some uncertainty as to whether homestead property transferred to a revocable living trust could be subject to a forced sale by a judgement creditor of the client, notwithstanding the Florida Constitutional homestead exemption. For example, in the case of In re Bosonetto, 271 B.R. 403 (Bankr. M.D. Fla. 2001), the bankruptcy court ruled that homestead property owned in a revocable inter vivos trust was not exempt property for purposes of the bankruptcy and was included in the bankruptcy estate, since the homestead was owned by a revocable inter vivos trust as opposed to a natural person. However, see In re Alexander, 346 B.R. 546 (Bankr. M.D. Fla. 2006), and In re Edwards, 356 B.R. 807 (Bankr. M.D. Fla. 2006), where the same Middle District Court reached the opposite conclusion, finding that real property in a revocable trust was eligible for the homestead exemption. Additionally, the attorney general, citing Fla. Stat. §196.041(2), has confirmed that a trust beneficiary specifically granted a life estate in real property by the trust may qualify for the homestead exemption. Op. Att’y Gen. Fla. 90-70 (1990); Op. Att’y Gen. Fla. 2005-52 (2005). Therefore, it seems very clear under current law that an individual’s homestead remains protected in a revocable trust, but not absolutely safe.
[4] Florida’s homestead law protects a resident’s primary home from a judgment creditor. Protection covers up to one-half acre within a municipality and up to 160 contiguous acres outside of a municipality. Exemption applies when the resident — a natural person — occupies the residence with the intent to make the home their permanent residence. Fla. Const. art. X, §4. There is no Florida statute specifically authorizing ladybird deeds. However, the general legal consensus is that ladybird deeds are authorized under common law, particularly by the Florida Supreme Court in Oglesby v. Lee, 73 So. 840 (Fla. 1917), and Aetna Ins. Co. v. La Gasse, 223 So. 2d 727 (Fla. 1969).
[5] Under Fla. Stat. §221.21(2)(a), beneficiaries of an IRA or pension plan who reside in Florida are protected from creditors on the death of the planned participant or IRA holder. Alan S. Gassman & Michael C. Markham, Gassman & Markham on Florida and Federal Asset Protection Law, Protecting the Intended Beneficiaries of Ira and Pension Plan Accounts (2019).
[6] In Citronelle Mobile-Gathering, Inc. v. Watkins, 934 F.2d 1180 (11th Cir. 1991), the court found th at the exemption available under §407(a) will not apply when the “reaching of Social Security benefits is not going to impair the ability of the recipient to satisfy his or her basic needs.” See also In re Lazin, in which the court held that Social Security proceeds did not lose their exempt simply because they were paid and deposited into a bank account. However, summary judgement was precluded as to the issue of whether the accumulated Social Security proceeds were exempt because an evidentiary hearing was necessary to determine “whether the Debtor has the necessary resources for continuing basic care and maintenance without the accumulated Social Security benefits.”
[7] Law v. Siegel, 134 S. Ct. 1188, 1196 (2014). The holding of Citronelle Mobile-Gathering, Inc. v. Watkins has been abrogated by In re Franklin, 506 B.R. 765, 768 (Bankr. C.D. Ill. 2014), finding that equitable exceptions to §407 of The Social Security Act’s exemption for social security benefits are not permitted. See also In re Carpenter, 614 F.3d 930 (8th Cir. 2010), finding that “§407 operates as a complete bar to the forced inclusion of past and future social security proceeds in the bankruptcy estate.”
[8] This may be achieved by giving the settlor the right to veto trust distributions and to appoint trust assets on death, with the power of appointment limited so that it is only exercisable with the consent of an adverse party. “Under federal gift tax principles, a gift made to a trust is incomplete if the person making the gift has a power to appoint the trust assets on death, and, according to CCA 201208026, also has the power to prevent trust assets from being paid to individuals other than the donor.” See Alan Gassman, Christopher Denicolo & Kacie Hollendale, JEST Offers Serious Estate Planning Plus for Spouses (Parts 1), Estate Planning (Oct./Nov. 2013).
[9] I.R.C. §2038(a).
[10] Under §733.701 unless a creditor’s claims are otherwise barred by §733.710, every personal representative shall cause notice to creditors to be published and served under Fla. Stat. §733.2121 (emphasis added).
[11] The notice of trust notifies the probate administration of the existence of the trust. Section 736.05055(1) provides that a notice of trust shall be filed upon the death of a settlor of a trust “with respect to which a decedent who is the grantor has at the decedent’s death a right of revocation,” by cross referencing to §733.707(3). The filing of a notice of trust is mandatory, as provided under §736.0105. While F.S. 733.701 notice to creditors refers to personal representatives of an estate, F.S. §736.05055 make specific reference to trustees.
