Potential Trust Pitfalls For New Floridians

It is generally a good idea for new Floridians to have any previous estate planning reviewed by a Florida attorney, so as to ensure that it complies with state law. In particular, wills and trusts will need extensive vetting in order to be certain that every detail has been addressed. Errors or issues with a will can often be resolved by simply executing a new instrument, but with trusts, it can be more complex. If you have created a trust in your old state, there are several common mistakes that new Floridians very often fail to remedy once they move – which can lead to serious financial consequences later on.

Failure To Anticipate State Income Tax

When a person moves to Florida, they are strongly urged to put down roots in the community, both socially and economically; this is advised both in order to help establish Florida as their new home, but also to break any ties with the person’s previous place of residence. Florida is one of only seven states that does not have a fiduciary income tax, and if you are moving away from a state with an income tax in place, it is critical that you make a clean break, especially when it comes to estate planning documents like trusts.

Most states tax a trust if the settlor (the creator) or a trustee (whether a co-trustee with the settlor, or a successor trustee administering the trust after the settlor’s passing) resides there, though there are some whose laws are more specific. For example, Massachusetts trusts are only taxed by the state if the trustee resides there, so if you move to Florida, taxes from Massachusetts will not be assessed – but, conversely, New York taxes trust income under different circumstances. Very often, this does not become an issue for a settlor, but rather for their beneficiaries – inheriting the contents of a trust only to have to pay large amounts in taxes because of where one lives can be an enormous shock.

Failure To “Take Your Trust”

Sometimes, the issue is not taxes, but rather, issues of state law differing between locales. If a trust is created under the law of, say, Michigan, there may be inherent differences or deficiencies in the trust by Florida standards. If so, it is necessary to ‘move’ the trust situs (place of establishment, and the choice of laws governing it) to ensure that the trust is considered valid and enforceable. The process of doing this is referred to as decanting, and while it has been permissible in Florida since 1940, the relevant law used to require that a trustee had been granted “absolute power” to “invade the principal” of the trust. In 2018, the law was modified to allow decanting by trustees who have not been granted this status, though there are limitations on the ability of those trustees.

Decanting can happen even if a trust is irrevocable (unchangeable without permission from its beneficiaries). Essentially, it creates a new trust, established under Florida law, which then receives all the assets from the previous trust. Doing this recklessly can create new tax problems, and the process may not always be available in every situation, but it can be a relatively painless process that can alleviate many choice-of-law issues for those new to Florida. An experienced attorney can help you through this process.

Contact A Naples Estate Planning Attorney

If you have questions, concerns or just want to set up a complimentary consultation to discuss your personal legal issues in a confidential setting, contact James R. Nici, the Managing Partner of Nici Law Firm, a Naples estate planning attorney with almost 30 years of legal experience.  This may be the first step toward ensuring all is how you want it to be going forward. Contact our offices today via our website, or on the telephone at 239-449-6150, to schedule your complimentary consultation.

Resource:

flsenate.gov/Laws/Statutes/2020/0736.04117