The family trust is a popular vehicle in estate planning. You know your family best, and a family trust can help you customize how you provide for your family, both during your lifetime and after your death.
Find out what kind of trusts there are, how to set them up, and which one is right for your family.
Family trust explained
If you've been thinking about setting up a family trust, it's important to understand that the concept of a family trust that's most commonly used during the estate planning process doesn't refer to a specific, legally defined type of trust.
When people talk about a family trust, chances are they are referring to the most common meaning behind the term. In most estate planning scenarios, a family trust is simply a trust that benefits the family members of the individual who's setting up the trust.
In trust terminology, this person is known as the grantor or settlor of the trust, while the family members who benefit from the trust are known as the beneficiaries. One other trust term is important, and that's the trustee. This is the person you select to manage and administer the trust.
Because a family trust can be any trust vehicle where the beneficiaries are family members, the type of trust you set up when creating your family trust will depend on your particular needs.
What is a revocable trust?
With a revocable trust, you reserve the right 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 the following:
- 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 that leaves ultimate control over the assets you've placed in it in your hands, the living trust is one of the most popular trust vehicles to be set up as a family trust.
People often appoint themselves the trustee of their living trusts. If you are 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.
What is an irrevocable trust?
Once an irrevocable trust has been set up, it becomes unchangeable. 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 the following:
- 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.
Setting up a family trust
While the type of trust you select will have an impact on the specific terms and conditions of the trust, the following are the basic steps you will usually need to go through to set up your family trust:
- Draft the trust document
- Choose a trustee to manage and administer the trust
- Transfer assets into the 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 which can be implemented in your trust, they can provide invaluable assistance in helping you to transfer assets into the trust properly.
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.