[12] Fla. Stat. §§733.701, 733.702. Section 733.702 provides “the notice shall state that creditors must file claims against the estate with the court during the time periods set forth in s. 733.702, or be forever barred.” See also Jeffrey S. Goethe, Considerations for Using a Trust, BarnesWalker (Oct. 20, 2017), https://barneswalker.com/considerations-for-using-a-trust/. Goethe observes, “Creditors have three months to file a claim if a notice is published in conjunction with a probate proceeding. Without probate, creditors have two years to file a claim. Therefore, a trust administration actually takes longer to handle creditor claims. Because the administration of a trust does not involve court supervision, there is no process to impose a three-month deadline for creditors, so creditors have up to two years to file a claim.” Id.
[13] Joint exempt step-up trust.
[14] Florida is joined by Alaska, Arkansas, Delaware, District of Columbia, Hawaii, Maryland, Massachusetts, Mississippi, Missouri, New Jersey, Oklahoma, Pennsylvania, Rhode Island, Tennessee, Vermont, Virginia, and Wyoming. Prashant Thakur, List of States Having Tenancy by the Entirety, Internal Revenue Code Simplified (Oct. 11, 2019), https://www.irstaxapp.com/list-of-states-having-tenancy-by-the-entirety/.
[15] See In re Romagnoli, 631 B.R. 807 (Bankr. S.D. Fla. 2021), where the court ruled that the creditor protection provided to tenancy by the entireties property is not lost when it is transferred to a joint trust. There, the court’s holding that the TBE property was exempt from attachment by the bankruptcy trustee, focused on the fact that neither the debtor nor his wife had the ability to alienate the property “without the joinder of the other.” See also R. Craig Harrison, Trusts: TBE or Not TBE, 87 Fla. B. J. 30 (May 2013). “First Nat’l Bank v. Hector Supply Co., 254 So. 2d 777 (Fla. 1971), addressing a bank account, held that a TBE interest was created in the account so long as the signature card was drafted in a manner consistent with the essential six unities of the TBE estate. This standard was reaffirmed in Beal Bank, SSB v. Almand and Associates, 780 So. 2d 45 (Fla. 2001), which pronounced that strong public policy considerations favored the finding of a TBE interest in property — at least with respect to creditors. Based on these common law standards, the TBE property interest is created by 1) the intention of the husband and wife to create the tenancy, and 2) the establishment of the six essential characteristics associated with TBE property.” Harrison goes on to cite In re Lyons’ Estate, 90 So. 2d 39 (Fla. 1956); Bailey v. Smith, 103 So. 833 (Fla. 1925); and Hagerty v. Hagerty, 52 So. 2d 432 (Fla. 1957), in addition to Hector Supply, for the proposition, with regard to bank accounts, that if the intent to create a TBE interest is set forth in the account signature card, the intent to create the TBE interest would be conclusive. Furthermore, Harrison’s position is that a trust can be drafted to meet the requirements as set forth in Beal Bank and Hector Supply through the use of a simple statement in the trust language that the settlors intend for the creation of a tenancy by the entireties interest for all property transferred.
[16] In re Givans, 631 B.R. at 930.
[17] The Beal Bank holding has been codified by Fla. Sta. §655.79: Any bank account owned by husband and wife is presumed to be a tenants by entireties account unless there is clear and convincing evidence of their contrary intent. Tennessee Code Ann. §35-15-510 enables married clients to transfer property to a joint trust — the Marital Asset Protection Trust (MAP Trust) — and obtain the same asset protection as property held as tenancy by the entirety. See also Del. Code Ann. tit. 12, §3334 (West), Va. Code Ann. §55.1-136 (West), MO Rev. Stat. §456.950, 765 ILCS 1005/1c.
[18] Id. But see Tita v. Tita, 334 So. 3d 646 (Fla. 4th DCA 2022), in which a Florida court found that the controlling operating agreement was ambiguous and did not unquestionably contain language specifically addressing the disposition of the interest in the company upon death. The critical fact to understanding the holding in Tita is that the operating agreement did not specify to whom the decedent’s interest should be passed nor did it provide that such interest would vest in another immediately upon the decedent’s death. The lesson from Tita is to make sure that pay on death transfers of this kind are carefully drafted with the help of an attorney who specializes in this area of the law.
[19] A “credit shelter trust,” also called an A-B trust or a bypass trust, is a key estate planning tool for married couples. The trust utilizes the estate tax exemption of the first spouse to die, and is not taxable in the surviving spouse’s estate.
