Summary
- A family trust is a legal entity designed to strategically pass on wealth to your heirs.
- Some of the benefits of a family trust include avoiding probate and estate taxes, but it’s possible you may end up paying more taxes while the assets sit in the fund.
- Some trusts can be changed after you set them up (revocable), while others cannot (irrevocable).
- Unbiased can connect you to a financial advisor with the expertise needed to help with all your questions.
What is a family trust?
A family trust is a legal structure that can help you pass on wealth to immediate family members. It is any type of trust that holds assets – such as property, cash, investments, shares, and other wealth – to be protected and managed for the benefit of the named family member beneficiaries.
Family trusts are common in estate planning and can be used to pass on wealth without going through probate. You can also avoid estate taxes. However, trusts are taxed, so you’ll need to weigh the cost of those taxes against estate taxes when you’re deciding how to pass on wealth to your family.
How does a family trust work?
A family trust ensures wealth is managed across generations. The legal structure works to protect, manage, and distribute assets in a way that aligns with the creator’s goals.
A family trust has the following three roles to make it work:
- Grantor: The person originating the trust.
- Beneficiary: The person receiving assets from the trust.
- Trustee: The person managing the assets of the trust for the benefit of the beneficiary.
The roles dictate how the trust will operate. The originator, or grantor, of the trust outlines what exactly goes into the trust in a trust document. This may include what the beneficiaries will receive, when they will receive it, and any other conditions or rules that need to be followed.
The trustee becomes the administrator of the trust once the assets have been placed in the trust. They follow the instructions outlined in the trust document.
The beneficiary’s role is to receive the benefits of the trust, as per the instructions of the trust document.
What are the different types of trusts?
The different types of trusts offer various benefits. Some have specific purposes that may suit your family’s unique needs. An advisor can be immensely helpful with setting up the right trust to efficiently transfer wealth.
Revocable trust
A revocable trust is a flexible trust that can be changed throughout your lifetime. You can add beneficiaries, add or remove assets, change trustees, adjust distributions, and more. This type of trust becomes irrevocable when you pass away.
Irrevocable trust
An irrevocable trust cannot be changed once it has been established. The assets you’ve placed into it are no longer under your control. The trustee is now in control of the administration of the trust. It’s less flexible, but it does offer a higher level of asset protection from potential future creditors.
Living trust
A living trust is a type of trust set up to serve your needs during your lifetime while providing administration for your assets upon your death. A living trust can be set up as either revocable or irrevocable.
Testamentary trust
A testamentary trust is a type of trust that activates upon your death. The terms are usually spelled out in your will. It is irrevocable.
Grantor trust
A grantor trust is one in which the creator retains a measure of control. They are responsible for paying taxes on all the assets and distributions in the trust.
Specific types of trusts
There are a number of trust types for specific use cases. Some examples include:
- Special needs trust: For the care of a child or loved one with special needs.
- Charitable trust: A trust used to donate money in a tax-efficient way.
- Generation-skipping trust: Passes assets directly to grandchildren to reduce estate taxes.
- Bypass trust: Where assets are strategically divided between spouses to maximize estate tax exemptions.
What are the pros and cons of family trusts?
A family trust has some pros and cons to consider. It’s also not the only option you have when it comes to setting up a trust.
Pros
- Family receives resources they need: A trust allows your assets to be passed on to family members upon your death.
- Avoid probate and family conflict: A family trust will have directions for who inherits certain assets. Your family won’t need to go through probate to receive it.
- Protect privacy: If you don’t want everyone to know your business and how much you’re worth, a trust avoids the very public probate process that would reveal that information.
- Flexibile: With the right structure, you can adjust the trust as needed in a family trust. If you need to change beneficiaries, add assets, or transfer assets back into your name, you may have the flexibility to do it.
- Protects assets: If you set up an irrevocable trust, assets may have protection from claims against you.
