Fortenberry Legal

Living trusts are a popular tools for avoiding probate. As discussed in How to Avoid Probate with a Living Trust, living trusts work by creating an artificial entity to hold title to a person’s assets. The person who creates the trust usually serves as trustee, giving him or her complete control over the assets. Upon his or her death, a successor trustee can step in and deal with the assets outside of the probate process.

This planning technique works fine in Florida from an asset transfer standpoint. Assets owned by a valid living trust are not part of the Florida probate process.  But even though probate may not be required to transfer assets, the trustee may want to probate the deceased person’s estate for another reason:  to deal with creditors.

The creditors of a deceased person can be a problem for his or her living trust. If the decedent had creditors and there are no assets in the estate to pay the creditors, Florida law provides that the living trust is responsible for the creditor claims.[1]

When a person with a living trust dies, the trustee of the trust is required to file a notice of trust with the court.[2]  The purpose of the notice of trust is to let the decedent’s creditors know about the trust and of their rights to enforce claims against the trust assets.

Creditors have two years from the decedent’s death to assert their claims against the trust.  This means that the living trust is potentially liable for claims against the decedent’s estate for two years.  If the trustee distributes all of the assets within that two year period and a creditor submits a claim, the trustee could be liable to the creditors for the premature distribution.

Because of this rule, some trustees are reluctant to distribute assets within the two-year creditor period. This means that the beneficiaries will need to wait two years before they receive distributions from the trust.  If the trust doesn’t call for distributions within a two year period, this may not be an issue. But two years can be a long time to wait. In most situations, beneficiaries will want to receive at least some (if not all) of the trust assets shortly after the decedent’s death.

Fortunately, there is a way to shorten the period during which creditors can submit claims: probate.  As part of the Florida probate process, creditors are formally notified and given three months to submit a claim. Any claims that are not submitted within that three month period are barred.

In other words, even though it may not be required by law if all assets are in a living trust, probate has the practical benefit of shortening the creditor claims period.  In some situations, trustees may probate the estate to take advantage of this three month period (and avoid the two-year period generally required).

Whether or not Florida probate will be advisable depends on the circumstances.  Would the assets in the trust be exempt from creditor claims?  Is the trustee also the sole beneficiary?  Does the trust require assets to be held for two years anyway?  Is the trustee confident that all creditor claims have been paid (or otherwise risk tolerant)? Questions like these can help determine whether Florida probate is a good idea.

Of course, there are other reasons for setting up living trusts (such as incapacity protection).  There are also other ways of avoiding probate in Florida, such as using jointly titled bank accounts and deeds (like a Lady Bird deed) to transfer real estate outside of probate.  Some of these techniques also have important asset protection consequences. All of this should be considered as part of the estate planning process.