Trusts are a tool used to protect assets from creditors, manage estate taxes, and transfer wealth to subsequent generations. What is a family trust?

Any trust you establish that benefits your family is considered a family trust. It’s frequently used as a legally binding contract to specify who will get what share of your money when you pass away. Making one has a number of advantages, such as ensuring that your family receives your wealth and preventing the public disclosure of trust assets. There are other options, so not every family will necessarily require a family trust.

In this post, you’ll learn about the different types of trusts, how to set them up, and which one is best for your family.

What Is A Family Trust?

A family trust is composed of three people: the grantor, the trustee, and the beneficiaries. The trust is established by the grantor, who also transfers their assets to the trust. The trustee is the individual who oversees the trust’s assets on the beneficiaries’ behalf. Similar to the beneficiaries of a life insurance policy, the beneficiaries are the people who receive some sort of financial benefit from the trust.

Family members are named as beneficiaries in a family trust, as one might anticipate. So your children, grandchildren, siblings, aunts, uncles, cousins, or any other family members can benefit. Spouses are permitted in family trusts as well.

Family trusts are a type of living trust that can be either revocable or irrevocable, depending on your preferences. A living trust, to start, is one that goes into effect during your lifetime. An irrevocable trust cannot be changed or revoked, whereas a revocable trust can. With a revocable family trust, you can serve as your own trustee and designate alternate trustees to take over in the event of your incapacity or decease. You must designate a different party to serve as the trustee in an irrevocable trust.

Different Types Of Family Trusts

Trusts come in a variety of forms. They primarily differ in who the trust benefits, how the trust proceeds are taxed, and when the beneficiaries receive the trust’s assets.

Some common types of family trusts include:

• Living trust. While you are still alive, this kind of trust manages your assets and lays out a strategy for what will happen to them after your death.
• Marital trust. An irrevocable trust that benefits the grantor’s spouse is known as a marital trust. When transferred from the grantor to the beneficiary, this trust is free of federal taxes.
• Charitable trust. A charitable trust can be used by a grantor to leave assets to a specific charity.
• Trust that spans generations. By using these trusts, large gifts can be made to younger generations without subjecting them to onerous estate and gift tax burdens.
• Special needs trust. Income from this trust is a crucial resource for people receiving Supplemental Security Income (SSI) or Medicare because it isn’t subject to the program’s income limits and can be used for a variety of related costs, such as prescription drugs.
• Spendthrift trust. A spendthrift trust restricts the number of assets that beneficiaries can access. Such trusts, for instance, prohibit beneficiaries from selling or otherwise disposing of their equitable interests in the trust’s assets.
• Testamentary trust. These trusts are established in a will and become final upon the death of the owner. Beneficiaries are only permitted to access their portion of the assets during specific hours.

Purposes Of Family Trusts

A family trust guarantees that your assets are managed for the benefit of your beneficiaries in accordance with your wishes. Let’s say you want to split $5 million worth of assets between your children. You can specify the conditions and timing for their access to their share of your assets using a family trust. You might specify in the trust agreement, for instance, that they aren’t allowed to access the funds until they graduate from college or turn a certain age, like 25 or 30, or until they reach a certain milestone in their lives.

If you have a child or relative who needs specialized medical care, you might also create a family trust. By putting their assets in a special needs trust, they can maintain their eligibility for Medicaid and other government-sponsored disability benefits.

If you want to spare your family from probate, family trusts can be helpful in estate planning. As a result of the decedent dying intestate (without a will) or having an estate that exceeds the state government’s threshold, the assets in the estate must be distributed through the legal process known as probate. Probate can be a costly and time-consuming process, and everything that occurs there is public record. In this way, giving assets to a family trust can make life much simpler for your family.

Assets can be protected from creditors by using an irrevocable family trust. Most importantly, a family trust can reduce estate taxes after the grantor of the trust passes away. If not, estate and gift taxes may significantly reduce your wealth.

Why Do You Need A Family Trust?

A family trust will ensure legally that any assets you wish to leave to your loved ones after you pass away are done so according to your wishes.

The sometimes traumatic, drawn-out, and the expensive probate process can be avoided with the help of a living family trust, which gives your family another reason to be hopeful. When someone passes away without leaving a will or when their estate exceeds the state government’s threshold, the legal process of distributing the assets in their estate is known as probate. The probate process’s monetary and psychological costs can be avoided by taking care of the matter now through a family trust.

Pros And Cons Of A Family Trust

Family Trusts have advantages and disadvantages, just like most Estate Planning strategies. Determining whether this is a route you want to take further can be aided by understanding each.

