Depending on how they are structured and maintained, different types of trusts fulfill distinct purposes to attain specific goals – whether for estate planning, tax deduction, probate avoidance, or other reasons.
In this article, you will have an overview of the pros and cons of Florida legacy trusts.
Revocable Trusts vs. Irrevocable Trusts – Understanding the Concept
A trust is a legal arrangement in which the trust maker (referred to as “trustor” or “settlor”) transfers the title of specific assets to a trustee (fiduciary) for the benefit of designated beneficiaries.
There are two types of trusts in Florida – revocable trusts and irrevocable trusts. While the trust maker is still alive, revocable trusts permit him or her to change, amend, or even revoke the trust in its entirety.
Many people prefer revocable trusts over irrevocable trusts, as they provide more flexibility if the trustor needs to alter the provisions in the trust agreement for whatever reason.
An irrevocable trust does not permit amendments, changes, or alterations to the legal arrangement. Once signed into existence, an irrevocable trust cannot be revoked without court intervention.
If used strategically, irrevocable trusts are valuable legal tools to protect the trustor’s estate upon death, reducing taxable estate and ensuring a smooth succession process.
What is a Florida Legacy Trust?
Also referred to as “wealth trusts,” legacy trusts are irrevocable trusts used to preserve the trustor’s assets for future generations, such as children and grandchildren.
With a legacy trust, the trustor removes assets from his or her primary estate to deposit them into the trust, which acts as a secondary estate. In many cases, trustors of legacy trusts make annual gifts to fund the trust while avoiding additional estate and gift taxes.
When compared to a revocable trust arrangement, a legacy trust has stricter requirements.
In a revocable “living” trust, the trustor can designate him or herself as the trustee of the trust, remaining in control of the assets held in trust while waiving nominal ownership over them. A legacy trust requires the designation of a third party as a trustee.
What Are the Pros and Cons of a Florida Legacy Trust? – Taking a Closer Look
In essence, a Florida legacy trust is similar to a savings plan. Depending on how the trust agreement is structured, it is possible to use the trust for specific circumstances that do not depend on the trustor’s death or incapacitation.
For example, it is possible to fund a legacy trust to:
- Save funds exclusively to pay college tuition fees
- Distribute income to children and grandchildren
- Save funds for emergency medical care
- Save funds to ensure long-term medical and personal care
Individuals who have particularly larger estates may benefit from legacy trusts, as these arrangements are not subject to the same taxes as a conventional estate. This option may also provide a valuable solution for trustors interested in performing ongoing charitable contributions.
The main issue associated with legacy trusts is their lack of flexibility. Once executed, it is not possible to change the terms of the trust. Despite the existing tax advantages, legacy trusts are subject to income taxes on earnings generated by assets held in trust.
Also, legacy trusts are only exempt from certain taxes if the value of the assets held in the trust does not exceed the required limit.