If you’re preparing for your family’s financial future, odds are you’re looking into a lot of estate planning options. A family trust might be one of them. But what is a family trust? How do they work? How do you create one?
In this guide, we’ll walk you through all the essentials of family trusts, including what they are, the different types, and how you can get started.
A family trust is a common type of tool used in estate planning. While every trust is a little different, they generally function the same way. The trust becomes a separate legal entity that holds assets “in trust” until the appointed time — for example, when the parents pass or the child reaches a certain age.
Each family trust has three important parties: the grantor, the trustee, and the beneficiary (or beneficiaries). The grantor is the person creating the estate, and the trustee is the individual appointed to manage the estate. Sometimes the grantor and the trustee are the same person, and other times they’re different people. Regardless, the grantor sets terms for the trustee to follow, all so the beneficiaries receive their share of the estate smoothly and efficiently.
There are two primary categories of trusts: revocable and irrevocable trusts. Revocable trusts are ones that can change if the grantor wants them to, including who the beneficiaries are, which assets are included, and more. Typically, they’re living trusts.
In contrast, in an irrevocable family trust, the terms and conditions of the trust can’t be changed as soon as the trust is executed. It’s a permanent trust. Either type of trust can be a viable option for a family trust, so it’s recommended to talk with a financial planner or estate lawyer to discuss which is right for you and your family.
There are several benefits of forming a family trust. First, a trust allows you to fully control the terms and conditions of how your estate is administered. More importantly, putting assets into a trust can help your family members avoid probate court. Probate can be an expensive, drawn-out process, especially if you have substantial assets, so avoiding it can greatly reduce stress for your heirs.
If you have a large estate, certain types of trusts can help you avoid or reduce estate taxes when the trust assets are passed to the beneficiaries. For some families, this can create significant tax savings. You can even use a trust in conjunction with other planning tools like a family LLC. We highly recommend consulting with an estate planner or lawyer to discuss how a family trust can benefit you — or if it’s even the right choice for you.
There are a wide variety of trust options you can create for your family — even beyond revocable and irrevocable trusts. If you’re not sure which type of trust is right for you, we highly recommend consulting with an estate planning attorney.
A living trust is a trust that you set up during your lifetime, and a majority of family trusts end up starting out as a type of living trust. That way, the trust property can change and be reallocated as needed. Depending on your wishes, a living trust can be revocable or irrevocable. You can even set up an original trustee, successor trustees, and more, all depending on your needs.
Some families prefer to set up a testamentary trust, sometimes called an after-death trust. These trusts are irrevocable, and they’re essentially created by the wishes set out by your will and testament.
Some families with dependents who need medical care or have other special needs dependents utilize a special needs trust to help provide for their loved one’s financial security. By using a trust, some families can ensure that their dependent will still be eligible for government-provided disability benefits like Medicare or the Supplemental Security Income program, while still getting some income from the trust.
You’ve probably already set up life insurance policies to protect your loved ones, but did you know you can actually set up a trust to hold a life insurance policy? Some families choose to set up their insurance policy within a trust for relief from estate taxes when the policy is paid out. While this isn’t the right approach for every family, it can be a valuable tool.
Spendthrift trusts are especially common for families with young children (or dependents that need growth in their financial responsibility). A spendthrift trust sets out very specific terms for how and when the money can be released and used by the beneficiaries.
If you want part of your financial legacy to go toward charitable causes, then you might consider setting up a charitable trust. This type of trust allows you to separately allocate funds and assets toward the charitable organizations of your choice.
This is, of course, not an exhaustive list of trust types. Even more choices can include marital trusts, generation-skipping trusts, and many more. If you think one of these might be a good fit for your estate planning objectives, we highly recommend consulting with a financial planner to learn more.
Technically, you can set up a family trust on your own. But we highly recommend enlisting an estate planning attorney. Every state has slightly different terms for what constitutes a legal, viable trust. For example, some states have different legal requirements for trusts, such as notarizing them. Hiring a lawyer can help you make sure that you fulfill all state requirements.
That said, the basic process for setting up a family trust is largely the same. First, you’ll decide what trust to create and draft a trust agreement document for it. Within that trust document, you’ll designate who the trustee is, who the beneficiaries are, and yourself (and perhaps your partner, if applicable) as the trust grantor.
Finally, you’ll need to transfer your desired assets into the trust, such as real estate properties, some of your bank account balance, and more. Done correctly, this process can protect some of your assets from creditors. Since this legal process technically involves a transfer of property ownership into a “business entity,” it’s a little complicated. That’s why it’s highly recommended to work with an attorney or financial planner to avoid any potential issues.
Managing finances can feel overwhelming, but you don’t necessarily have to do it alone. Here at ZenBusiness, we can’t create a trust for you, but we can help with other needs. If you want to start an LLC, support to stay compliant year-round, or need a registered agent for your family business, we have your back.
Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
Many families choose to create a family trust to provide financial benefits for their families long-term and to keep their assets protected and out of probate court when they pass away. Many trusts can also help significantly reduce a family’s burden for estate and gift taxes.
The biggest drawback to family trusts is that they can be a bit complicated to set up and manage. Often, you’ll need to enlist an estate planning lawyer’s help to set up an effective trust.
Practically speaking, a family trust and a regular trust don’t function any differently. They’re the same legal structure. A family trust is just a regular trust that’s being used to meet the needs of family members (and potentially future generations) as opposed to other beneficiaries.
Estate planning is extremely important for every family, but especially for those that have a family business. Using tools like a family trust can help families create a comprehensive estate plan, detailing the exact ways their money is passed on to the next generation as smoothly as possible.
Currently, the tax rate for estate and gift taxes maxes out at 40%, but usually only if you have an estate larger than $12.92 million. If your estate doesn’t exceed the taxable threshold, forming a trust won’t give you any estate tax savings.
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