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Understanding the Purpose of a Family Trust

Before we dive into the legal nuts‑and‑bolts, take a breath and ask, what is a family trust? Think of it as an encrypted USB vault for your wealth: you load the assets, give the passcode to a trusted person, and set the future date when it unlocks for your loved ones.

What is a Family Trust?

A family trust is a legal entity to which you assign ownership of your assets for the benefit of your family members such as a spouse or children, who are listed as beneficiaries of the Trust. It is a means for asset transfer within the family, reduction in estate taxes and providing privacy and avoiding the probate process.

Grantor: The person who created the trust and funds it with their assets is called a grantor.

Beneficiaries are the people, typically family members, who derive benefits from the trust including assets or income.

Trustee: The person who administers the trust for the benefit of the beneficiaries. The trustee manages the Trust in line with the wishes of the grantor.

How does a Family Trust Work?

The grantor creates a family trust as a legal document that describes the terms of the trust, names of trustees, the beneficiaries of the trust, and the circumstances and conditions under which they receive financial benefits. It also talks about how the assets should be managed and distributed.

The grantor funds the trust with the assets they intend to leave to the beneficiaries, including bank accounts, brokerage, retirement accounts, crypto, real estate, vehicles and any other assets.

Family Trust Benefits & Use-Cases

Estate planning

Family Trusts are a useful vehicle for estate planning and asset transfer to heirs. Family trusts can facilitate frictionless transfer of funds to beneficiaries and heirs while avoiding the probate process. You can stipulate the benefits that beneficiaries receive and under what circumstances they will receive the benefits. A trust ensures that family assets remain within the family for future generations.

Care for a family member who needs ongoing medical care

A family trust can be used to care for a child or loved one with special needs who will need ongoing medical care. By putting the assets in a trust, they can access disability benefits such as Medicaid while deriving financial benefits from the trust.

Avoiding probate

Probate is the process by which a deceased person’s estate is administered, when they leave a will, and also when there is no will. The deceased person’s assets are collected to pay off any liabilities and distribute assets to the heirs. The probate process can take a long time to finalize, anywhere between 6-18 months. The proceedings of the probate are public and potentially can attract the attention of creditors or other predatory entities.

A family trust, on the other hand, ensures that your assets do not have to go through the probate process because the assets are transferred to the trust in the grantor’s lifetime. This means the assets are not subject to probate upon death.

The successor trustee designated by the grantor will handle the distribution of assets per the terms of the trust without the need to involve a probate court.

Trusts are private, unlike Wills and the probate process, which are public. Moreover, the transfer of assets to the beneficiaries is much faster with trusts, unlike the probate process.

How Does a Family Trust Work & How to Set One Up

Planning

Identify all the assets you wish to put into the trust.
This includes bank accounts, brokerage and retirement accounts, vehicles, real estate and crypto assets.

Decide the trustee and beneficiaries

Decide who you want to appoint as a trustee. Typically, trustees can be close family members that meet 2 criteria:

(1) You have a lot of faith in their integrity and trust them to do well by the beneficiaries.

(2) They have the financial acumen necessary to manage the assets responsibly. It is not just enough to be well-intentioned, it is also important that the finances of the trust be managed wisely.

Decide when the beneficiaries should receive trust benefits

Think about the conditions or circumstances under which beneficiaries can receive income or assets. For example, you may want your child to be 25 years old and also complete a certain level of education such as a Bachelor's college degree to be able to receive assets or income from the trust.

Create the trust documents

The trust deed is a legal document that lays out the terms and conditions for the trust, the trustee’s responsibilities and the conditions in which beneficiaries receive benefits from the trust.

You can either hire an attorney or follow a Do-It-Yourself (DIY) approach yourself to create the trust documents.

DIY Approach: If you decide to go the DIY route, you can download online trust forms or use legal platforms. You also should do your own research on estate and trust laws both at the federal and state levels and ensure that you follow your state legal requirements.

Attorney Assistance: Hire an estate planning attorney

If you’re going to be working with a legal professional, plan to spend at least $1,000, but set aside up to $3,000 for trust set up and consultation fees.

