Family Trust: Definition, Types & How To Set Up One

Family Trust

A Family Trust is a fantastic option if you want to put something in place to care for your loved ones and your legacy (even if you are no longer alive to do so). If you want to set up your estate to provide financial benefits and more, you should consider a strategic strategy like a family trust.
Learn more about what a family trust is, the several types available to you, the cost, and the numerous benefits of this unique estate planning alternative (we’ll also discuss any potential disadvantages).
So, whether you’re considering establishing a trust for your family or simply want to educate yourself on the subject so you can make an informed, logical decision, our family trust guide will provide you with all the knowledge you need.

What is a Family Trust?

A family trust is a legally binding estate planning mechanism set up to safeguard and benefit you and your family financially. A Family Trust, like other trusts, may be able to assist you in avoiding probate, defer or minimizing taxes, and protect your assets.

What Purposes Do Family Trusts Serve?

A family trust ensures that your assets are administered on behalf of your beneficiaries in accordance with your preferences. Assume you have $5 million in assets and want to divide them among your children. You can utilize a family trust to determine when and under what conditions they can receive their part of your assets. For example, you could insert a provision in the trust agreement that they can’t touch the money until they finish college or reach a certain age, such as 30.

If you have a kid or family member who requires special medical care, you may want to set up a family trust. Placing assets in a special needs trust permits them to continue receiving government-provided disability benefits, such as Medicaid.

If you want to avoid probate for your family, family trusts can also be valuable in estate planning. Probate is the legal procedure of distributing the assets of an estate when the deceased dies intestate (without a will) or has an estate that exceeds the state government’s limit. Everything that happens in probate becomes a public record, and it may be a time-consuming and costly process. Transferring assets to a family trust can therefore make life considerably easier for your family.

An irrevocable family trust can be used to protect assets from creditors. Most importantly, when the trust grantor dies, a family trust can help to reduce estate taxes. Otherwise, estate and gift taxes might deplete your assets significantly.

Types of Family Trust

There are numerous types of trusts. The key distinctions between them are who benefits from the trust, how the proceeds are taxed, and when the assets are distributed to the beneficiaries.

Among the most frequent types of family trusts are:

#1. Living trust.

This form of trust both holds your assets while you are alive and creates a strategy for what happens to those assets once you die.

#2. Marriage trust.

An irrevocable trust that benefits the grantor’s spouse is known as a marital trust. When transferred from the grantor to the beneficiary, this trust avoids federal taxes.

#3. Charitable Trust.

A charitable trust can be used by a grantor to leave assets to a specified charity.

#4. Generation-Skipping Trust.

These trusts are set up to make big gifts to future generations without incurring high estate and gift taxes.

#5. Special Needs Trust.

Income from this trust does not count toward income caps for these programs and can be used for a range of specific connected needs, such as medication, making it a useful tool for beneficiaries of Supplemental Security Income (SSI) or Medicare.

#6. Spendthrift trust.

A spendthrift trust restricts beneficiaries’ access to their assets. A beneficiary of one of these trusts, for example, cannot sell or give up their equitable interest in the trust property.

#7. Testamentary Trust:

These trusts are established through a will and are irrevocable after the owner dies. Beneficiaries can only access their assets at a specific time.

How to Set a Family Trust

Choosing the appropriate type of trust for you is a personal choice. A family trust may be an excellent approach for some people to maintain their families, but it may not provide the protections that others require.

Family trusts are best suited for persons with bigger estates or who desire to maintain their money and assets within their family. Family trusts are also a good option for people who want to assure care for family members who have special needs or unique care demands.

Setting a family trust is similar to making other types of living trusts. You will finish the trust forms and pick who and what to put in the trust. The trust will then be “funded” with the assets you desire to leave to your loved ones.

To establish your family trust, do the following steps:

#1. Determine the type of family trust you wish to establish.

A revocable trust is typically used by people who have straightforward estate-planning needs. People with more complex requirements may opt for an irrevocable trust.

#2. Create trust documents.

What paperwork you’ll need to fill out will be determined by your state’s regulations and standards. An estate planning lawyer can walk you through the process and answer any questions you may have.

#3. Choose a trustee.

Your trustee can be you, another person, or an organization if you form an RLT. If you want to oversee the trust while you’re still living, you should choose a “successor trustee.”

#4. Choose your recipients.

Beneficiaries in a family trust are the family members you name to receive your assets. You should include instructions for how you want those assets dispersed in your trust documents.

#5. Put your trust into action.

