Creating a revocable trust to hold title to a person’s assets is often thought of as the best way to avoid probate. Probate is often feared and always thought to be avoided because it is believed that it involves substantial attorney’s fees, court costs, and long delays. Creating a revocable trust, however, is not always the best estate plan for certain individuals and under certain circumstances.
Creating revocable trusts for spouses who own most assets jointly and who intend to leave them at death to the surviving spouse may not be the best planning strategy.
Consider the following. A married couple in Florida owning assets jointly as husband and wife are presumed to own them as “tenants by the entireties” unless otherwise stated in the ownership document or if they acquired such assets when they previously lived in a community property state such as California, and have not terminated their community property form of ownership.
There are two significant benefits to tenancy by the entireties ownership. The first is that a judgment against only one spouse does not attach as a lien on tenancy by the entireties assets while both spouses are alive, which is a built-in form of asset protection. A judgment against only one spouse will only attach to certain separate non-exempt assets of the spouse against whom the judgment was entered.
The second benefit of tenancy by the entireties ownership is that at the death of the first spouse, those assets are held solely by the surviving spouse without any probate proceeding or other administration.
If a married couple wants to create a revocable trust for each spouse, they would have to terminate their tenancy by the entireties ownership by transferring joint assets (presumable a onehalf interest), to a separate revocable trust for each spouse. Undoing the joint ownership eliminates the asset protection for non-exempt assets held in each trust. More significantly, however, at the death of the first spouse trust administration is required for the deceased spouse’s trust, which usually involves payment of fees for the successor trustee and for the attorney for the successor trustee. If a spouse wants to leave most or all of his or her assets to the surviving spouse, it usually makes no sense to undo tenancy by the entireties ownership during life only to give the deceased spouse’s interest in the same asset to the surviving spouse.
Creating a joint revocable trust and transferring tenancy by the entireties assets to the joint trust does not maintain tenancy by the entireties ownership, which allows such form of ownership only by a married couple. Ownership by co-trustees of a trust even if they are married to each other does not qualify. Additionally, at the death of the first spouse, trust administration is required even if there is no probate proceeding. Trust administration after the death of the trust grantor is not free. Furthermore, in and of itself a revocable trust does not provide any tax advantages or any asset protection during the life or after the death of the trust grantor.
Common situations in which establishing a revocable trust may be advisable include, but are not limited to, the following: (1) an individual, whether married or single, is the sole owner of business assets, investment assets, or non-retirement financial assets having significant value, or out of state real property; (2) an individual owns out of state real property; (3) a couple owns out of state real property located in a state that does not have tenancy by the entireties ownership; and (4) a couple who owns community property assets and they want to maintain that form of ownership.
Certain assets are not usually transferred to a revocable trust include: (1) retirement accounts; (2) tangible personal property such as automobiles, furniture, furnishings, and appliances; and (3) a single person’s homestead if it is the sole asset of the trust.
There are attorney’s fees and expenses for establishing and funding a revocable trust as well as fees for trust administration after the death of the trust grantor. Florida Statutes has a “presumed reasonable” (but not mandatory) compensation schedule for the attorney for the trustee for trust administration after the death of the trust grantor. The presumed reasonable fee is 75% of the presumed reasonable fee for the attorney for the personal representative for probate administration. When added to the fees and expenses for setting up and funding a revocable trust, the total fees expended may not result in any savings for a married couple or any real savings for an unmarried client with limited non-exempt assets.
Also consider that probate is not always expensive or lengthy. Often an abbreviated form of probate called “summary administration” is available if a deceased person’s “non-exempt” assets do not exceed a total of $75,000, which total excludes the value of exempt homestead and exempt personal property. Summary administration will identify and remove exempt assets from the probate process and shorten the creditor claims period by serving and publishing a notice of the probate proceeding to ascertainable creditors. Summary administration can usually be completed within a few months. Attorney’s fees for summary administration may not exceed the fees for creating and funding a revocable trust and for trust administration after the death of the trust grantor.
Estate planning usually involves minimizing or eliminating probate when feasible and to the extent advisable. There, however, are two potential benefits to probate. First, the two-year statute of limitations for claims by non-federal creditors against a deceased person’s estate can be shortened to three months from the date the creditor is provided notice of the probate proceeding. Second, “exempt” assets are identified and removed by court order from the probate proceeding (e.g., homestead passing to a relative; furniture, furnishings, and appliances in the homestead passing to a surviving spouse or to a child up to a value of $20,000; and two automobiles passing to a surviving spouse or to a child). Furthermore, attorney’s fees in probate cannot be based on the value of the exempt assets.
If there is no probate proceeding, assets held in a revocable trust at the death of the trust grantor are subject to the claims of the deceased person’s non-federal creditors for two years after the date of death of the trust grantor. Furthermore, if the successor trustee makes full distribution of trust assets prior to expiration of the claims period, an unpaid creditor can pursue its claim against the trustee personally.
In conclusion, a revocable trust is not for everyone and, when applicable, is not for all assets that a person owns. Because much misinformation circulates about probate and revocable trusts, it is advisable for a person to meet with an experienced estate planning lawyer to discuss appropriate estate planning strategies that best fits that person’s situation.