Mom And Dad Had A Living Trust – Now What?
Our office receives many calls from clients inquiring about the use of revocable living trusts to “avoid probate” of their assets when they die. Indeed, so long as the trust is properly funded, assets passing under such a trust are not typically subject to a probate proceeding. However, many trustees responsible for handling trust assets are often misinformed or misunderstand their obligations beyond simply “distribute the assets and walk away.”
Assets titled in a revocable living trust are not equivalent to payable-on-death (“POD”) accounts or direct beneficiary designations. Those designations are contractual in nature and funds held with the financial institution or insurance company may immediately be turned over to the death beneficiary when the owner dies. Trustees, however, are obligated to follow strict procedures when administering a trust after the death of the Settlor (i.e., the person establishing the trust, sometimes called the “Grantor”).
Florida law clearly lays out the responsibilities of a trustee. If the trustee fails to follow these obligations they expose themselves to significant liability for breach of duty to the trust beneficiaries, estate creditors, and other interested parties. There are numerous specific duties of a trustee, but generally, a trustee’s obligations include a fiduciary duty to all trust beneficiaries, avoidance of self-dealing with respect to trust assets, and a duty of impartiality toward all trust beneficiaries. The trustee must also prudently invest trust assets and pay only reasonable and proper expenses from the trust (including trustee commissions, attorney fees, taxes, and creditor claims).
Proper administration of a trust becomes more imperative when the trust contains ongoing obligations, such as when trust assets are to be held for a period of time before distribution to the beneficiary. This may occur when the beneficiaries are minors, spendthrifts, or have a disability that precludes an outright distribution of assets. When dealing with disabled beneficiaries, the trustee may be obligated to establish a special needs trust (“SNT”) for the benefit of the disabled individual. SNT’s carry with them their own duties and obligations. In addition to claims for breach of duty, a trustee’s failure to properly administer an SNT may jeopardize any public benefits (such as Medicaid or SSI) for which the beneficiary is eligible.
One common misconception is that trust assets cannot be reached by the Grantor’s creditors after death; this is incorrect. While payment of creditor claims is first an obligation of the Grantor’s probate estate, should the probate estate contain insufficient assets to handle these claims then such claims may be satisfied from revocable living trust assets. Under Florida law, creditors have 2 years in which to seek payment for any claims (although this may be shortened by opening a probate administration for the purpose of barring creditors). The trustee may be personally liable should any distributions be made without first ensuring any creditor claims are satisfied or barred. The trustee should also be aware that certain debts, such as IRS debt, may not be bound by state limitations on creditor claims.
All trustees should seek the advice of a trust attorney, CPA, and other professionals as needed to assist them with proper administration of trust assets. This not only helps protect the trustee, but it protects the beneficiaries and other interested parties to whom the trustee owes an obligation.
Contact Feldman & Feldman, Counsellors at Law, P.A.
To discuss the administration of a revocable living trust with an attorney, schedule a consultation by calling 954-227-7320 or filling out our online contact form.