It’s time to make it official after you’ve completed your trust forms and named your trustee and beneficiaries. The precise procedure for finalizing your trust will be determined by the laws and criteria of your state. This frequently requires signing your trust documents in the presence of witnesses. In some states, your trust may also need to be notarized in order to be valid.

#6. Fill the trust.

Finally, you must transfer your assets to the trust. This includes any real estate or property you possess (such as your home), financial accounts, non-cash assets (such as stocks), and even a life insurance policy. It’s a good idea to consult with a financial expert about the assets you’ve selected for your trust. They can assist you in understanding how your trust assets may be taxed.

Each state has its own set of regulations and procedures for establishing trust. Depending on where you live, you may need to take extra procedures to set your trust.

If you have any questions or if your estate is more complicated, an estate planning attorney can assist you. They can address your issues and give solutions depending on your specific situation.

What Are the Benefits and Disadvantages of a Family Trust?

Benefits of a Family Trust

Setting a family trust can provide you and your loved ones with numerous benefits, including:

  • You can avoid probate: Probate is the legal procedure of dispersing a person’s estate after their death in accordance with their final will and testament. Trusts avoid the probate process, saving your loved one’s time, money, and stress.
  • Adaptability to change: You can make adjustments or additions to a revocable trust at any time. This can include the assets held in the trust as well as the trustee(s) or beneficiaries. You can also choose to terminate the trust completely. You can also include conditions in the trust’s terms. You can, for example, indicate whether you want your children to reach a specific age before they can receive any funds.
  • Possessing authority over your final wishes: You get to specify exactly what you want to happen after you die in your trust. These instructions are included in the trust paperwork and must be followed by your trustee. This provides you with authority over critical decisions, such as who manages and invests trust assets on behalf of your children.
Read Also: 7 Ways You Can Avoid Death Taxes
  • Conflict avoidance: Having trust can make it more difficult for family members to question your motives. Because you’ve defined your preferences in your trust agreements, there’s less chance that family members would disagree over how your assets are divided.
  • Privacy protection. Because a trust does not have to go through the probate procedure, its contents are not made public. This protects both you and your beneficiaries’ privacy.

An irrevocable family trust can also provide some benefits—as well as some limitations. You can still avoid probate, maintain privacy, and potentially avoid family disputes with an irrevocable trust. However, once built, this type of trust is often unchangeable.

Still, irrevocable trusts have advantages. They can reduce your estate tax liability by removing assets from your taxable estate, easing the financial strain on your family.

Disadvantages of Family Trust

  • There may be a loss of control and/or a lack of flexibility: You risk losing control of your assets if you use an irrevocable family trust.
  • Cost: Establishing and maintaining a family trust can be costly. The trustee, who is in charge of managing the estate, may incur recurring fees. There are also possible disadvantages to needing to hire an attorney to defend the trust if necessary. Finally, the trust may be required to file taxes each year, which will incur preparation and filing fees.
  • It works best with an independent trustee: While an independent trustee might provide the best security, it also limits control over assets. In addition, there are recurring costs to compensate an Independent Trustee.

Is it necessary to pay taxes on a trust fund established by a deceased family member?

Unfortunately, there is no simple answer to this question. A very high-level, fundamental answer is that any distribution made by a trust may imply that the beneficiary is liable at their or her tax rate. If the trust has any remaining revenue at the end of the year, the estate or trust would pay any taxes owed. If a beneficiary owes taxes, the trustee will send him or her a K-1 form.

Conclusion

If you want to keep your fortune in the family, you may consider using a family trust. Setting one up necessitates some planning, so the assistance of a financial advisor or estate planning attorney may be beneficial. Consider whether you want a revocable or irrevocable family trust before setting one. After all, if you choose a permanent trust, you won’t be able to amend your strategy later, while the trade-off is that you’ll get considerable tax benefits.

By establishing a family trust for assets you wish to leave on, you are making your family’s experience after your death much easier. Your comprehensive estate plan should include a family trust, as well as a will, advanced directive, and power of attorney.

Family Trust FAQs

Is a family trust worth it?

Family trusts might be useful for shielding vulnerable beneficiaries who could make rash spending decisions if assets were held in their own name. A spendthrift youngster or a child with a gambling addiction may have access to income but not to a big sum of money that can be spent rapidly.

What are typical trust fees?

Most corporate Trustees will receive between 1% and 2% of the Trust assets. For example, a Trust with a value of $10 million will pay Trustee fees ranging from $100,000 to $200,000.

Do trusts pay taxes?

Yes, whether the trust is simple or complicated, the trustee is required to file a tax return for the trust (IRS Form 1041) if the trust has any taxable income (gross income minus deductions is greater than $0) or gross income of $600 or more. It depends on the grantor’s trust.

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