In last month’s article, I discussed the various ways individuals can hold title to real property in Florida. These were as tenants in common, joint tenants with full rights of survivorship and as tenants by the entireties. These estates are the most common but in many cases, they are not the best approach for owners of investment property, rental properties, second homes (in or outside the state of Florida) and foreigners. In these cases a different approach to ownership should be considered. Because of the tax and estate issues involved in this discussion, you should always seek professional legal and tax help before choosing how to hold title to these type properties, as no one method is best.
The most common method for ownership is the use of a trust. The benefit of trust ownership is that it allows for a transfer of the property outside the estate of the individual owner. For example, If a husband and wife have a home in New York and by a vacation home in Florida in Boca Raton, when the first spouse dies, the property passes, by operation of law, to the surviving spouse (simply record a death certificate and an affidavit of continuous marriage to clear title). However, when the second spouse dies, an ancillary administration of the surviving spouse New York estate must be completed in order to clear title. This is often a surprise to the surviving children, and can delay sale of the property in Florida for months.
By creating a trust to hold title to the property, this ancillary administration is avoided. The most common trust is a Revocable Living Trust. This type of trust allows the settlors to retain the power to cancel the trust or take trust action without permission of the beneficiaries (or the trustee(s) if different than the settlors themselves. In the scenario above, the husband and wife create a trust naming themselves as the Co-Trustees, and their preferred heirs as the beneficiaries.
They also provide a provision that upon the first spouse’s death, the second spouse remains the sole trustee and then upon the last spouse’s death, a successor trustee is appointed (either a friend, relative, attorney or one of the beneficiaries) who then has the powers provided for in the trust. These powers can be as broad as the original trustees or can be specifically limited, such as requiring the property be deeded to a specific person or charity. However, no probate of the last spouse’s estate is needed. To clear title only the recording of a death certificate and a trust certificate with relevant portions of the trust attached is necessary.
Generally speaking, Revocable Trusts do not infer any tax benefit and provide no creditor rights protection to the settlors. The property in the trust is deemed the settlors property for tax and creditor claims. This is because the settlors retain control over the property through the revocable nature of the trust. Therefore a Revocable Trust is not a good vehicle to protect owners of multiple properties where the risk of tenant lawsuits could result in substantial damage claims.
Revocable Trusts do provide the ability to protect the trust from the claims of the creditors of the beneficiaries of the trust. By including a spendthrift clause in the trust, the funds and assets held by the trust that would go to a beneficiary cannot be reached as long as the funds either remain in the trust and the distribution of assets is discretionary to the trustee (and not mandatory). With proper drafting, the funds can be used to benefit the credit risky beneficiary without letting creditor’s reach those funds.
Trust usage does have its drawbacks. It is an immediate expense to create a trust that may never be used to avoid probate. It breaks the special creditor’s right protection afforded property owned by husband and wives in Florida. It does not offer any creditor or tax protection. Many people create a trust and fail to put all their assets in the trust, which then requires some level of probate. However, in many cases a trust makes sense, especially if done as part of a comprehensive estate plan.
Michael J Posner, Esq., is a partner in Ward, Damon, Posner, Pheterson & Bleau, P.L., a mid-sized real estate and business oriented law firm serving all of South Florida, with offices in Palm Beach County. They specialize in real estate trust matters and can assist in advising on and creating trusts. Mr. Posner can be reached at 561.594.1452, or at firstname.lastname@example.org