Understanding the Concept of a Family Trust and Considerations for Establishing One

Many people don’t understand the concept of a Family Trust, also known as a Revocable Living Trust. Many people confuse the differences between a will and a trust.

A family trust is more time-consuming and therefore more expensive than a simple will. However, it has many benefits for most individuals.

Many of my clients feel they ” must set up a Trust“. Many people want to avoid the probate process at all costs. Please remember that probate IS NOT a four-letter word.

It’s not necessary to set up a trust in every case.

How a family trust functions

A family trust is an legally binding document which covers the assets of an individual during their lifetime, and specifies how they will be distributed after death or incapacity.

The grantor, or person who creates the trust, transfers all his assets to the trust so that it becomes the owner and not the individual.

In practice, this distinction is only a technicality; the grantor still has full control and access to all of his/her assets.

The trustee is appointed when the trust is created, but does not have any role until the grantor dies or becomes incapacitated. The trustee could be a close relative, a friend of the family or even a financial organization (think bank).

All of the above have been selected by clients as their primary trustees or successor trustees. Remember that selecting a financial institution to be a trustee is the most expensive option.

These institutions are specialized in this area and a friend of the family may not be able to handle all the responsibilities associated with trust.

The trust’s terms, and the assets that are included in it, can be modified at any time. If a car is bought, for example, the trust can include it.

It is important to note that this applies to all major purchases and sales (homes, cars, etc.). Intangible assets, such as securities and other financial investments (such as real estate), are also subject to this rule. The grantor can also change the identity of the trustees and beneficiaries at any time.

The way assets are distributed can also be altered. You could, for example, set up a family trust that would distribute the assets according to the age of your child.

You could receive 1/3 of your income when you reach 45. The remaining 1/3 can be received at age 55. The final payment is made at 65. This is only one of thousands of ways a family trust could be created.

To make sure that I had covered all my bases, Adam Lawler from Adam B. Law Firm, LLC. What he said:

In my world, “family trust” is a revocable joint-tenancy trust that has a grantor (settlor), trustee and beneficiary (both during their lifetime). If only one person is involved, it’s called a living trust, revocable or grantor trust.

The initial trustee of a trust is usually (99.99%) also the settlor or grantor. Professional fiduciaries are usually only called in after the death of a trust maker or if there is no competent child, uncle, etc.

There are different types of family trusts

There are many types of revocable estate trusts, which can make planning an estate a little more complicated. An A-B Trust, for example, is used by married couples who want to continue supporting the surviving spouse while also ensuring that their children will eventually receive a portion of the estate after both spouses have passed away. The A-B trust lets the surviving spouse use the trust income, while the remaining assets will be divided between the children when the second spouse dies.

This is only one example of the type of trust that you can choose to set up for your family. Here are some other examples:

Types of TrustDescriptionCommon Uses
Revocable TrustsGrantors can alter or revoke their grant at any time during their lifetimeEstate planning, asset management, beneficiary designation
Trusts IrrevocableOnce created, the certificate cannot be revoked or modified.Minimizing estate tax, protecting assets, and ensuring that assets are distributed in accordance with the grantor’s will
The Testamentary TrustA will is created in the person’s name and becomes effective after deathProvide for minors or those with special needs
Charitable TrustsFounded to benefit an organization or charitable causeGrantors can enjoy tax benefits and support a good cause.
Asset Protection TrustsProtect assets against creditors or court judgmentsProtect yourself from potential financial or legal risks
Special Needs TrustsCreated to benefit an individual with disabilitiesProvide for individual needs without compromising eligibility for government benefits

Benefits of Family Trusts

A family trust has many advantages.

  • Avoidance the probate process. When the grantor passes away, the estate will be able to avoid the probate court. This is a significant advantage over a simple Will, which requires probate for all assets that are not listed.
  • Avoiding legal challenges to asset distribution. A family trust has a very strong legal basis, which is another advantage of a simple will.
  • Limitation on exposure to estate tax as part of an estate planning process.
  • Simplicity, Flexibility A Family Trust is an easy document to create and maintain with the assistance of a professional estate planning attorney. It is easy to transfer assets into the trust. It is a versatile vehicle because it allows you to change the terms and conditions at any time.
  • Control. The trust will specify what happens to your assets if you become incapacitated, or die. If the trustee does not follow your instructions, they could face civil and criminal charges.

Managing a Family Trust

It is essential to maintain and manage a family estate trust to ensure it meets its purpose. This section will discuss some key aspects of managing family trusts, such as the responsibilities and tax implications.

The Trustee’s Responsibilities

The trustee has the responsibility of managing assets in a family trust, and then distributing those assets to beneficiaries as per the trust’s terms. The trustee is responsible for managing the assets held in the family trust and distributing them to the beneficiaries according to the terms of the trust. The trustee must adhere to the fiduciary duty, which means that they are legally bound to act in the beneficiary’s best interest.

Trusts are changing

There are circumstances where a family trust may need to be changed. Changes in family circumstances, tax laws or investment trends are all common reasons to change a trust. Changes to a trust should be made according to the trust’s terms and applicable laws. An experienced estate planning lawyer can help you make the right changes.

Tax implications of a family trust

Both the grantors and beneficiaries of family trusts may be affected by the tax implications. The trust’s income is usually subject to taxation, as are any distributions to beneficiaries.

There may also be estate tax implications if assets are transferred in or out of a trust. Working with a tax professional is essential to fully understand the tax implications and ensure the trust is set up in a manner that minimizes the tax liability.

Abusing trusts for tax purposes

The IRS is also very aware that people use trust to avoid paying taxes. Do not assume you are smarter than government officials on this issue.

It is important to manage a family trust properly to ensure that it continues to deliver the benefits intended for both the grantors and beneficiaries.

Understanding the role of the trustee and how to make changes to the family trust can help individuals make an informed decision about the management of their trust.

The Bottom Line – What a Family Trust does

A family trust can be a powerful, yet inexpensive legal vehicle that offers many benefits to a variety of people.

A family trust ensures that, in the event of your death, you will receive the inheritance you have designated. It also makes sure that beneficiaries will get their inheritance quickly and completely. This fact may be sufficient to make the family trust process worthwhile.

There are cheaper online alternatives to hiring a local lawyer for our testamentary trust and will. NOLO is one example.

Try them out if you don’t have a will or are interested in a FREE Living Trust.

FAQs about Family Trusts

Who can benefit from the creation of a family trust

Anyone who wants to manage and protect their assets, minimize their taxes and provide for loved ones can benefit from a family trust. Wealthy individuals often use family trusts, but they can be helpful for those with modest assets that want to make sure their estate is distributed and managed according to their wishes.What type of assets can you hold in a trust for family members?

A family trust can hold almost any asset, including cash, real estate, investments and personal property. Certain assets, like retirement accounts, require special considerations before they can be transferred to a family trust.Who should be a trustee of a trust for family members?

A family trust trustee can be any person who is reliable and capable of managing assets. Some people choose a close family friend or relative to act as trustee. Others prefer a professional trustee like a trust company or bank.Can a trust for family members be revoked or changed?

A family trust may be able to be changed or revoked depending on its type. For example, revocable trusts can be changed or revoked at any time by the grantor. In most cases, irrevocable trusts cannot be altered or revoked by the grantor without court approval.

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