Cons
- Expensive: Setting up a family trust requires expertise in several different areas. The services you’ll need to pay for can add up quickly. There may be ongoing expenses, especially if the trustee is actively managing investments and making distributions for beneficiaries.
- No favorable tax treatment: Individual filers have much higher thresholds than trusts do, so when income comes through a trust, you’ll pay more taxes on it. If the trust is set up as a grantor trust, the grantor will pay all taxes on the income earned from the assets in it.
- Compliance and administrative requirements: Trusts have legal, tax, and regulatory compliance requirements that need to be met.
- Family disputes: You may see conflict over distributions, assets, and management of the trust.
Family trust vs. living trust: What’s the difference?
A family trust vs. a living trust describes the different ways a trust can be organized. A family trust describes who benefits from the trust, while a living trust describes when the trust was set up. A family trust can be a living trust.
A living trust is organized when the grantor is still living. The creator is both a beneficiary and trustee of the trust until he dies. Then, the trust transfers to the new trustee and beneficiaries named in the trust document.
How to set up a family trust
Numbered step-by-step guide.
Setting up a family trust isn’t as complicated as it seems. Generally speaking, setting one up will look something like the following.
Step 1: Find expert advisors
Finding the right people to help you is invaluable. Look for legal, financial, tax, estate planning, and other kinds of help. Competent, kind financial advisors look out for your needs and can help advise you with your unique estate planning needs.
One of the key people you’ll need to find is your trustee. Your trustee is responsible for managing the trust. In certain trusts, you can appoint yourself as a trustee, one of the most important people you’ll be working with. Interview as many as you want before deciding who you want to work with.
Step 2: Decide on the type of trust
With your legal and financial advisors, take a look at how the different types of trusts can benefit your family. Discuss your needs for control, flexibility, asset protection, privacy, type of distributions, and management when deciding on the type of trust.
Step 3: Draw up the trust documents
The trust is controlled by a trust document, which describes in detail how the trust will be administered. It includes things like:
- Names of the beneficiaries, trustee, and grantor.
- List and description of assets included.
- How and when assets will be distributed to beneficiaries.
- The role and duties of the trustee.
- When and how the trust will terminate.
You’ll want to work with your advisors on this document and make decisions regarding the trust. Your advisors can help you consider how the trust document can work for your beneficiaries.
Step 4: Execute the trusts
To execute the trust, you’ll sign and file the documents. You may need to have the trust notarized or have witnesses present (depending on state law). It becomes legally binding when all parties have fulfilled their legal duties, which includes funding the trust.
Step 5: Fund the trust
Once you’ve executed the trust, you'll need to fund it. You essentially fund the trust by transferring the title of your assets into the trust's name. You can do this with bank accounts, real estate, brokerage accounts, life insurance, property, businesses, and retirement accounts.
Transferring personal assets to a family trust fund can be done in the following ways:
- Title transfer: You may be able to change the title to reflect the trust’s ownership in it. Vehicles, brokerage accounts, certificates of deposit, and different types of investment accounts are some examples.
- Open new accounts: You may be required to open new accounts in the name of the trust and transfer assets there. Savings, checking, money market, and certificate of deposit accounts may require a new account with the trust’s name on it.
- Assignment of ownership: Property that you want to pass on includes antiques, art, collectibles, royalties, copyrights, patents, and trademarks. List all the personal property on a page of the trust document called Schedule A or Exhibit A with enough description so the property can be easily identified.
- Name the trust as a beneficiary: In some cases, naming the trust as a beneficiary can fund it. For example, an IRAcannot be owned by your trust before your death. You can, however, name your trust as a beneficiary of your IRA, and it will transfer ownership upon your death.
- Have a deed prepared by a title company or attorney: To transfer ownership from your personal name to the name of your trust, you may need to file a quit claim or grant form, which can vary by state. Record it with your county recorder’s office.
Bottom line
If you need help setting up a trust, you’ll need someone with the right expertise.
Unbiased can match you to a financial advisor to answer any questions you have about estate planning, trusts, retirement, investing, and more.