How does a trust avoid probate?

By Attorney Truman Scarborough

 

When someone dies, assets held just in the decedent’s name without beneficiaries are frozen.

A Power of Attorney ends at death. Like an employer – employee relationship, when an

employer goes out of business there are no longer employees. A Will by itself cannot transfer

property to the heirs. The person named in the Will to administer the estate needs “Letters of

Administration” from the Probate Court to access accounts. Before distribution can be made to

beneficiaries the Probate Court must be shown that all the requirements of the Florida Statutes

and Probate Rules have been met. When everything runs smoothly, this process takes around

nine months.

 

In last month’s article we looked at how trusts evolved as means to avoid probate. The trust

used to avoid probate is a Living Trust or an Inter Vivos Revocable Trust. Inter Vivos means

during life as opposed to a Testamentary Trust in a will, which comes into being in probate.

Revocable means the trust can be amended or abolished.

A trust is a separate legal entity. At eighteen (18) years of age in Florida, individuals acquire

certain rights as natural legal entities, including the right to hold title to property, enter into

contracts, and bring law suits. As artificial legal entities, corporations and trusts enjoy these

same rights.

 

Although a separate legal entity, the IRS defines most Living Trusts as Grantor Trusts as long

as the creator of the Trust is still living. This means the creator of the trust continues to use

his/her social security number for income received by the trust and reports the income on a

regular 1040 tax return. After the creator dies, the Trust becomes a Non-Grantor Trust and a

tax identification number (EIN) will be required, for income can no longer be reported under the

decedent’s social security number. Instead of the 1040 Tax Return, a 1041 Fiduciary Return is

used. A Probate Estate must also have its own tax identification number and is required to file a

1041 Fiduciary Tax Return.

 

Like a corporation, a trust has a division of rights and responsibilities. Both have a creator(s);

with the corporation it is the incorporator(s), with the trust it is the Settlor(s), or Grantor(s). Each

has a person(s) with legal authority to act on behalf of the entity; with a corporation it is the

officers and directors, with a trust it is the trustee. Lastly there are those who have the beneficial

rights; with a corporation it is the shareholder(s), with a trust it is the beneficiaries. However,

the same person could be the incorporator, sole shareholder and president of a corporation.

With the Living Trust, the same person could be: (1) Settlor – creator of the Trust with the

right to cancel and change; (2) Beneficiary – person with the right to enjoy and use; and (3)

Trustee – business manager. Generally a trust provides for a special trustee to take over in

the event that the creator(s) no longer have the capacity to manage their affairs, avoiding the

need for guardianship. At the demise of the settlor(s), the successor trustee takes over and has

immediate control of the trust assets. Without seeking court approval, he/she has the authority

to pay bills and make distribution to the beneficiaries as set forth in the trust.

 

For further information on estate planning you may be interested in Attorney Truman

Scarborough’s Booklet on Estate Planning in Florida. It is available without charge

or obligation by calling (321) 267 – 4770. His office is located at 239 Harrison Street,

Titusville, Florida.

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