What is a Living Trust?
Think of a Living Trust as a bucket on paper. A trust is an agreement between the Trustee and the Trustmaker (also called a Settlor or Grantor) whereby the Trustee holds title to the assets for the benefit of the Trustmaker and other named beneficiaries. A Living Trust usually is an agreement with yourself that while you are alive and well, you maintain total control of your property and may do whatever you’d like with that property. Then upon your disability, it names a successor Trustee who will manage the assets for your benefit. Then upon your death, it designates a successor and how the property is to pass to your beneficiaries.
To go back to the bucket theory, think of it as a bucket you carry along while you are alive, and if you need an asset, you take whatever you need out of the bucket, and as you receive or purchase an asset, you put it into the bucket. If you become ill, you hand the bucket off to someone else to take care of the assets. It is that simple.
Do you have to be wealthy to have a Living Trust?
No, you don’t. However, a Living Trust is more expensive than a typical will, and the money you spend to set it up is minute compared to the money you save in probate costs upon death. So do you want to pay more now to save more later or pay a little now to pay more later?
Why a Living Trust?
The primary purpose of a Florida Living Trust is to spare your beneficiaries the delay, publicity, and expense of a public probate court proceeding. In Florida, a probate court proceeding can take anywhere from 8-15 months, depending on the size of the estate and whether or not a hearing is needed. However, with a Florida Living Trust, your assets can pass to your beneficiaries without delay, usually within a month or two.
A Living Trust also allows you to do disability planning to avoid having to set up guardianship in the future. This alone is a significant benefit to setting up a living trust and transferring all of your assets into the living trust.
Types of Living Trust?
There are two types of living trusts: revocable and irrevocable. A revocable living trust keeps you in control of your assets while you are still living and allows you to change beneficiaries, modify the terms or even revoke the trust.
An irrevocable living trust is one you do not control and cannot be changed or revoked. However, tax benefits to an irrevocable trust are not available with a revocable trust. Generally, an irrevocable trust is not subject to estate taxes. On the other hand, an irrevocable trust is only available in certain situations.
How to set up a Living Trust?
Many websites out there say they will set up a Living Trust for you by just answering a few questions. However, I suggest you see an attorney to set up a Living Trust for you. I have seen some of the trusts created online, and when I review what they say to the client, they do not pass the property according to the client’s wishes. Sometimes they give property to people that the client wanted to disinherit!
Estate Planning For Business Owners
Many business owners in Northeast Florida have significant assets but no estate plan in place or no plan on how to exit their businesses. This blog will focus on how to estate plan around your business and how to find a way to exit your business.
As far as estate planning for your business goes, a Living Trust is the best way to ensure continuity in your industry. A Living Trust is a Grantor Trust for taxation purposes, so it will qualify as a shareholder for an S corporation. A Grantor Trust is a trust in which the grantor retains certain powers over the trust (such as the ability to revoke the trust) so that all income is reflected on the grantor’s income tax return. For IRS purposes, the trust does not exist since everything tax-wise is reflected personally.
The Living Trust will say who will take over as Trustee of the trust (owner of the business) should you become disabled or pass away. Once the trust is set up, you will transfer your company ownership into your trust. For a corporation, that would be re-issuing new stock in the name of your Living Trust. If an LLC, you would re-issue your membership interests in the name of your Living Trust.
A Living Trust is better suited for owning your business because of the continuity of ownership. If you only have a Will-based estate plan, then your Durable Power of Attorney would control who can run the business. However, guardianship must be set up to run the business if your power of attorney is not accepted for any reason. A Living Trust avoids all of these problems.
When it comes to leaving your business, there are only two ways: involuntarily or voluntarily. You need to plan for both! Involuntarily means you leave via disability or death. Voluntarily means you go when you want to via a sale to a third party, transferring the business to family or key employees. Again, either way, requires planning.
If your business transfer is through involuntary means, you can plan around it through a buy-sell agreement with your partners. What a buy-sell deal does is if one partner becomes disabled or passes away, it forces the other partners to buy out that partner. This agreement is usually funded with insurance, so cash is readily available for the transfer. If you do not have a partner, you may want to think about bringing one in or training critical employees so that if something happened to you, the business would not disappear overnight.
If your business transfer is through voluntary means, you should answer the following questions to begin your planning:
- How long do you want to remain in the business?
- To whom do you want to transfer the business?
These two questions are vital to planning for your exit from the business. If your answer to “when” is tomorrow, there is not much you can do. If your answer is five years, there may be some business restructuring we can do to maximize the value of the business and lessen the tax burden to you because of the sale. The “who” is just as important as the “when.” If to family members, you may want to legally lower the value of the business as much as you can. If to a third party, you will probably want to increase the value of the business as much as you can.