Pro: AVOID PROBATE

The ability to avoid probate, which is an expensive, drawn-out, and frequently stressful process for families to go through after a loved one passes away, is one of the biggest benefits of any Trust.

Pro: SIMPLE AND FLEXIBLE

From the point of creation through the funding stage and into the management stage, a Family Trust can be straightforward and adaptable. Furthermore, they are very easy to update or modify at any time (as long as they are not irrevocable) because they are so easily accessible.

Pro: LIMIT ESTATE TAX EXPOSURE (AND OTHER TAX BENEFITS)

The reduction of estate taxes can be greatly helped by effective estate planning.

Pro: AVOID LEGAL PROCEEDINGS

Legal challenges won’t be very likely when it’s time to distribute a family trust because trusts are, for the most part, legally inert documents. Assets may be shielded from the threat of litigation, bankruptcy, or divorce with the appropriate Trust.

Pro: NO RISK TO PUBLIC BENEFITS ELIGIBILITY

Any beneficiary who is qualified for public assistance or benefits can maintain their standing without reducing the value of the estate by using trusts.

Con: POTENTIAL LOSS OF CONTROL AND/OR LACK OF FLEXIBILITY

You run the risk of ceding control of your assets if you decide to use an irrevocable family trust.

Con: COST

A Family Trust’s creation and upkeep can be expensive. The Trustee, who is in charge of overseeing the estate, may be required to pay ongoing fees. In the event that counsel is ultimately required to defend the Trust, there may also be disadvantages. Finally, the Trust may be required to file taxes annually, which will cost money to prepare and file.

Con: WORKS BEST IF AN INDEPENDENT TRUSTEE IS USED

Most protection is provided by an independent, external Trustee, but the amount of control over assets would be constrained. Additionally, there is the issue of ongoing fees to pay an Independent Trustee.

How To Set Up A Family Trust

While the type of trust you select will have an impact on the specific terms and conditions of the trust, the following are the basic steps you will usually need to go through to set up your family trust:

Step 1: Draft A Trust Document

A Trust Agreement document merely lists all of the Trust’s assets and the individuals who will be its beneficiaries. Naturally, family members of the Grantor—the person who established the Trust—will be its beneficiaries in a Family Trust.

Along with naming a Trustee, the agreement will also contain specific instructions outlining how the Trust’s assets should be managed. You should keep in mind that one of the benefits of a family trust is that you can make it as specific or as general as you like.

Step 2: Set up your Family Trust (Online) 

You have a few options for setting up your family trust. Of course, you can always take the conventional route and hire an estate planning lawyer. But the cost and duration of the process could be quite high. Then there are the DIY options, which can be challenging to accomplish correctly. And let’s face it, you have a lot on the line in this situation. Many people have attempted to establish their own Trust, only to unintentionally make matters exponentially worse for their loved ones.

The final option is an exhilarating substitute for both the conventional attorney and the DIY Trust methods that are available. Using an online, trusted option like Trust & Will makes the process simple, affordable, and best of all, effective and safe.

The process of drafting all of your estate planning documents has been streamlined by Trust & Will. From your Will to your Trust, to appoint aguardians for your children, we’ve taken the middleman out of the process, so everything you need is in one place. With our assistance, you can create the ideal estate plan in a matter of minutes. You do not need the help of an overpriced attorney. With our state-specific, attorney-designed documents, you can have the same level of confidence in our procedure that we do.

We understand that it’s a lot to ask for your trust, so if our thousands of positive reviews and 4.9 Trustpilot rating aren’t enough to ease your mind, don’t worry – Trust & Will offers attorney support for a small additional fee.

Step 3: Move Your Assets Into The Trust

Transferring your assets into your new Family Trust completes the picture. Actually, all these means is that you must formally retitle your assets in order to make them Trust-owned. You only need to contact each financial institution where you have accounts, policies, and/or assets to begin what is typically a fairly simple process. You should inquire about their specific procedure and the necessary paperwork.

Establishing a Family Trust can be a smart move for many reasons. The time is now to start if you’re considering setting up a protective Family Trust.

Bottom Line

A Family Trust can be a good idea if you want to put something in place to care for your loved ones, and your legacy (even when you’re no longer around to care for them yourself). Consider a strategic plan like a family trust if you’re looking for a way to organize your estate so that it provides financial benefits and more.

Please keep in mind that by setting up a family trust for the assets you wish to leave to your family, you greatly simplify the process for them after your passing. Your thorough estate plan should include a family trust in addition to a will, an advanced directive, and a power of attorney.

Read More: How To Build Wealth In Your 30s?

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