Do Trustees Have to Provide Accountings for Irrevocable Grantor Trusts in Florida?
When dealing with Florida trusts, one of the most common questions we hear is:
“Does a trustee have to provide accountings to a beneficiary of an irrevocable grantor trust when the settlor can still change the beneficiaries and no one has a right to distributions?”
The Irrevocable trust is one of the most valuable tools for estate planning and Florida asset protection that is available. These trusts are not only a great way to pass assets outside of probate, but also allow assets to be protected from creditors. For an irrevocable trust to be valid, a person or entity must serve as the trustee, or manager, of the trust. The Trustee is a person who is responsible for accounting and managing the trust’s assets for the beneficiaries of the trust. Naturally, a question our firm often receives is can I (the grantor/creator of the trust) serve as the trustee?
Can a grantor be a trustee of an Irrevocable Trust? The now outdated school of thought was that a grantor should never serve as the trustee because it could potentially make the trust’s assets available to the grantor’s creditors – thus defeating the asset protection benefits offered by an irrevocable trust. The belief came from section 2036 of the tax code, which states any trust where the grantor retains the right to possess or enjoy the property or designate who will possess and enjoy the trust property will make the principal of the trust includable in the grantor’s estate at death for estate tax purposes.
Most financial planners are unfamiliar with some of the modern twists available with irrevocable trusts. They tend to be familiar with the older style of irrevocable trust that can pose several problems for those who use them. These problems include:
The irrevocable trust, you have chosen does not suffer from any of the traditional problems discussed above. It is an Irrevocable Pure Grantor trust (IPUG™). With the iPug™ many of the advantages that are traditionally only found with a revocable trust can be provided in an irrevocable trust. Some may ask, why should we use an irrevocable trust instead of a revocable trust. Here is a summary of the reasons that the iPug™ trust is superior to the revocable trust and does not pose the problems that a traditional irrevocable trust presents:
NOTE: The US Supreme Court ruled that inherited IRAs are not protected from creditors. Florida has statutes that appear to offer protections for residents of Florida. It is best to plan for no creditor protection for inherited IRAs at this time.
At the Law Office of David M. Goldman, one of our biggest goals is to protect our client’s assets from creditors. One of the most important assets a person can have is a retirement account. These accounts are often targeted by creditors, but the good news is many retirement accounts are protected from creditors through federal and state laws.
So what type of retirement accounts are protected from creditors? The most common form of protected retirement accounts are known as “qualified retirement plans,” and are protected under Federal ERISA law. ERISA protected accounts include traditional pension plans such as 401(k) and 403(b) plans, and these plans are usually exempt from civil court judgments and from bankruptcy. Other protected accounts include Rollover IRA accounts, which are assets, formerly in a 401(k) account, from a previous employer that are “rolled over” into an IRA. This means that these retirement accounts are usually protected no matter what state they were established in.
In Florida, a trust is not valid until funded. Many trusts need to be funded prior to your death to be used in the way intended. Often, individuals create trusts and forget to fund them during their life and do not receive the benefits that their trusts were designed for. There are 4 major ways to fund a trust.
Last month the United States District court in Orlando found that the membership interest in a Nevis LLC was subject to Florida jurisdiction. The court also found that Florida law, not Nevis law, applies to the creditor’s application for a charging lien because the situs of the asset determines what laws are applicable to issues related to the charging lien.
This rationale would seem to apply to Foreign trusts as well as Foreign LLCs. It appears that a Corporation or LLC where there were actual certificates for the membership interests that were not located within the state of Florida may have a different result.
The court rejected the claim that jurisdiction was in Nevis. They stated that unlike with a corporation, a membership interest “accompanies the person of the owner.” and as a result is subject to Florida jurisdiction if the owner of the certificate is subject to the jurisdiction. With some foreign LLCs a single member can have charging order protection, but under this court’s ruling, a single member foreign LLC would not receive charging order protection as only a multi-member LLC has charging order protection as an exclusive remedy.
If you have been told, don’t worry about your IRA it is protected because Florida has statutory protections for IRAs, you may have misunderstood or been mislead. While Florida does have statutory protection for inherited IRA’s, this protection only applies if your beneficiaries are residents of Florida at the time of your death.
Why take a chance with naming individuals as a beneficiary of your IRA. A properly designed trust should be the beneficiary of your IRA to protect the proceeds from the creditors of your beneficiaries at the time of your death.
In June of this year, the US Supreme Court in Clark V Rameker stated that children or other “non-spouse” individuals who inherit are at risk of loss to their creditors. This was not a close call, it was a 9-0 decision and clarifies that an inherited IRA is not protected from the creditors of its owners.
The U.S. Supreme Court recently held that the funds contained in an IRA are not “retirement funds” and thus not protected from creditors during bankruptcy. The next question many attorneys now have is how this ruling will affect tax law?
The Supreme Court justices felt there were three legal characteristics that lead the Court to conclude inherited IRA’s are not retirement funds within the meaning of 11 U.S.C. Section 522(b)(3)(c).
One of most common topics we discuss with our business and estate planning clients is asset protection. The best time to do asset protection is when you do not have any known or potential creditors. Unfortunately, this is often the least likely time to consider protecting your assets.
Today we have some innovative trusts that provide asset protection without the risks, expenses, and IRS compliance associated with Foreign ssset protection trusts or Domestic asset protection trusts (DAPT). A domestic asset protection trust is a trust created under state statute (not in Florida) which purports to protect the assets while still giving you access to the assets when there are no creditors. Unfortunately many states will not recognize the protections when there are assets which are located in another state. For example if you have your Florida property or bank account in a Nevada or other state’s DAPT, it is likely that a court in Florida may not offer you the protections you have expected.
Unlike a DAPT which relies on another state’s laws, our Florida Asset Protection Trust is an IGAP Trust which is based on statutory and common law principles regarding Trusts and Property and can be structured to protect the principal or principle and income of the property being held by the trust. The IGAP trust has no adverse tax consequences like some trusts do because it is taxed just as if you owned the property yourself. In addition some asset protection trusts lose the ability to increase the basis in the assets to the value at your death, but the IGAP Florida asset protection trust does not have this problem and receives the same tax treatment as if you owned the property yourself.
It has been many years since the regional divisor has been updated. For the last several years the penalty period was calculated using an outdated nursing home cost of $5000. As of now, the divisor has been raised from $5000 to $6880 in Florida (Florida Administrative Code)
What does this mean? If one does property planning, they can give away $6880 and only have a 1 month penalty. This becomes important when doing planning for individuals who have nursing home exposure.
This will significantly increase the amount of money most people could save by doing elder law planning in Florida. As you age it is important to consider both Florida Estate Planning and elder law when structuring your plan.
Florida Estate Planning Lawyer Blog