Both a family trust and a living trust can help you achieve your estate planning goals, but which one is better for you depends on your needs.
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updated November 21, 2023 · 3min read
Both a family trust and a living trust can help you achieve your estate planning goals — and actually, in most cases, the terms may be interchangeable.
First, it is important to understand the general concept of a trust. A trust is a legal instrument used to hold assets for the benefit of another.
The person who creates the trust is called the “grantor" or “settlor" and the people who manage the trust are called “trustees." The "beneficiaries" are those who may benefit under the trust.
Quite simply, a “family trust" may refer to any trust created with family members as its beneficiaries. A family trust can be set up in two ways:
Which method is preferable depends on your situation, but often the goal of creating a family trust as a living trust is to transfer wealth to family members and remove assets from the grantor's legal ownership, while still allowing their control over the trust property and the right to receive benefits from the assets as well.
Accordingly, one major factor to think about is whether you would prefer to keep assets under your personal control or have them be held by a trust during your lifetime.
Set-up costs may be another important factor when deciding between a testamentary trust and a living trust. Establishing a living trust requires additional planning and documentation beyond a last will and testament, so it costs more upfront as well.
Depending on whether you gain any tax savings, though, the cost analysis may end up swinging in favor of a living trust.
Both testamentary and living trusts are revocable trusts, which means that the trusts' terms can be changed at any time, or the trust may be canceled entirely, by the grantor of the trust. A revocable trust is the most flexible type of trust because of the possibility of changing it.
The opposite is an irrevocable trust, which forbids changing any of the provisions in the trust or canceling it.
In irrevocable trusts, the grantor gives up all rights and control over the trust as well as the property contained in it, which means he can't act as a trustee or remove assets from the trust. There may be tax advantages and other personal reasons to opt for an irrevocable trust.
Sometimes the term “family trust" refers specifically to a “credit shelter trust," “bypass trust," or “B trust," when it is used to reduce or eliminate state or federal estate taxes upon the death of a surviving spouse.
A credit shelter trust is set up so that when one spouse dies, the trust property can be used by the surviving spouse and the surviving spouse can receive income from the trust's assets, but the property passes to other familial beneficiaries—usually children—federal estate tax-free up to the decedent's exemption amount ($5.49 million in 2107).
Because the assets are in trust, when the surviving spouse dies, they are not included in the surviving spouse's estate, and the surviving spouse's exemption is still available as well. This allows a married couple the opportunity to use up the full, combined federal estate tax exemption amount ($10.98 million in 2017).
If you need to avoid federal estate tax, professional advice is crucial. Even in seemingly simpler situations, though, a living trust attorney can help you make the best decisions on all kinds of estate planning issues, including which type of trust is best for you.
by Michelle Kaminsky, Esq.
Freelance writer and editor Michelle Kaminsky, Esq. has been working with LegalZoom since 2004. She earned a Jur...
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