One of the common estate planning tips for investors is to get a trust to protect their assets. However, that advice is hardly specific enough. There are many types of trusts, and each has its unique pros and cons. In this article, we’re going to focus on the key differences, as well as pros and cons, between a family trust and a living trust. One of the smartest moves you can make in estate planning is to work with a financial advisor.
Benefits of Placing Assets in a Trust
When you place your assets into a trust, they are shielded from probate court. Avoiding probate shields your heirs from expensive court costs and reduces estate and gift taxes. Plus, it eliminates the publicity of probate court.
While you are living, certain trusts can provide better protection against creditors and lawsuits. Trusts allow you to distribute your assets to beneficiaries in any manner you see fit. And you can put conditions on how and when your assets are distributed after you die.
What Is a Family Trust?
A family trust is a legally binding document that is often used to create a financial legacy for your loved ones. Family trusts are a type of living trust. It 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 number of milestones you wish. For example, a beneficiary may receive a set amount based on graduating high school or college, getting married, having a baby or on specific birthdays.
These trusts can also be set up to take care of a child or family member who has special needs. 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.
What Is a Living Trust?
A living trust is a formal document that eliminates the need for probate when you pass away. Living trusts save money by avoiding probate fees and reducing the potential for estate 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, you’ll 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 life. 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 that 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 Family Trusts and Living Trusts
While family trusts and living trusts both offer protection and benefits for your assets, there are several key differences between them:
- A living trust lets a grantor decide how assets are handle before and after death. The grantor is typically the trustee of their trust. They control the assets that are held inside through 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 that enables it to distribute assets based on designated milestones (ie., marriage, having children). It can also fund the special needs care of a loved one for the remainder of their life.
- Who receives the estate. A living trust can distribute assets to anyone who is named as a beneficiary when the grantor dies. Living trust 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?
Yes, 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 is 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. And they provide control over 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.
The Bottom Line
Creating a trust is a recommended strategy to protect your assets and reduce 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 publicity of probate court. There are many nuances with trust rules, so speak with your financial advisor to discuss which one is right for your personal situation.
Tips on Estate Planning
- When creating your estate plan, be sure to include a financial advisor in the planning. Such an expert can provide valuable advice on the appropriate accounts, asset mix and tax implications of your portfolio. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor, get started now.
- Our 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.
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