Family Trust vs. Living Trust: What Are the Differences?

As part of their estate planning strategy, many investors use a trust to protect their assets. However, there are many different types of trusts you can use, each with its own pros and cons. Two of the most common are family trusts and living trusts, but they differ in these key areas.

For guidance on your estate planning needs, consider working with a financial advisor in your area.

Benefits of Placing Assets in a Trust

When you place your assets into a trust, they are then shielded from probate court in the future. Avoiding probate shields your heirs from unnecessary and expensive court costs, while reducing your overall estate and gift taxes. Plus, it provides a layer of security, eliminating the publicity of probate court so your affairs remain private.

While you are living, certain types of trusts can provide better protection against creditors and lawsuits. You can distribute your assets to beneficiaries in any manner you see fit, and you can also put conditions on how and when your assets are distributed after you pass.

What Is a Family Trust?

A family trust is a legally binding document often used to create a financial legacy for your loved ones. They are a type of living trust that can be revocable or irrevocable, depending on the estate planning strategy you have in mind.

Family trusts are designed to manage your assets on behalf of your beneficiaries. The conditions are completely flexible and can be distributed based on any milestones you wish. For example, a beneficiary may receive a set amount upon high school or college graduation, marriage, a new baby or on a specific birthdays.

These trusts can also be set up to take care of a disabled child or family member. The added benefit is that family trust assets are excluded from Medicaid eligibility guidelines. This means that they can get the care that they need without having to deplete the trust’s assets first.

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What Is a Living Trust?

A living trust is a formal document that eliminates the need for probate upon your death. They can save money by avoiding probate fees and reducing the potential for estate taxes and gift taxes. They can be either revocable or irrevocable based on how you and your advisors want to structure them.

Once the trust is completed, transfer your assets into the trust to ensure that they are distributed according to your wishes upon death. Most people retain control of their trust throughout their lifetime. When creating your trust, you’ll name a successor trustee, who is responsible for following the rules within the trust when distributing assets to your named beneficiaries.

With a living trust, you can leave your estate to anyone you choose. This includes family members, friends, charities, schools, foundations, pets and others. You can also specifically deny an inheritance to anyone.

By stating your wishes in clear terms, you can minimize the potential for people to contest the estate plan you have built.

Key Differences Between a Family Trust vs. Living Trust

Members of a family whose assets are held in trust.

While family trusts and living trusts both offer protection and benefits for your assets, there are several key differences.

A living trust lets a grantor decide how assets are handled before and after death. The grantor is typically the trustee of their trust. They control the assets held inside the trust for the rest of their life or until a successor trustee takes over. Once the grantor passes away, assets are distributed according to their written wishes.
Family trusts are meant to live beyond the grantor’s life. A family trust has an extended lifespan, enabling it to distribute assets based on designated milestones (i.e., marriage, having children, etc.). It can also fund the care of a disabled loved one for the remainder of their life.
Recipient of the estate. A living trust can distribute assets to anyone who is named as a beneficiary when the grantor dies. These beneficiaries can include family, friends, charities, alma maters, pets and others. By contrast, family trusts are designed to benefit only the family members of the grantor.

Should You Create a Trust for Your Estate?

A trust is a good choice in almost every situation.

Even if you don’t think that you have enough money to worry about estate taxes, a trust can still be beneficial. Trusts eliminate the need for probate and can minimize the potential for heirs to contest your wishes.

You can control your estate “from the grave” by implementing rules for how money is distributed after your death. Trusts can help you care for someone with medical needs for the rest of their life.

Trusts also control the distribution of your estate. For example, money can be given based on reaching a certain age or life milestones, like graduation, marriage or having children.

How to Choose Between a Family Trust and a Living Trust

Deciding between a family trust and a general living trust will depend on your goals.

If your main focus is to avoid probate and keep your estate plan private and flexible, a revocable living trust may be the better option. It gives you full control of your assets during your lifetime and allows you to update beneficiaries or terms as your situation changes.

If your priority is long-term support for family members, such as funding education, supporting a disabled dependent or preserving wealth across generations, a family trust may be more appropriate. Family trusts are often structured with longer timelines and detailed rules for how and when assets are distributed.

In many cases, the structure of the trust can be customized to meet a mix of goals. A financial advisor or estate attorney can help you decide which approach fits best based on your family, financial situation and estate planning needs.

Tax and Asset Protection Considerations for Trusts

Knowing how a trust is taxed and how it protects assets is an important part of selecting the right structure.

Revocable living trusts do not provide income tax benefits while the grantor is alive. All income generated inside the trust is reported on the grantor’s personal tax return, and assets in a revocable trust are still counted as part of the taxable estate. These trusts help with probate avoidance and organization, but they fail to shield assets from creditors or lawsuits during the grantor’s lifetime.

Irrevocable family trusts operate differently. When assets are transferred to an irrevocable trust, the grantor generally gives up control, which can limit creditor access and may reduce the size of the taxable estate.

Income generated inside an irrevocable trust is taxed either to the trust or to the beneficiaries who receive distributions, depending on how the trust document is written. Because trust tax brackets are compressed, income retained in the trust may be taxed at higher rates than individual income. Distributing income to beneficiaries can help manage this tax exposure.

Some family trusts also play a role in long-term care planning. Certain irrevocable trust structures may allow assets to be excluded from Medicaid eligibility calculations if they meet strict regulatory requirements and are established well in advance of a Medicaid application. These rules vary by state and often require careful legal guidance.

Asset protection, tax treatment and estate tax exposure are areas where living trusts and family trusts differ significantly. Reviewing these factors when building an estate plan can help you decide which structure aligns with your goals.

Bottom Line

Creating a trust is an estate planning strategy that can help protect your assets and reduce gift and estate taxes.

Creating a trust is an estate planning strategy that can help protect your assets while reducing gift and estate taxes. With a living trust or family trust, you can create rules on how your estate is distributed without hefty costs and the publicity of probate court. There are many nuances with trust rules, so consider speaking with a financial advisor to discuss which one is right for your personal situation.

Tips on Estate Planning

When creating your estate plan, consider working with a professional financial advisor during the planning stages. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
SmartAsset’s asset allocation calculator will help you find a mix of investment choices that fits your risk tolerance. With an allocation that fits your goals, you might be able to provide retirement income for the rest of your life and an estate that can be left to your beneficiaries.