Family trust vs. living trust: What's the difference?

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.

Ready to start your estate plan?

Excellent TrustScore 4.5 out of 5
1,818 reviews Trustpilot
Woman reading with child sitting on floor

by Michelle Kaminsky, Esq.
updated January 26, 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.

Family trust vs. living 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:

  • Testamentary trust: Set up through a last will and testament, which means it will only come into existence upon the death of the grantor and probating of the will. A testamentary trust, therefore, does not avoid probate.
  • Living trust: Set up and implemented during the grantor's lifetime. The grantor often also serves as a trustee in controlling the property in the trust. With a living trust, the grantor names a successor trustee to carry through the provisions of the trust upon his death, which happens outside of the probate process.

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.

Testamentary trust cost vs. living trust cost

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.

Revocable trust vs. irrevocable 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.

Credit shelter trusts

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.

Ensure your loved ones and property are protected START MY ESTATE PLAN
Michelle Kaminsky, Esq.

About the Author

Michelle Kaminsky, Esq.

Freelance writer and editor Michelle Kaminsky, Esq. has been working with LegalZoom since 2004. She earned a Juris Docto… Read more

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of the author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.