What is a family trust and how do you start one?

If you’re worried about the financial legacy you’ll leave for your children or grandchildren, a family trust might be just the wealth management tool that’s right for you. This may also be something recommended by your financial advisor to best manage your personal finance goals.

A family trust is an estate planning tool that gives you control over how your wealth is managed, protected, and transferred from one generation to the next. Setting up a family trust lets you ensure that your wealth is used in a way that aligns with your financial goals and objectives, even once you’re gone. 

There are many benefits to using a family trust as an estate planning tool:

• Ensure your family receives your wealth
• Avoid public disclosure of assets
• Skip long, complicated probate 
• Lessen tax liability of intergenerational wealth transfer

Family trusts explained

A family trust is an estate planning tool used to pass down wealth from one generation to another efficiently and without large fees. The term “family trust” doesn’t refer to a specific type of trust—rather, it’s a colloquial term used to describe trusts set up to benefit family members. 

There are three primary roles in a family trust. 

• The grantor is the person who creates the trust and transfers assets into it. 
• The trustee is the person or people who manage the trust for the beneficiary.
• The beneficiaries are the people who will inherit assets or gain financially from the trust after the death of the grantor.

Types of family trusts

A family trust is a type of living trust. It can either be revocable or irrevocable. Which one is right for you will depend upon your situation.

Revocable trusts

A revocable family trust allows you to change the trust’s terms at any time. This right includes not only modifying the terms but also terminating the trust altogether. 

The revocable trust has many advantages, including:

• Because the trust can be changed or revoked at any time, you retain control over the assets you've placed in the trust.
• At your death, the assets you've placed in the trust do not need to go through the probate process, and their distribution can take place immediately according to the terms of the trust.
• Probate is a public process, and the assets that go through the probate process become a matter of public record; with a revocable trust, since the assets held by the trust aren't part of the probate process, there is more privacy.

One example of a revocable trust that's commonly used in estate planning is the living trust, which is a trust set up and implemented during your lifetime. Because it's a revocable trust, you have ultimate control over the assets you've placed in it, making the living trust one of the most popular trust vehicles.

It’s common to appoint yourself as the trustee of your living trust. If you’re the trustee of your living trust, another advantage is the ability to appoint a successor trustee who can take over management of the trust if you become incapacitated and are no longer able to manage the trust's assets.

Irrevocable trusts

An irrevocable family trust is one that becomes unchangeable as soon as it is set up. You can't change the terms, and you also can't cancel the trust. Specific types of irrevocable trusts have specific advantages, so it's well worth consulting with a tax expert if you plan on using an irrevocable trust in your estate plan. 

The advantages that may be available when setting up your irrevocable trust include:

• There are many irrevocable trusts available that can help your estate minimize or avoid estate taxes. These trusts can be quite complex, so expert help is always advisable when choosing this type of irrevocable trust.
• If one of your beneficiaries is disabled and you're worried that adding to their income or assets will disqualify them for government programs like Medicaid, you can set up an irrevocable trust to help provide for them without significantly impacting their ability to receive such aid.
• An irrevocable trust provides more creditor protection than a revocable trust can, so if this is important to you or your beneficiaries, making your trust irrevocable may be the better option.

One common example of an irrevocable trust is the testamentary trust, the terms of which are outlined in your will. The testamentary trust is not created until your death. At that point, the trust comes into existence following the terms you've set out in your will, and once established, these terms cannot be changed.

Other types of family trusts

If you’re looking for ways to share money with your family, there are many different types of trusts available to fit your needs.

Here are some common types of family trusts:

• Spendthrift trust. A spendthrift trust sets limits on how, when, and how much money from the trust a beneficiary can access. This allows the grantor to set limits which protects the beneficiary from overspending their inheritance. This type of trust also protects the trust assets from creditors.
• Special needs trust. This type of trust allows a family to set up a trust for someone with a disability. The trust allows them to transfer money to that person without affecting their eligibility for government benefits such as Medicaid or Supplemental Security Income or SSI.
• Testamentary trust. The terms of your will determine the bounds of a testamentary trust. At the time of your death, the trust will be funded. These types of trusts are often used to give a surviving spouse or children funds at a certain age because the assets are only available at a predetermined time.
• Bypass trust. A bypass trust transfers a surviving spouse’s share of the estate to a trust upon death. The surviving spouse may use funds from the trust, but the beneficiaries of the trust inherit the assets when the surviving spouse dies. 

Pros and cons of family trusts

Family trusts come with an impressive set of advantages—but not without a cost.

