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Who Owns the Property in a Revocable Trust?

Sep 21, 2022 | Financial Trust Legal Blogs | Elder Law P.A

In terms of creating a revocable trust Florida has seen an increase in interest. Revocable trusts have become a popular option when considering estate planning. Who owns the property in a revocable trust in Florida? In general, the trust maker (aka grantor or settlor) creates a trust, which is a legal entity that will hold the assets on behalf of the grantor. The grantor will also select a trustee to oversee or manage the assets being held in the trust for the benefit of the beneficiaries. The trustee may be a person or a legal entity.

If the assets are looked after by a legal entity or a third party, though, who actually owns the property in a revocable trust in Florida? This is important to know for many reasons, one of which is the possibility of tax implications.

THE REVOCABLE TRUST

A revocable trust is essentially a legal agreement whereby the trust maker transfers the assets or real estate property to a trustee for the benefit of a third party, which is usually the beneficiary. There are two basic types of trusts: a revocable trust and an irrevocable trust.

The most important thing to know about a revocable trust is that it can be altered, amended, changed, or even revoked during the lifetime of the grantor. On the other hand, an irrevocable trust cannot be altered, revoked, or amended once it has been created.

Following the death of the grantor, all revocable trusts automatically become irrevocable.

Types of assets usually transferred to a trust include:

  • Real estate property
  • Jewelry
  • Bank accounts
  • Certain investments
  • Shares, stocks
  • Pension

All your assets, such as real estate, bank accounts, and investments need to be formally transferred to the trust before your death to obtain the maximum benefit from the trust. This process of placing assets in a trust is known as funding. This is a formal process where the ownership of the assets is changed, retitled, and assigned to the trust. Any asset that is not rightfully transferred to the trust may be subject to probate. Further, some assets cannot be transferred to the trust because it may lead to tax issues. It is important to consult with an estate lawyer when creating a trust so that you are fully aware of what assets can and cannot be transferred to the trust.

WHO OWNS THE PROPERTY IN A REVOCABLE TRUST?

In all cases, the trustee will manage the trust assets according to the provisions stated in the trust agreement. A revocable trust in Florida allows the grantor to still have control over the assets within the trust by naming him or her as the trust’s trustee. Doing so will allow one to avoid probate and transfer the assets to the beneficiaries without the use of the court system.

Besides the grantor being named the trustee, one also has the option of naming another person, a lawyer, or a financial lender to serve as the trustee. If the trust is revocable, it can be modified, changed, or even canceled, as long as the grantor is not incapacitated. Further, by transferring assets to a revocable trust, one slowly mitigates the tax liability; however, this will depend on whether the trust is revocable or irrevocable.

Legally, the assets held in a revocable trust belong to the grantor. Even though the assets may have been renamed or retitled when placed in a trust, the grantor is still liable for reporting any capital gains or income taxes incurred by the assets within the trust.

Unlike property in a revocable trust, all property in an irrevocable trust is owned by the trust itself. Once the grantor has created the irrevocable trust and signed the agreement, the grantor has no legal rights to ownership of the assets held within the trust.

INCOME TAX AND TRUSTS

Each year, the trustee is required to file an annual income tax return. The taxable income, credits, and any deductions are filed in the same way as any individual or business. In general, the beneficiary will pay taxes on the distribution he or she receives from the trust income. The trust itself does not pay any taxes. However, the beneficiary is not responsible for any tax on the principal because the IRS assumes that it was taxed before it was placed in the trust. When the trust makes a distribution, it will indicate how much interest the beneficiary has earned and the amount of tax payable. If the beneficiary is the trust maker, then he or she will have to pay the taxes. The trust will use the beneficiary’s SIN (Social Insurance Number) as its tax ID number. Any income that is not distributed to the beneficiary will be taxable to the trust.

Like a revocable trust, the irrevocable trust also has tax implications. In this case, however, the trustee will file a tax return. Because the irrevocable trust is a distinct legal entity, it will have its own tax identification number (TIN). Hence, any income tax owed by the trust is paid out by the trust and not the grantor or the trustee.

TRUSTS AND CREDITORS

When it comes to creditors, the grantor needs to be aware that despite the popular belief that revocable trusts are a shield against creditors, this is a myth. Revocable trusts only offer partial protection from creditors. The trust law in Florida does not have a specific law or requirement for identifying creditors upon a death. Creditors have up to two years from the date of death to file a claim against the state. That’s a long time to wait to distribute any other assets among beneficiaries. Some people choose to open probate administration to utilize the probate claim process. Probate law limits the time creditors have to file claims to three months from the date of notice, generally speaking.

SPENDTHRIFT PROVISION

In Florida, when trust assets remain in the trust after the decedent’s death, beneficiaries’ interests can be protected from creditors if a “spendthrift” provision was in the trust agreement. Florida has laws offering special protection to a variety of assets, including those assets owned together by a husband and wife, known as “tenants by entirety.” A knowledgeable attorney should be consulted to help with these types of issues.

TRUST FUNDING

Once the trust has been funded, it will be managed by the trustee according to the trust agreement. In most cases, the trust agreement will permit the trustor to withdraw any amount of assets from the trust at any time. Further, if you become disabled or incapacitated, the trustee will manage the assets, make investment decisions, pay your bills, and transfer money to you, if needed. This is one major benefit of a revocable trust as it avoids a court-appointed guardian overseeing your assets.

Following your death, the trustee will be responsible for paying all the taxes and bills of creditors and then distributing the assets to the named beneficiaries in the trust document.

CONCLUSION

Who owns the property in a revocable trust? Trusts are a useful way to protect your assets when planning strategies for your estate but, at the same time, it is important to work with a lawyer experienced in and knowledgeable about trust and will matters. A revocable trust in Florida is a great way to pass the assets to your beneficiaries, but they also have income tax implications that you should know about. By consulting with an estate lawyer, you may learn of several options for protecting your assets, while also saving money. Elder Law, P.A. has a knowledgeable staff who specialize in creating trusts and wills. Call us today at 1-561-933-4465 to learn more.

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