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Family trusts are one of the many ways to transfer generational wealth. They are used to ensure your family members can inherit the things you own quickly and easily after you die. They are highly customizable and depending on how they’re structured, they may carry other benefits too, such as shielding your assets from lawsuits.
In this article, we’ll dive into what family trusts are, how they work and why people choose to use them.
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What is a family trust?
A family trust is any type of trust that lists one or more of your family members as beneficiaries. It’s a legally-binding estate planning product that outlines who inherits your property and wealth after you die.
A family trust involves three primary parties:
- Grantor: The person who sets up the trust and transfers their assets into it.
- Trustee: The person or entity responsible for managing and distributing the trust’s assets according to the grantor’s wishes.
- Beneficiary: The person(s) who receive assets from the trust.
Family trusts are a type of living trust, which simply means it takes effect during your lifetime. A family trust can be either revocable or irrevocable.
- Revocable trust: The grantor can make changes to the trust during their lifetime, such as adding and removing beneficiaries or even dissolving the trust entirely. This provides flexibility and control.
- Irrevocable trust: Once established, the terms of the trust can’t be changed. However, this type of trust offers greater protection from creditors and potential tax benefits.
Family trusts can also spare your family from owing estate taxes after you die, but this benefit is limited to those with significant assets. In 2023, a gross estate value of $12.9 million or more is required to trigger federal estate taxes. A handful of states levy their own estate tax at lower limits.
Types of family trusts
A family trust fund is more of an informal term than a legal one. In reality, a family trust can be any type of trust that passes assets from one family member to another.
Here’s a brief overview of a few different types of trusts and how they work:
- Special Needs Trust
- Designed to support individuals with disabilities, this trust ensures the beneficiary receives financial assistance without jeopardizing their eligibility for government benefits.
- Spendthrift trust
- This trust allows a beneficiary to receive regular distributions, while protecting the assets from the creditors or the beneficiary’s own reckless spending. The trustee has control over the trust’s assets and manages distributions according to the trust's terms.
- Testamentary trust
- This trust is created through a will and only goes into effect after the grantor dies. It allows for the management and distribution of assets for the benefit of specific beneficiaries.
- Generation-skipping trust
- This trust allows assets to skip a generation and pass directly to the grantor’s grandchildren. It can be a useful tool for estate tax planning.
Consider getting advice from a financial advisor or an estate planning attorney to determine which type of trust aligns best with your specific circumstances.
Why have a family trust?
One of the biggest advantages of creating a family trust is that it avoids probate, a lengthy and often costly legal process that determines the validity of a will. With a family trust, assets skip the probate process, ensuring a smooth transition of assets from your estate to your beneficiaries.
Unlike wills, which become public record during probate, trusts offer a higher level of privacy, so details about your assets and who receives them remain confidential.
Irrevocable family trusts can also shield assets from creditors and lawsuits, providing an extra layer of protection for your wealth.
Not everyone needs a family trust. People with modest to average estates can pass down assets to family members through an effectively-executed will, and avoid the extra cost and complexity of establishing a trust.
Considerations for establishing a family trust
If you’re trying to determine if a family trust is right for you, here are some pros and cons to consider:
- Control: A family trust allows you to specify who gets what and under what conditions.
- Privacy: Trusts provide a level of confidentiality not afforded by wills because trusts avoid probate.
- Asset protection: Irrevocable trusts offer protection from creditors.
- Harder to challenge in court: Because trusts bypass probate, they tend to be harder to contest than wills.
- Complexity: Setting up and managing a trust can be complex and generally requires professional assistance.
- Cost: A very simple living trust can cost at least $1,500 to $2,000 to create, while a complicated trust document can cost $2,500 to $5,000 or more.
How to set up a family trust
A family trust fund is a complex legal document, so you should consult an estate planning attorney to set one up.
Here are the general steps you’ll need to follow to establish a family trust fund:
- Gather necessary documents: You’ll need information about your assets, such as property deeds, account statements and investment details.
- Choose a trustee: This could be a family member, friend or a professional entity.
- Draft the trust agreement: An estate planning attorney will help you outline the terms and conditions of the trust, including how assets will be managed and distributed. Your attorney will ensure you’ve met all your state’s requirements and have the required signatures.
- Fund the trust: Transfer ownership of your assets into the trust’s name. This can include things like bank accounts, real estate, vehicles, investments and other property. It’ll require updating deeds, titles and beneficiary designations because once transferred, these assets become the trust’s assets.
- Notify beneficiaries: While not required, informing beneficiaries of the trust’s existence can help avoid future conflicts.
A family trust is used in estate planning to pass along assets to your family after you die. A trust has certain advantages over wills, including bypassing probate. It’s a complex document, so consulting an estate planning attorney and a financial advisor could be a smart move.