Family trust pros

There are many advantages to setting up a family trust:

• Avoid probate. Unlike with a will, assets in a family trust can be transferred to beneficiaries without probate, making the process more efficient and cost-effective. Probate is a legal proceeding that can take a long time to complete and can be expensive, even with a legally enforceable will.
• Minimize estate taxes. If your total assets exceed $13 million, you’ll need to pay estate tax. Putting your assets into a family trust can lessen the amount of tax you pay on those assets being given to beneficiaries. 
• Maintain privacy over financial affairs. By avoiding probate, you don’t expose your financial affairs to the public. Probate is listed in the public record and would include a list of your financial assets being transferred.
• Increase flexibility. A family trust gives you more control over what happens to your money after you’re gone. You can decide now who gets what and when. This is especially true for revocable trusts, which allow you to make changes whenever you need to.
• Reduce the likelihood of going to court. If a family member disagrees with your will, they can contest the legality of your will. A family trust is more difficult to contest and therefore is more likely not to go to court. 

Because of these benefits, a family trust can be particularly beneficial to families with someone who will need long-term care or who wants to protect their assets from estate tax and creditors.

Family trust cons

Setting up a family trust comes along with a few disadvantages: 

• Increased cost. To set up your family trust, you’ll need to hire an estate planning attorney, which will incur a higher fee than creating your own will. In addition, you may need to compensate your trustee and pay any court fees.
• Additional paperwork. Setting up a trust is more complicated than writing a will and can lead to additional paperwork and transfer of assets. 
• Higher tax rate. As the assets within a trust increase, this is considered income for the trust and will incur a tax. The tax brackets for trusts are higher than for individuals. Meaning, you may pay more tax on the same amount of income if it’s in a trust than if it was still owned by an individual.

Setting up a family trust in 6 steps

While there are some specifics that vary between states and the different types of trusts, you can follow these six basic steps to start your own family trust.

Depending on your choice of trust, you may want to consult with an estate planning attorney when setting up your trust. In addition to relying on their knowledge of the various terms and conditions that can be implemented in your trust, they can provide invaluable assistance in helping you to transfer assets into the trust properly. LegalZoom’s estate planning bundle can be your guide through this process. 

1. Decide the type of trust

The first step in setting up a family trust is to choose which type of trust is right for your situation. The family trust is simply any trust vehicle that's set up to benefit your family members. Because of this, the features of the family trust you create in your estate plan will depend primarily on the type of trust vehicle you choose.

Here are some common types of trusts you can choose from:

• Revocable
• Irrevocable
• Spendthrift
• Special needs
• Testamentary
• Bypass

2. Draft the trust document

Your next step is to draft the trust document. You will need to identify the following:

• The names of your grantor, trustee, and beneficiaries 
• The assets that will be included in the trust
• Which beneficiaries will receive which assets
• The terms and conditions of the trust—how you want the assets to be managed and distributed and when 

An estate planning attorney can review or create your trust so that it meets your state’s guidelines and is legally enforceable.

3. Choose a trustee

One of the most important people involved in your trust is the trustee. This is the person who will manage the trust until the assets are distributed to the beneficiaries. Your trustee can be a family member, friend, or professional.

4. Comply with state requirements

Each state has slightly different regulations for family trusts. It’s important to work with an estate planning attorney or online service to make sure that your trust meets all of the requirements of your state. Your trust documentation will need to be signed by the right people to be valid.

Even small errors or omissions can invalidate the trust and cause your family a lot of headaches after you’re gone. Ensuring that everything is correct is important. 

5. Conduct a trust assessment

You don’t have to go through this process alone. Our estate planning bundle provides tools to help ensure that your trust is valid and ready to support your beneficiaries even after you’re gone. Through our service, you’ll get to work with an affordable estate planning attorney to ensure that your documents are all in order which can give you peace of mind for the right price.

6. Transfer assets

The final step in setting up your family trust is to transfer your assets into the trust’s name.

Assets you might consider adding to your trust include:

• Bank accounts
• Investment accounts
• Real estate
• Vehicles

Once you transfer these assets, they will belong entirely to the trust.

FAQs

What can be included in a family trust?

You can include any of your assets in a family trust. Common types of assets included in trusts include:

• Bank accounts
• Investment accounts
• Real estate
• Vehicles

What happens to a family trust after the death of the grantor?

After the death of a grantor (the person who set up and funded the trust), the trust becomes irrevocable or unchangeable and the assets are passed on to the beneficiaries as laid out in the trust documents.

How long does a trust last?

Trusts are generally set to last a set number of years. Once this term has been reached, any remaining assets are distributed to the beneficiaries according to the instructions in the trust.

How much does a family trust cost?

When setting up a trust with a traditional offline attorney, you may need to pay: 

• An estate planning attorney for the setup and review
• Trustee fees for the management of the trust
• Administrative costs, which might include filing taxes and forms
• Asset management fees for managing any investments in the trust
• Miscellaneous operational costs

Belle Wong, J.D., contributed to this article.