Family trusts are one of many ways to transfer generational wealth. They are used to ensure that your relatives can quickly and easily inherit your assets after your death. They are highly customizable and depending on how they are structured, they can also bring other benefits, such as protecting your assets from lawsuits.
In this article, we’ll take a closer look at what family trusts are, how they work, and why people choose to use them.
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What is a family trust?
A family trust is any type of trust that names one or more of your family members as beneficiaries. It is a legally binding estate planning product that specifies who will inherit your assets and wealth after you die.
There are three primary parties involved in a family trust:
- Grantor: The person who creates the trust and transfers his assets into it.
- Trustee: The person or entity responsible for managing and distributing the trust assets according to the grantor’s wishes.
- Beneficiary: The person(s) who will receive assets from the trust.
A family trust is a type of living trust, which simply means that it takes effect during your lifetime. A family trust can be revocable or irrevocable.
- Revocable trust: The grantor can make changes to the trust during his lifetime, such as adding and removing beneficiaries or even dissolve the trust entirely. This provides flexibility and control.
- Irrevocable trust: Once established, the terms of the trust cannot be changed. However, this type of trust offers greater protection from creditors and potential tax benefits.
Family trusts can also save your family from estate taxes after you die, but this benefit is limited to people with significant assets. In 2023, a gross estate value of $12.9 million or more is required to collect federal estate taxes. A handful of states impose their own estate taxes at lower limits.
Types of Family Trusts
A family trust fund is more of an informal term than a legal term. In reality, a family trust can be any type of trust that transfers assets from one family member to another.
Here’s a brief overview of some different types of trusts and how they work:
- Confidence in special needs
- This trust is designed to support individuals with disabilities and ensures that the beneficiary receives financial assistance without jeopardizing their eligibility for government benefits.
- Waste of trust
- This trust allows a beneficiary to receive regular distributions while protecting the assets from the beneficiary’s creditors or reckless spending. The trustee has control over the assets of the trust and administers distributions according to the terms of the trust.
- Testamentary trust
- This trust is created by a will and only takes effect after the grantor’s death. It enables the management and distribution of assets for the benefit of specific beneficiaries.
- Generation-skipping trust
- This trust allows assets to skip a generation and go directly to the grantor’s grandchildren. It can be a useful tool for estate tax planning.
Consider seeking advice from a financial advisor or estate planning attorney to determine which type of trust is best suited to your specific circumstances.
Why a Family Trust?
One of the biggest benefits of creating a family trust is that it avoids probate, a lengthy and often costly legal process that determines the validity of a will. In a family trust, assets skip the probate process, ensuring a smooth transition of assets from your estate to your beneficiaries.
Unlike wills, which are made public during probate, trusts offer a higher level of privacy, so details about your assets and who receives them remain confidential.
Irrevocable family trusts can also protect assets from creditors and lawsuits, giving your assets an extra layer of protection.
Not everyone needs a family trust. People with modest to moderate assets can pass assets to family members through an effectively executed will, avoiding the added expense and complexity of setting up a trust.
Considerations when setting up a family trust
If you’re trying to determine whether a family trust is right for you, here are some pros and cons to consider:
Positives
- Control: A family trust allows you to determine who gets what and under what conditions.
- Privacy: Trusts provide a level of confidentiality not provided by wills because trusts avoid probate.
- Asset protection: Irrevocable trusts provide protection from creditors.
- More difficult to challenge in court: Because trusts bypass probate, they are generally more difficult to contest than wills.
Disadvantages
- Complexity: Setting up and managing a trust can be complex and usually requires professional help.
- Costs: A very simple living trust document can cost at least $1,500 to $2,000 to create, while a complicated trust document can cost $2,500 to $5,000 or more.
How to set up a family trust
A family trust fund is a complex legal document, so you should consult an estate planning attorney to set one up.
These are the general steps you need to follow to set up a family trust fund:
- Gather the necessary documents: You need information about your assets, such as title deeds, account statements and investment details.
- Choose a confidant: This could be a family member, friend or a professional entity.
- Draw up the trust agreement: An estate planning attorney will help you outline the terms and conditions of the trust, including how the assets will be managed and distributed. Your attorney will ensure that you meet all your state’s requirements and have the required signatures.
- Fund the trust: Transfer ownership of your assets into the name of the trust. This can include things like bank accounts, real estate, vehicles, investments and other property. It requires updating deeds, titles, and beneficiary designations because these assets, once transferred, become the assets of the trust.
- Notify beneficiaries: Although not required, informing the beneficiaries of the trust’s existence can help avoid future conflicts.
In short
A family trust is used in estate planning to transfer assets to your family after your death. A trust has certain advantages over wills, including avoiding probate. It’s a complex document, so consulting an estate planning attorney and financial advisor can be a smart move.