Pro-tip: Reduce legal costs through company benefits

Many companies offer legal services as part of their employee benefits. Typically, you have to sign up for legal services as part of the annual benefits enrollment and pay a monthly premium to access the services of a lawyer. You could save 1000s of dollars in legal service fees by doing this. Check with your company’s benefits team to see if legal benefits are available to you.

Determine what assets will be transferred to the trust.

Transfer your assets into the trust’s name. The assets can include the following:

Bank accounts
Brokerage
Retirement accounts
Real estate
Vehicles
Art
Insurance policies

You may need to retitle banking and brokerage accounts and update the beneficiary designations for insurance policies.

Types of Family Trusts

Revocable trust: In this type of trust, the grantor can revoke the trust, cancel it or change the terms of the trust. Thereby the grantor has more control over the trust and its assets.

Irrevocable trust: Once created, the grantor cannot change terms of trust or dissolve it. It is often used for tax planning and asset management. This type of trust can be helpful to keep assets away from creditors and for tax planning.

Living trust: this trust is created and in effect during the lifetime of the grantor. Living trusts can be used to avoid the probate process and achieve tax savings. It can also be used to protect the assets from creditors. A living trust is a type of revocable trust and can be changed any time by the grantor.

Testamentary trust: A testamentary trust is created as part of the last will and testament and is irrevocable once the owner dies. Beneficiaries can only access their share of assets at a predetermined time and possibly after certain conditions have been met.

Family Trust vs Will & Other Estate-Planning Tools

In addition to setting up a trust there are other important aspects of estate planning that you should remember to do:

Will

A Will is a legal document in which you will designate your heirs and stipulate how much of your assets you wish to leave for each heir.

Durable power of attorney

The power of attorney is a legal document that designates someone to make medical and financial decisions on your behalf, should you ever be incapable of making these decisions. It includes a durable Healthcare Power of Attorney and a durable Financial Power of attorney.

Advanced health directive

These are your instructions for end-of-life care or the care that you want to receive if you are incapacitated.

Guardianship designations

Designate guardians for minor children as part of the estate planning process. If possible, it is recommended that the guardian be different from the trustee to establish checks-and-balances for your kids’ care vs their financial well-being.

Frequently Asked Questions (FAQs) about Family Trusts

(1) What is the difference between a will and a trust?

Both wills and trust are used to pass your assets to your heirs in accordance with your wishes. However there are some key differences;

Wills are legal documents that set out your wishes for how your assets should be distributed.
A trust is a legal entity set up to ensure that the beneficiaries get the assets and other financial benefits per the wishes of the grantor. A trust can be set up in the lifetime of the grantor. A trust needs to be funded, and assets transferred to their trust be retitling them. have to be retitled

Wills are subject to probate and can be contested. Trusts avoid the probate process and provide privacy.

(2) What are common mistakes people make when setting up a trust?

Mistake 1: Choosing the wrong trustee.

It is important to pick a trustee that meets 2 important criteria:

(1) They should be trustworthy and do the right thing for the beneficiaries, especially minor beneficiaries.

(2) They should have some financial ability to administer the trust and make good decisions.

Mistake 2: Transferring assets to a trust incorrectly.

A common mistake that people make is that after creating the legal trust documents and signing them, they forget to actually fund the trust or transfer assets incorrectly.

In general, assets have to be retitled, i.e. the title of the assets has to be transferred to the trust. For some types of assets, such as insurance policies, the trust needs to be designated as a beneficiary.

Mistake 3: Not updating the trust as circumstances changeTrusts need to be updated when your personal circumstances change, such as a divorce or marriage or the birth of a child.

Conclusion

Creating a family trust is an integral part of estate planning. Family trusts are an important vehicle to leave one’s assets to family members as beneficiaries. Identify the right person to be a trustee to administer the trust and make sure to transfer assets to the trust. You can stipulate the conditions under which beneficiaries receive trust assets or other benefits.

About Planwell

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