Irrevocable Trusts

A Florida irrevocable trust cannot be canceled or changed after it is created without the consent of the parties involved.  In very limiting cases can your trust be changed through a process called “decanting,” but these scenarios are rare.  In an irrevocable trust, the grantor is the person who forms the trust for the benefit of the beneficiary and a trustee oversees the trust assets. Although you can be the trustee or the beneficiary they are typically setup for the benefit of someone else or with someone managing the property for your benefit. Irrevocable trusts are very useful in life insurance planning. Using a irrevocable trust can avoid probate costs and fees.

The Purpose of many irrevocable trusts, is to make a gift of property to the trust’s beneficiaries in order to:

  • protect assets
  • shift income
  • shift appreciation
  • shift the value

of the property away from the trust’s grantor to reduce his estate tax liability at death.

Many people may think that simply putting assets int he name of an irrevocable trust, that they are shielded from creditors.  This is not so.  In a common irrevocable trust, the trust provides that all income be paid to the client, grantor/settlor , during his lifetime, and that upon his death the balance of trust property goes to other named beneficiaries.  Trust agreements can have  “spendthrift provision” which say that the settlor’s income interest cannot not be assigned or attacked by creditors.  This trust will not protect the grantor from creditors and that it would not survive a bankruptcy.

This trust is an example of a “self settled trust” because the settlor established the trust for his own benefit during his lifetime. In 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act was passed which allows access to self settled trusts in the last 10 years.  Additionaly, Florida courts have held that spendthrift protection set forth in self-settled trusts is invalid against creditors.  That the trust is irrevocable, or that the ultimate beneficiaries are people other than the settlor, does not solve the problem. A creditor or bankruptcy trustee could take the settlor’s lifetime income interest.  The income interest could be sold for its present value based on the settlor’s age and the amount of monthly income.

Because annuities are protected from creditors and in bankruptcy, a good solution exists for the grantor.  The trustee of the trust could invest all the trust property in an annuity which pays current income. The trust distributions would represent proceeds of an annuity which would be exempt without limitation from creditors under Florida statutes.  These funds remain exempt even after depositing into a bank account.