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Family Trust

Trusts are used to manage estate taxes, shelter assets from creditors and pass on wealth to future generations. A family trust is a specific type of trust that families can use to create a financial legacy for years to come. There are several benefits to creating one, including ensuring your family members receive your wealth and avoiding public disclosure of trust assets. However, not every family necessarily needs a family trust, as there are other options too. If you have questions about your family’s situation, consider speaking with a local financial advisor.

What Is a Family Trust?

At the core of a family trust, there are three parties: a grantor, a trustee and the beneficiaries. The grantor is the person who makes the trust and transfers their assets into it. The trustee is the person who manages the assets in the trust on behalf of the beneficiaries. The beneficiaries are the individuals who receive some type of financial benefit from the trust, similar to a beneficiary for a life insurance policy.

As you might expect, a family trust lists your family members as the beneficiaries. So that means your children, grandchildren, siblings, aunts and uncles, cousins or any other family members can be a beneficiary. Family trusts can also include spouses.

Family trusts are a type of living trust, and they can be revocable or irrevocable depending on your wishes. For starters, a living trust is one that takes effect during your lifetime. A revocable trust can be altered or terminated at any time, while an irrevocable trust is permanent. With a revocable family trust, you can act as your own trustee, naming successor trustees to take over the reins if you become incapacitated or pass away. With an irrevocable trust, you must name someone else to act as the trustee.

For reference, the table below briefly compares the advantages of common types of trusts:

Overview of Different Types of Trusts
Trust Type Main Benefits
Marital Trusts (“A” Trust) Established by one spouse for the benefit of the other. The surviving spouse gets assets in the trust along with any income. This allows surviving spouses to avoid paying taxes on assets during their lifetimes. But heirs must pay taxes on remaining assets that they inherit.
Bypass Trust (“B” or Credit Shelter Trust) Established to reduce estate tax for heirs. This is an irrevocable trust where the surviving spouse manages assets but doesn’t inherit. This protects remaining assets for beneficiaries who will inherit remaining assets tax-free.
Charitable Trust Established to divide assets between specific charities and beneficiaries, or pass on remaining assets to a designated charity.
Generation-Skipping Trust Established to pass assets to grandchildren while allowing children to potentially access income generated from those assets tax-free.
Life Insurance Trust This is an irrevocable trust that is designated as the beneficiary of a life insurance policy to avoid estate taxes on policy payouts.
Special Needs Trust Established to pay for medical care or day-to-day expenses of special needs dependents, which allows them to remain eligible for government benefits.
Spendthrift Trust This trust structures and limits beneficiary access to assets to avoid misuse. Beneficiaries could access income or interest earned from assets but may be excluded from getting the principal amount.
Testamentary Trust This trust becomes irrevocable upon the owner’s death, and is established through a last will and testament. Beneficiaries can access assets only at a predetermined time.
Totten Trust This trust is payable-on-death to the beneficiary named in the account.

What Are Family Trusts Used For?

Family Trust

A family trust ensures that your assets are managed according to your wishes on behalf of your beneficiaries. So let’s say you have $5 million in assets and you want to divide it between your children. You can use a family trust to specify when they can access their share of your assets and under what terms. For instance, you may include a stipulation in the trust agreement that they can’t touch the money until they complete college or reach a designated birthday, such as 30.

You might also set up a family trust if you have a child or family member who requires special medical care. Placing assets in a trust can exclude them from Medicaid eligibility guidelines, which is something you may be concerned with if they end up needing long-term nursing care.

Family trusts can also be useful in estate planning if you want to avoid probate for your family. Probate is the legal process of distributing the assets in an estate, due to the decedent dying intestate (without a will) or having an estate larger than their respective state government’s limit.

During probate, your executor must collect and liquidate your assets, pay your creditors and distribute any remaining assets to your heirs according to the terms of your will or state inheritance laws. Anything that happens in probate is part of the public record and it can be a time-consuming and expensive process. So transferring assets to a family trust can make life much easier for your family in this way.

You can use a family trust to insulate assets from creditors in the event that you’re sued. Most importantly, a family trust can help to minimize estate taxes once the trust grantor passes away. Otherwise, estate and gift taxes could take a significant bite out of your wealth.

How to Set Up a Family Trust

The first step in creating a family trust is typically talking with an estate planning attorney or financial advisor to make sure this type of trust is right for you. There are a variety of trust options you can use in estate planning, something with very specific purposes and others that are more general. An attorney can help you compare different trust options to find the best one.

If it is, then the next steps in the process are fairly straightforward. First, you’d decide who you want to act as trustee. Again, that could be yourself or you could name someone else. Next, you’d decide which family members you want to benefit from the trust. You’d also need to determine exactly what benefit they’d get from the trust.

From there, you’d create the trust agreement. While there are plenty of software programs that can help you do this at little to no cost online, these may not be the best choice if you have substantial assets. So keep that in mind when weighing whether to create a trust yourself or work with an estate planning attorney.

Once the trust document is complete, the next step is funding it. Funding a trust means transferring assets to the ownership of the trustee. So if you want to place a home inside a family trust, you’d transfer the deed to the trustee. In terms of what you can place in a family trust, the list includes real estate, vehicles, fine art, collectibles and heirlooms, bank accounts, stocks and other investments.

Whether your trust documents need a notary and/or filed with your local register of deeds depends on the laws in your state. It’s helpful to check the legal requirements for a family trust where you live to make sure you’ve done it correctly. Otherwise, your heirs might run into issues later when it’s time to access trust assets.

Bottom Line

Family Trust

A family trust is something you might consider using if you want to keep your wealth in the family. Setting one up requires some planning, so the services of a financial advisor or estate planning attorney could be helpful. Before setting up a family trust, consider whether you want it to be revocable or irrevocable. After all, if you choose a permanent trust, you won’t be able to make any changes to your plan later.

Remember, by creating a family trust for assets you want to pass on, you’re making your family’s experience following your death much simpler. A family trust, as well as a will, advanced directive and power of attorney, should all be part of your comprehensive estate plan.

Estate Planning Tips

  • Consider working with a financial advisor on your family’s financial and estate plans. Luckily, finding the right financial advisor doesn’t have to be hard. In fact, SmartAsset’s free tool matches you with up to three financial advisors in your area in five minutes. Get started now.
  • If you’re considering a trust, remember to factor in the cost of creating one. Firstly, there are fees if you’re working with an estate planning attorney. You’ll also pay a fee to the trustee if you’re assigning someone other than yourself that task. And if you’re naming yourself as trustee, choose at least one person who could take over.

Photo credit: ©iStock.com/skynesher, ©iStock.com/sturti, ©iStock.com/FilippoBacci

Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She's worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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