Asset protection and wealth preservation are the ultimate tools in irrevocable trusts. Unlike revocable trusts, these trusts are designed to be unchangeable, meaning that assets placed within these trusts are protected – protected from lawsuits, creditors or other threats.
State laws in Florida favor asset protection and financial security, so irrevocable trusts have special advantages there. But it needs precision, legal expertise and a clear understanding of what it takes to set one up. Here’s what you need to know.
What Is an Irrevocable Trust?
An irrevocable trust is a legal agreement in which the trustmaker (or settlor) gives up ownership of assets to the trust. Once the transfer is complete, control and ownership of these assets are dropped by the settlor.
This distinction is crucial: In this case, the settlor gives up control over the assets so that creditors cannot reach them or make claims against them, and the assets are taken off the settlor’s estate.
Florida’s strong spendthrift provision and discretionary distribution rules make Florida’s irrevocable trusts a particularly valuable vehicle. These are legal mechanisms that prevent creditors from getting trust assets for the beneficiaries.
Irrevocable trusts are not for every situation, however. It’s all about how they are structured. A poorly designed trust is a liability; a well-designed trust is virtually impenetrable.
Irrevocable Trusts Are a Great Tool in Florida for Many Reasons
Irrevocable trusts are an indispensable tool for high-net-worth individuals in Florida because of the legal protections they provide to irrevocable trusts. Here’s how an irrevocable trust can benefit you:
Asset Protection
Beneficiaries of irrevocable trusts are well protected by Florida law. Spendthrift provisions preclude beneficiaries from assigning their interest in the trust to creditors, while discretionary distribution clauses give the trustees absolute control with respect to whether and when and how distributions are going to be made.
Estate Tax Reduction
This makes trust a very good vacuum into which assets can be pulled and never returned, eliminating them from the settlor’s taxable estate, both of which are very good for high-net-worth people who want to avoid tax liabilities.
Avoiding Probate
An irrevocable trust is a way of placing property out of probate so that beneficiaries can inherit without delay or public scrutiny.
Preserving Generational Wealth
Many irrevocable trusts, intended to last generations providing intergenerational asset protection, guarantee that family wealth stays within the family.
How to Set Up an Irrevocable Trust in Florida
You can’t set up an irrevocable trust with a template or generic online service. This is a process that necessitates a custom approach. Here’s how to do it the right way:
Hire a Qualified Legal Team
The professionals you work with are the foundation of a successful irrevocable trust. Your legal team should also comprise lawyers who are versed with the Florida trust laws as well as the advisors who are adequately knowledgeable about international asset protection.
We go one step further at Dominion by combining financial, legal and administrative support to create bulletproof solutions that meet our clients’ specific needs.
Choose the Right Trustee
Choosing the right trustee is important. To avoid any kind of influence on the settlor, the trustee must be a neutral third party. In any legal challenge, ultimately a trustee who is too close to a settlor can jeopardize the protections of the trust.
The jurisdictions in which offshore trustees are usually preferred are for their jurisdictional advantages. Under Florida law, these structures are recognized, so clients can also avail of the global experience and confidentiality that offshore jurisdictions offer.
Identify Your Beneficiaries
Decide who will receive the benefit from the trust and when. Specific provisions allow the beneficiaries to include family members, charities, or, sometimes, even the settlor.
To protect the assets from outside claims and protect the terms of the trust so the assets are distributed as designed, the terms of the trust must spell out precisely how and when distributions are made.
Draft the Trust Document
The irrevocable trust’s legal backbone is the trust document. The document must be drafted meticulously so as to include certain key protections, like spendthrift clauses, discretionary distribution rules, and the guidelines for assets transfer.
All of these documents must also be executed by specific execution standards, such as notarization and witnesses, pursuant to Florida law.
Our attorneys at Dominion take drafting beyond the norm by making sure that every trust we create is protected from legal, financial, or geopolitical vulnerabilities.
