Chances are you’ve heard the phrase “family trust” before. But if you were asked to clearly define it off the hip, it’s likely that a fair amount of doubt would be present. We hope to clear all of that up for you by making all the details and options around family trusts comprehensible. We’ll also provide answers to the most commonly asked questions; what is a family trust, why would you need one, and how would you set one up?
What is a Family Trust?
The creator of a family trust’s main purpose for setting one up is to provide an inheritance (benefits, hard assets, or funds) to a family member or members. Depending on the wishes of the family trust creator, known as a grantor, the inheritances outlined in the family trust can be dispersed while the grantor is still alive or will become accessible only after their death. They may also choose one trust type over the other if they would like the ability to make alterations to the trust, or even revoke it. There are many kinds of family trust options available, each dependent on the grantor’s specific desires and needs.
The Five Types of Family Trusts
There are five major trusts types available to a grantor. The first is a revocable trust, the most commonly used of the five trust options. In a revocable trust, the grantor can change their trust in any way they desire, at any point in time, and for any reason, they may have. When the grantor dies, the trust becomes irrevocable and acts as a will; inheritances are distributed to the listed beneficiaries using the instructions or details stated in the trust agreement. An irrevocable trust, unlike a revocable, cannot be altered or revoked after it has been signed and becomes effective.
An inter vivos trust, also known as a living trust, is typically used by a grantor for more specific reasons, the most common being to set up a college education fund for their children or their child. Inter vivos trusts can be made revocable or irrevocable. The opposite of an inter vivos trust is a testamentary trust; set up for the same reasons, what makes it unlike an inter vivos trust is that the funds are only accessible after the death of the grantor. Finally, there is a marital trust, known as an “A” trust, which is a trust used to transfer all assets to a surviving spouse after the death of a grantor.
Family Trust Benefits
There are less obvious reasons why a person may decide to set up a family trust but are just as beneficial to a grantor and worth considering. The most common reasons a grantor may choose to set up a family trust is to avoid probate courts, to reduce their tax burden, to protect their families’ privacy, and to keep their assets out of creditors’ hands.
Interfacing with probate courts can be a really time-consuming and expensive process; an established and well-documented family trust will save a grantor a lot of time and money. Regarding lowering tax burdens, often a family trust will distribute the grantor’s assets to a beneficiary who is categorized under a different income tax bracket. In this scenario, the income received by the beneficiary will be taxed at a lower rate than it would be if it was still in the grantor’s name and possession. This allows more wealth to be available to the beneficiary while also reducing their inheritance tax burden.
When somebody passes away, details surrounding their wealth and assets become a public record rather quickly. This can be really troubling for sensitive situations and for certain estate types and sizes. However, if a grantor has a family trust in place when they die, then their record becomes private. And finally, assets listed in a family trust, and beneficiaries named in a family trust, can be protected from credit companies that attempt to make claims for payments after the grantor’s passing.
How to Set Up a Family Trust
Once the type of trust the grantor would like to proceed with has been determined, the first step to set up the trust is to assign a trustee role and to name beneficiaries. A trustee’s sole responsibility is to supervise the execution of the trust on the grantor’s behalf. The beneficiaries are the recipients of the assets outlined in the trust; typically a family member, but sometimes, a beneficiary can be an organization, charity, or a close friend.
Once a trustee has been appointed and the beneficiaries are named, the grantor must then begin the creation of the trust itself. This is easiest and most effective when a grantor works alongside an estate planning attorney who is adept at the inner workings of trust documentation and will know the technicalities and intricacies the probate courts require.
With the help of an estate planning attorney, the grantor will then need to fund the trust with their investments, properties, and include any other valuable belongings that they would like included in the trust. Once the trust is funded, the grantor will then work with their banks and other financial institutions to legitimately transfer the listed assets to the trust. In other words, the assets must be re-titled to be trust-owned rather than individually-owned.
Work With An Estate Planning Attorney Today
If you or someone you love is considering a family trust and would like to weigh the options based on your estate’s unique situation, the best course of action is to work with an estate planning attorney who specializes in setting up family trusts. They will help you navigate the documents required and assist with any obstacles you may come across when factoring in the details of your estate.