[20] I.R.C. §2041(b)(1)(A): A power to consume, invade, or appropriate property for the benefit of the decedent which is limited by an ascertainable standard relating to the health, education, support, or maintenance of the decedent shall not be deemed a general power of appointment.
[21] Trust assets protected by a spendthrift provision technically become the property of your trustee, rather than your beneficiary. The provision should include language prohibiting creditors from obtaining any trust assets intended for a specific beneficiary. However, once the assets are distributed outright to the beneficiary, and the beneficiary receives them, they could be turned over to the creditors.
[22] The IRS has found that using a general power of appointment in this way will result, upon the first spouse’s death, in the surviving spouse being treated as having made a completed gift to the deceased spouse of the assets that the surviving spouse contributed to the trust. See Priv. Ltr. Ruls. 200101021, 200210051, and 200403094. PLR 200403094 allowed the funding of a credit shelter trust for the surviving spouse of assets from the revocable trust of the surviving spouse when the first dying spouse had a general power of appointment over such assets, and such assets were not included in the surviving spouse’s estate for estate tax purposes at their later death.
[23] I.R.C. §1014(e) provides that appreciated property acquired by a decedent by gift during the one-year period ending on the date of the decedent’s death will not receive a step-up in basis if such property is acquired from the decedent by the donor of such property.
[24] 1 Est. Plan. for Farmers and Ranchers §4:73.60 (3d ed.), credit shelter trusts, portability, and income tax planning.
[25] With a separate trust, the deceased spouse’s trust becomes irrevocable at their death, and the surviving spouse has limited control over these assets, typically restricted to withdrawals for health, education, maintenance, and support. Mike Piershale, Joint Trusts or Separate Trusts: Advice for Married Couples, Kiplinger (Nov. 20, 2020), https://www.kiplinger.com/retirement/estate-planning/601782/joint-trusts-or-separate-trusts-advice-for-married-couples. The trust may limit distributions of the assets to HEMS, which is an ascertainable standard recognized by the IRS and can be vital for protecting the trust’s assets. The HEMS standard serves to restrict the trustee from making distributions that can unnecessarily diminish the trust, while providing appropriate support for the beneficiary. By including this language in the trust, a grantor can prevent the beneficiary from having unlimited access to the trust’s assets. Law Office of Gem McDowell, What Is HEMS and What Does It Mean for Trustees? (Apr. 1, 2020), https://gemmcdowell.com/what-is-hems-and-what-does-it-mean-for-trustees/.
[26] 42 U.S.C. §1396p(d)(2)(A)(ii). See also Blakely Moore, The Qualifying Special Needs Trust, PTM Trust and Estate Law, https://ptmlegal.com/blog/the-qualifying-special-needs-trust, providing that “Despite [Fla. Stat. 732.2025(8)]’s clear language that the QSNT may be created before or after death, a trust created inter vivos by one spouse for the benefit of the other spouse is considered to be a first-party trust. Thus, the assets in the inter vivos trust would be considered to be a countable asset unless the trust was a disability trust. However, a trust established by the spouse “by will” is not a countable asset. Thus, a QSNT ought to be created in the decedent’s last will and testament. (Endnotes removed).
[27] 42 U.S.C.A. §1396p(c)(1)(B)(i).
[28] Moore, The Qualifying Special Needs Trust, citing ESS Public Assistance Policy Manual §1640.0305.04.
[29] Shalloway & Shalloway, P.A., Qualified Elective Share Special Needs Trust, https://www.shalloway.com/qualified-elective-share-special-needs-trust/. See also §11:5. Considerations when planning — Protecting ill spouse, Jerome Ira Solkoff & Scott Solkoff, 14 Fla. Prac. Elder Law §11:5 (2022-2023 ed.), providing the following apt description of how these laws work. “For a surviving spouse who receives Medicaid benefits, [taking the elective share] would destroy Medicaid benefits as, then, the surviving spouse/Medicaid recipient would have too much income and/or assets to comply with the rules. Furthermore, even if the surviving spouse/Medicaid recipient does not make the election, the state could make the claim for the Medicaid recipient or the state could claim that the surviving spouse/Medicaid recipient made a gift of this amount. The state could either penalize the surviving spouse by disqualifying him or her from receiving Medicaid benefits for a period of time until the elective share funds have been spent down to below the Medicaid asset limit or the state could confiscate the elective share funds to reimburse it for Medicaid already paid out. What may result is a person left without Medicaid or other health care benefits who is destitute. However, the decedent, prior to death, could create a qualifying elective share special needs trust which will: (1) satisfy the marital election claim requirement; (2) preserve Medicaid benefits for the surviving spouse; (3) allow funds to be used to provide the surviving spouse items or services not provided by Medicaid; and (4) avoid Medicaid repayment requirement.”