Take Assets Out of the Trust
After that, you must formally transfer assets into the trust. Many times, property is retitled, bank accounts are transferred, and the trust is designated the owner of investment accounts. In order to avoid transfer disputes or claims that the transfer was incomplete, it is necessary to properly document.
Maintain a Visitor Trust
An irrevocable trust is an ongoing administration to maintain compliance with Florida law and changing international standards. Beneficiaries should be kept regularly advised of what is going on inside the trust and distributions should be made as required by the terms of the trust.
Types of Irrevocable Trusts in Florida
Whether you want to protect assets from creditors or minimize estate taxes, or you are trying to set up a legacy for people in the future, Florida’s legal system provides a number of different options for irrevocable trust.
Now let’s look at the most common types and what they are used for.
Spendthrift Trusts
A spendthrift trust is a commonly chosen trust that offers a layer of protection for trust beneficiaries from threats from both outside the trust and from the trust beneficiary’s own potentially impulsive decisions. Certain of these trusts contain provisions known as spendthrift clauses, which prevent the beneficiary from assigning or transferring his or her interest in the trust.
It means that a creditor does not have access to the assets of the trust for the payment of the beneficiary’s debts. Though that beneficiary might go bankrupt or be the subject of legal claims, the trust itself is protected by these assets, and so the wealth created in the trust will be used for the intention of trust. This trust is especially attractive to families with beneficiaries who have a history of mismanaging money or being vulnerable to litigation.
Discretionary Trusts
The discretionary trust provides greater asset protection because the trustees have complete discretion as to when, how, and if distributions are made to the beneficiaries. The fact that this flexibility offers protection against creditors to the trust’s assets – combined with the fact that its distributions can be adjusted to what is appropriate to the beneficiaries given their true needs and situation – best represents the second differential advantage expected from a trust.
Florida law also backs this protection by disallowing creditors to compel distributions by the trustee. The upside of this type of trust is it protects your family’s finances and the strategic advantage they may need.
Irrevocable Life Insurance Trusts (ILITs)
A specialized tool used to hold life insurance policies is an irrevocable life insurance trust (ILIT). This allows the settlor to transfer ownership of a life insurance policy into an ILIT which assures that the death benefit of the policy is excluded from the settlor’s taxable estate. The strategy greatly reduces estate tax liabilities for high-net-worth individuals.
An ILIT has asset protection benefits in addition to tax advantages. Creditors and legal claims against the trust beneficiaries are protected if the life insurance proceeds are structured inside of a trust containing a spendthrift clause or have discretionary distribution provisions.
A key element of estate planning for those who want to maximize wealth transfer efficiency while guarding their heirs is ILITs.
Charitable Remainder Trusts
Depending upon the circumstances of the transfer, a charitable remainder trust (CRT) can accomplish both philanthropy and financial goals. The CRT (charitable remainder trust) works by the settlor donating assets into the trust where the trust provides income to specified beneficiaries (usually the settlor is one of the beneficiaries for a period of time). At this point, any remaining trust assets go to a named charity.
This is a very beneficial arrangement. Income earned on the trust can support their financial needs while they’re alive, and the settlor receives a charitable tax deduction for the donation.
Not only does this let the assets in the trust grow tax free, but it also helps the beneficiary and charity to the fullest. Furthermore, they are a great way to create a long lasting legacy and you can benefit financially and over tax free now.
Pitfalls to Avoid
Even the most secure irrevocable trusts can blow up if improperly managed. Here are some common mistakes to avoid:
Self-Settled Trusts
Florida law does not protect self-settled trusts, where the settlor is also a beneficiary. It is inherently subject to creditor claims.
Improper Execution
Florida’s legal requirements for executing a trust (notarization and witnesses) need to be met; otherwise, the trust fails and is void.
Incomplete Asset Transfers
Some of the trust property fails to go into the trust, and thus, it is not protected from legal attacks or taxation as part of the settlor’s estate.
Dominion Fortifies Your Wealth
Dominion is home to experts in crafting bulletproof irrevocable trusts that can’t be challenged. If you would like to learn how we can tailor a solution to your exact needs, please contact us today.
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