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Trusts are used to manage estate taxes, shelter assets from creditors and pass wealth to future generations. 1 A family trust is a specific type of trust for families to create a financial legacy for the future. Before setting one up, however, it’s important to understand the different types of trusts available and to review your assets to see whether it’s necessary at all. Doing so can give you a clear picture of which estate planning strategies are best for you and your beneficiaries.
If you have questions about your family’s financial outlook, consider speaking with a financial advisor who specializes in estate planning.
What Is a Family Trust?
At the core of a family trust, there are three parties: a grantor, a trustee and beneficiaries: 2
- Grantor. The grantor is the person who makes the trust and transfers their assets into it.
- Trustee. The trustee is the person who manages the trust assets on behalf of the beneficiaries.
- Beneficiaries. The beneficiaries are the individuals who receive some form of financial advantage from the trust, similar to beneficiaries on a life insurance policy.
As you might expect, a family trust lists your family members as the beneficiaries. This includes several types of family members.
- Spouses
- Children
- Grandchildren
- Siblings
- Aunts and uncles
- Cousins
- Any other family members
Family trusts are a type of living trust that takes effect during your lifetime. They can be either revocable or irrevocable, depending on your wishes. 3 A revocable trust can be altered or terminated at any time. You can act as your own trustee, naming successor trustees to take over the reins if you become incapacitated or pass away. Meanwhile, an irrevocable trust is permanent. You must name someone else to act as the trustee.
Types of Trusts
Each type of trust has its own benefits.
Overview of Different Types of Trusts 4
| Trust Type | Main Benefits |
|---|---|
| Marital Trusts (“A” Trust) | An irrevocable 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 the remaining assets that they inherit. |
| Bypass Trust (“B” or Credit Shelter Trust) | Reduces or eliminates estate tax by preserving the deceased spouse’s estate tax exemption. |
| 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 | An irrevocable trust that holds a life insurance policy for a designated beneficiary. Both the value of the policy and the death benefit avoid estate taxes. |
| Special Needs Trust | Established to pay for medical care or day-to-day expenses of special needs dependents, allowing them to remain eligible for government benefits. |
| Spendthrift 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 | Becomes irrevocable upon the owner’s death and is established through a last will and testament. Can access assets only at a predetermined time. |
| Totten Trust | A type of bank account payable on death to the beneficiary named in the account. |
What Are Family Trusts Used For?
A family trust ensures your assets are managed according to your wishes for your beneficiaries.
Say, for example, you have $5 million in assets and want to divide it among your children. You can use a family trust to specify when they can access their share and under what terms, such as a stipulation that they can’t touch the money until they complete college or reach a predetermined age.
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 special needs trust allows them to remain eligible for government-provided disability benefits, like Medicaid.
Family trusts can also be useful in estate planning if you want to help your family avoid probate. 5 Probate is the legal process of distributing an estate’s assets, triggered when someone dies intestate, or without a will, or when an estate exceeds their state’s limit. Everything that happens in probate becomes part of the public record, and the process can be time-consuming and expensive. Transferring assets to a family trust can spare your family this hassle.
You can also use an irrevocable family trust to protect assets from creditors. 6 Perhaps most importantly, a family trust can help minimize estate taxes once the grantor passes away. Otherwise, estate and gift taxes could take a significant bite out of your wealth.
How to Set Up a Family Trust
It takes just a few steps to set up a family trust.
Consult a Professional
The first step in setting up 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. A professional can help you compare different trust options to find the best one.
Choose a Trustee
If you choose to move forward with a family trust, you should first decide on a trustee. Again, that could be yourself, or you could name someone else.
Next, decide which family members will be beneficiaries that receive from the trust.
Create the Agreement
From there, create the trust agreement.
While low-cost or free online options exist, they may not be the best choice if you have substantial assets. Keep that in mind when weighing whether to create a trust yourself or work with an estate planning attorney.
Fund the Trust
Once the trust document is complete, the next step is funding it. This means transferring ownership of assets to the trust, with the trustee responsible for managing them.
This can include several types of assets, such as:
- Real estate
- Vehicles
- Collectibles
- Bank accounts
- Investment holdings
For example, placing a home in a family trust involves transferring the deed. The trust then becomes the legal owner, with the trustee overseeing it.
Check State Laws
Your trust documents may require notarization, or you may need to file them with your local register of deeds. It all depends on your state’s laws.
It’s helpful to check the legal requirements for a family trust in your area to ensure it’s set up correctly. Otherwise, your heirs might run into issues later when it’s time to access trust assets.
Estate Planning Alternatives to Family Trusts
Setting up a family trust is only one estate planning strategy to transfer wealth and protect assets. In some cases, other estate planning tools may be more practical or affordable.
One alternative is a payable-on-death (POD) or transfer-on-death (TOD) arrangement. These designations let you attach a beneficiary directly to a bank account, brokerage account or, in some states, real estate. When the account holder dies, ownership passes to the beneficiary without requiring probate.
Joint ownership is another option. Property held jointly with rights of survivorship passes automatically to the surviving owner. This can work well for couples who share property, but it may not suit more complicated situations where you want to divide assets among several heirs.
Beneficiary designations can also serve as a simple planning tool. Retirement plans, life insurance contracts and annuities allow you to name who receives your funds after your death. Because these assets pass by contract, they aren’t tied to your will and don’t go through probate.
For many people, a will is still the basic way to outline how assets should be distributed. While it usually requires probate, a will provides clarity and direction, and it is often easier and less costly to prepare than a trust.
Some states also allow small estates to bypass full probate if the total value of assets falls below a set threshold. In these cases, heirs may only need to submit a small estate affidavit to transfer property.
These tools generally don’t offer the same level of tax planning, asset protection or privacy as a family trust, but they can still be effective for families with smaller estates or more straightforward financial needs. Weighing alternatives against a family trust can help you determine which path best fits your situation.
Bottom Line
A family trust is worth considering if you want to keep your money within the family. Setting one up for the assets you plan to pass on can make your family’s experience after your death much simpler. A family trust, along with a will, advance directives for health care and a power of attorney, should all be part of a comprehensive estate plan.
Estate Planning Tips
- Consider working with a financial advisor on your family’s financial and estate plans. 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.
- 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.
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