[30] Shalloway & Shalloway, P.A., Qualified Elective Share Special Needs Trust.
[31] Lillesand, Wolasky & Fanzlaw, Special Needs Trusts, Fl-Cle 17-1, “Inter vivos third-party SNTs retain independence from court oversight, unless the court’s jurisdiction is affirmatively sought by filing an independent action pursuant to the Florida Trust Code. The same is not necessarily true of trusts that are established after death, or at least those that are established through a Last Will and Testament. If not specifically part of the probate administration, testamentary special needs trusts are at least generally established contemporaneously with the probate administration, which involves at least some court oversight in ensuring that the trust is properly funded.”
[32] 42 U.S.C.A. §1396p(b)(4) (“For purposes of this subsection, the term “estate,” with respect to a deceased individual — (A) shall include all real and personal property and other assets included within the individual’s estate, as defined for purposes of State probate law.”).
[33] Known as the Medicaid Estate Recovery Act, Fla. Stat. §409.9101 mandates that Florida seek recovery from the estate of a Medicaid recipient. This statute essentially creates a debt that is paid upon the death of the Medicaid recipient through their probate assets. The right to recovery is generally limited to the value of medical services provided.
[34] Probate, Trusts and Guardianships — General Amendments, 1992 Fla. Sess. Law Serv. Ch. 92-200 (H.B. 1901) (West).
[35] See Alan Gassman & Chris Denicolo, The Florida Community Property Trust: Rethinking Client Trrust Logistics with a New Powerful Catalyst, Leimberg Information Services (Jul. 8, 2021). See also Jonathan G. Blattmachr, Howard M. Zaritsky & Mark L. Ascher, Tax Planning with Consensual Community Property: Alaska’s New Community Property Law, Real Prop., Prob. and Trust J., Vol. 33, No. 4 (Winter 1999).
[36] Fla. Stat. Ann. §736.08145 (West).
[37] Fla. Stat. §736.0505(3) was amended to provide for this in July 2022.
[38] Richard S. Franklin & Roi E. Baugher III, Protecting and Preserving the Save Our Homes Cap, 77 Fla. B. J. 34 (Oct. 2003).
[39] Fla. Const. art. VII, §6, states, “Every person who has the legal or equitable title to real estate and maintains thereon the permanent residence of the owner, or another legally or naturally dependent upon the owner, shall be exempt from taxation thereon…up to the assessed valuation of twenty-five thousand dollars….” See also Fla. Stat. §196.031.
[40] Fla. Stat. §196.041 provides, “A person who otherwise qualifies by the required residence for the homestead tax exemption provided in s. 196.031 shall be entitled to such exemption where the person’s possessory right in such real property is based upon an instrument granting to him or her a beneficial interest for life, such interest being hereby declared to be ‘equitable title to real estate,’ as that term is employed in s. 6, Art. VII of the State Constitution; and such person shall be entitled to the homestead tax exemption irrespective of whether such interest was created prior or subsequent to the effective date of this act.”
[41] Fla. Admin. Code Ann. R. 12D-7.011.
[42] Fla. Stat. §196.041. See also Franklin & Baugher III, Protecting and Preserving the Save Our Homes Cap.
Alan S. Gassman, J.D., LL.M., is a Florida board-certified trust and estates lawyer who founded the law firm of Gassman, Crotty & Denicolo, P.A., in Clearwater in 1987. He has an undergraduate degree in business and accounting from Rollins College in Winter Park, and both a law degree and post-law master’s degree (LL.M.) in taxation from the University of Florida.
Significant work has been contributed to this article by Anthony Del Rosario and Jeffrey Southerland.
Brock Exline graduated from Stetson University College of Law in May 2023, where he served as president of the Business Law Society. He will continue his career with Gassman, Crotty & Denicolo after taking the Florida bar exam. As a law clerk with the firm, he has helped co-author articles on community property, homestead assessment limitations, SLAT planning, and more.
Peter Farrell is a third-year law student at Stetson University College of Law and intends to pursue an LL.M. in taxation. He is a law clerk at Gassman, Crotty & Denicolo, P.A., and will be joining the firm as an associate attorney.
This column is submitted on behalf of the Tax Section, Mark R. Brown, chair, and Charlotte A. Erdmann, Daniel W. Hudson, Angie Miller, and Brian Harris, editors.
