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What Is a Family Trust and How Do You Set One Up?

·6 min read
A happy family out for a walk
A happy family out for a walk

A trust can be used to manage estate taxes, shelter assets from creditors and pass on wealth to future generations. A family trust is a specific type of trust families can use to create a financial legacy for years to come. There are several benefits to creating one, though not every family necessarily needs one. If you’re curious about where this type of trust might fit into your family’s estate plan, here’s what you need to know.

What Is a Family Trust?

A family trust is a trust you create for the direct financial benefit of your family members.

Here’s a quick primer on how trusts work, if you’re not familiar. There are three parties involved in a trust arrangement: a grantor, a trustee and the beneficiaries. The grantor is the person who makes the trust and transfers their assets into it. The trustee is the person who manages the assets in the trust on behalf of the beneficiaries. The beneficiaries are the individuals who receive some type of financial benefit from the trust, similar to a beneficiary for a life insurance policy.

A family trust has just your family members as the beneficiaries. So that means your children, grandchildren, siblings, aunts and uncles, cousins – any family members you choose to list as beneficiaries. Spouses can also be included in family trusts.

This type of trust is a living trust and it can be revocable or irrevocable, depending on your wishes. A living trust is a type of trust that takes effect during your lifetime. A revocable trust can be altered or terminated at any time. An irrevocable trust is permanent. With a revocable family trust, you can act as your own trustee, naming successor trustees to take over the reins if you become incapacitated or pass away. With an irrevocable trust, you’d have to name someone else to act as the trustee.

What Does a Family Trust Do?

A family trust ensures that your assets are managed according to your wishes on behalf of your beneficiaries. So, for example, say that you have $5 million in assets and you want to divide that between your children. You could use a family trust to specify when they can access their share of your assets and under what terms. For instance, you may include a stipulation in the trust agreement that they can’t touch the money until they complete college or reach their a designated birthday, such as 30.

You might also set up a family trust if you have a child or other family member who requires specialized medical care. Placing assets in a trust can exclude them from Medicaid eligibility guidelines, which is something you may be concerned with if your family member requires long-term nursing care.

Family trusts can also be useful in estate planning if you’d rather avoid probate. Probate is a legal process that involves the court system. An executor is assigned to collect and liquidate your assets, pay your creditors and distribute any remaining assets to your heirs according to the terms of your will or state inheritance laws. Anything that happens in probate is part of the public record and it can be a time-consuming process as well as expensive. Transferring assets to a family trust means they’re no longer subject to probate.

You can use a family trust to insulate assets from creditors in the event that you’re sued. Lastly and perhaps most importantly for higher net worth investors, a family trust can help to minimize estate taxes once the trust grantor passes away. Estate and gift taxes could take a significant bite out of your wealth but trusts can be helpful for minimizing the tax burden for wealthier investors.

How to Set up a Family Trust

Financial advisor with family
Financial advisor with family

The first step in creating a family trust is typically talking with an estate planning attorney to make sure this type of trust is right for you. There are a variety of trust options you can use in estate planning, something with very specific purposes and others that are more general. An attorney can help you compare different trust options to help you decide if a family trust is your best bet.

If it is, then the next steps in the process are fairly straightforward. First, you’d decide who you want to act as trustee. Again, that could be yourself or you could name someone else. Next, you’d decide which family members you want to benefit from the trust. You’d also need to determine exactly what benefit they’d get from the trust.

From there, you’d create the trust agreement. While there are plenty of software programs that can help you do this at little to no cost online, these may not be the best choice if you have substantial assets you want to place in the trust. So keep that in mind when weighing whether to create a trust yourself or work with an estate planning attorney.

Once the trust document is created, the next step is funding it. Funding a trust means transferring assets to the ownership of the trustee. So if you want to place a home inside a family trust, you’d transfer the deed to the trustee. In terms of what you can place in a family trust, the list includes real estate, vehicles, fine art, collectibles and heirlooms, bank accounts, stocks and other investments.

Whether your trust documents need to be notarized and/or filed with your local register of deeds depends on the laws in your state. It’s helpful to check the legal requirements for a family trust where you live to make sure you’ve done it correctly. Otherwise, your heirs might run into issues later when it’s time to access trust assets.

The Bottom Line

A family trust is something you might consider including in your estate plan if you want to keep your wealth in the family. Setting one up requires some planning, but it doesn’t have to be difficult. Before setting up a family trust, consider whether you need it to be revocable or irrevocable, since choosing a permanent trust means you won’t be able to make any changes to your plan later.

Tips for Investing

  • Consider working with a financial advisor on your family’s financial and estate plans. Finding the right financial advisor who fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors who will help you achieve your financial goals, get started now.

  • If you’re considering a trust, remember to factor in the cost of creating one. There are attorney’s fees if you’re working with an estate planning attorney, but you’ll also pay a fee to the trustee if you’re assigning someone other than yourself that task. And if you’re naming yourself as trustee, choose at least one person who could take over the trust’s management for you if the worst happens.

Photo credit: ©iStock.com/skynesher, ©iStock.com/sturti, ©iStock.com/FilippoBacci

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