Living trusts are popular estate and legacy planning tools in Florida for probate avoidance. However, when the grantor, which is the person who initially creates a living trust, dies, the trust does not automatically dissolve.
In fact, at that point, the trust becomes irrevocable and is then left in the hands of a named successor trustee to carry out its provisions.
Understanding the termination of a Florida Living Trust
Truth be told, wrapping up a probate-avoidance Florida living trust is rather mundane as there is no formal documentation required or court approval necessary, as with the administration of a Will.
However, there are several moving parts that must be considered and addressed by the successor trustee.
Essentially, when all the expenses, such as funeral costs, etc., have been paid and all the trust property has been properly distributed or transferred to the named beneficiaries, the Florida living trust just ceases to exist.
But the trustee’s job isn’t over just yet!
After a trustee believes she or he has concluded all actions and requirements of a particular trust and there are no more assets in the trust, then it is time for the trust to be closed or terminated.
To ensure that a Florida living trust is not being wrapped up prematurely and that all matters have been adequately addressed, there are four main steps to properly wrapping up and closing out a Florida living trust:
1. Review the Trust Documents to ensure all provisions have been complied with and satisfied
A well-written living trust governs the entire process of its administration.
It provides detailed instructions as to how property is to be distributed, to whom that property should be transferred, and when the trust shall cease to exist.
As a fiduciary, the successor trustee has a duty and is legally bound to following the directions of the trust.
Only if the trust is silent on a procedural matter does the trustee look to guidance from Florida statutes as to how to proceed.
Typically, the duties of the trustee are short-term for most living trusts and can be wrapped up shortly after all responsibilities of gathering the trust property, paying all debts and creditors, and distributing assets to the named beneficiaries are completed.
However, certain trusts, such as those leaving assets for minor children or individuals with special needs, may require the trustee to carry on his or her duties for several years.
As such, the first step would be for the trustee to be intimately familiar with the requirements of the specific trust so they can confirm whether all expenses have been paid, beneficiaries have received their distributions in accordance with the trust restrictions and there are no further assets left to distribute.
2. Prepare and File the Final Tax Return, if applicable
After all assets are assessed, the trust may be required to file a tax return in accordance with Federal law.
If the trust earned more than $600 in income, then the trustee would have to file a tax return on its behalf prior to closing.
The trustee may also have to pay any of these taxes due by the estate using estate assets.
Therefore, it is advisable to communicate with a tax specialist well in advance of beginning to prepare the trust’s tax return to ensure that sufficient assets remain available to cover any amounts due.
Trust taxes may include having to file the decedent’s (individual who has passed away) final form 1040, the actual trust income tax return (Form 1041), an estate tax return (for qualifying estates), as well as, form 4810 requesting a prompt assessment of tax.
3. Notify all known Creditors
When an individual dies, their debts remain and must still be satisfied.
Wrapping up a trust may be a creditor’s last chance to be paid.
However, unlike the probate process which gives creditors 90 days to file a claim, Florida law allows for trusts to be subject to creditors’ claims for up to 2 years.
Therefore, a trustee who distributes assets within two years of a decedent’s death does so subject to any creditor claims.
As such, it is best to notify all known creditors as soon as possible to ensure that all known debts are settled prior to paying out any of the beneficiaries.
4. Notify Beneficiaries that the Trust is being Terminated
Again, best practices would suggest working with an accountant or tax specialist to ensure all records are accurate and to make sure adequate information is being passed on to the beneficiaries.
Florida requires that you provide a full accounting to all beneficiaries absent their waiver to receive such accounting. However, it’s always best to have such an accounting available for any beneficiaries regardless of any waivers. This accounting should include:
- List of Expenses: this may include, but is certainly not limited to, property insurance bills for real estate held by the trust, fees assessed by financial institutions in which trust assets are held, anticipated trust income taxes, and any accountant or tax preparer fees.
- Income Earned by the trust: such as interest earned on trust bank accounts or rental income from real property owned by the trust.
- Inventory of distributed assets: this essentially provides a list of what assets were distributed to which beneficiaries.
As a trustee may remain liable for any future expenses that arise, only after all property is sold, retitled or otherwise distributed, after all creditors are satisfied and after arrangements have been made for the payment of any taxes that may be due, should a trustee finally consider a trust closed or terminated.
It goes without saying that the role of a trustee can be complicated and rather involved, even for a small estate. For this reason, it’s always best to seek the assistance and guidance of an attorney and tax specialist who is experienced with trust administration.
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