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Everything You Need to Know About Family Trusts
What is a Family Trust?
You may be surprised to learn that "family trust" doesn’t describe a specific type of trust. It’s actually any trust formed to benefit your family. They can be simple or complex, depending on your situation and goals.
Who Can Benefit From a Family Trust?
Anyone can take advantage of a trust to benefit their family members. This includes a parent who wants to pass an inheritance to their child, a grandparent to a grandchild, or an aunt to a niece or nephew. The key to setting up a successful trust is to discuss your unique situation with an attorney (like us!)
How Does a Family Trust Work?
A trust has three roles: grantor, trustee, and beneficiary. The grantor is the person who creates and puts assets into the trust. In a family trust, the grantor is generally the parents or grandparents. The trustee is the company or person who oversees the day-to-day functions of the trust. The beneficiary is the person who benefits from the trust assets. In this example, it would be a child or grandchild.
Why Set Up a Family Trust?
Family trusts can be an effective means of succession planning. They allow for a responsible trustee to manage the finances, assets, investments, and income of multiple beneficiaries. If one beneficiary is irresponsible with money, the other beneficiaries’ trust assets won’t be affected by their bad decisions. It can also protect a family member from their own bad decisions, creditors, or spouses.
What Can Go Into a Family Trust?
Commonly placed items include real estate, personal property, bank accounts, investment products, company ownership shares, and cash. The specific assets you can put into a trust depend on the type of trust and local laws. Know that assets, like retirement accounts and primary residences, require special consideration due to tax implications.
What Is a Spendthrift Provision?
A spendthrift is a person who spends money extravagantly and irresponsibly. This provision protects the beneficiary from their own bad decisions. It restricts the beneficiary's ability to transfer future payments of income or assets to any third party, including a creditor. The trustee has complete discretion to make, or not make, distributions to a beneficiary.
Set Up a Family Trust
Trust Creation and Execution
We prepare your trust document. It lists the beneficiaries and trustees and instructs the trustee on how the trust should be managed.
Assets Transfer
The grantor transfers assets to the trust. First, they open bank and investment accounts in the trust's name. Then, they deposit cash and other assets into the trust. Transferring real estate into the name of the trust is done with a deed. The type of deed to use can vary, but a quitclaim deed, warranty deed, or special warranty deed may be used. If applicable, you can identify the trust's ownership of personal property like coins or art with a personal property memorandum.
Transferring LLC membership interests or shares in a private corporation can be accomplished with an assignment of interest. A trust can own almost anything a person can own. Moving assets into the trust can be more complicated. It’s important to remember that you can continue to move assets into the trust over time, so you shouldn’t feel like you need to do everything all at once.
10 Benefits of a Family Trust
- Asset protection: A family trust can shield assets from the beneficiaries’ creditors, lawsuits, and other potential threats.
- Estate planning and wealth transfer: You can specify how and when beneficiaries receive assets, potentially over many years or based on certain conditions.
- Tax advantages: Depending on the trust’s structure, it may offer various tax benefits. This can include reducing estate taxes, income taxes, or capital gains taxes.
- Avoiding probate: Assets in a trust typically bypass the probate process, which can be time-consuming, expensive, and public. This allows for quicker and more private asset distribution to beneficiaries.
- Privacy preservation: Unlike wills, which become public record during probate, trusts generally remain private. This keeps family financial matters confidential.
- Control over asset distribution: Trusts allow grantors to set specific terms for how and when assets are distributed, ensuring funds are used for intended purposes.
- Management flexibility: Trusts can be structured to allow for professional asset management, which can be helpful if beneficiaries lack financial expertise or if the trust assets are complex.
- Continuity across generations: A properly structured trust formed in certain states can continue for multiple generations, ensuring long-term family wealth management and preservation.
- Protection for beneficiaries with special needs: Special needs trusts can provide for family members with disabilities without jeopardizing their eligibility for government benefits.
- Potential reduction of estate taxes: Certain types of trusts can minimize estate taxes on larger estates, allowing more wealth to be passed on to beneficiaries.
How to Decide If a Family Trust Is Right for You?
A trust may be right for you if you want to pass down valuable property or protect assets for your children or grandchildren. Think about whether privacy is important and if you want to avoid the probate process after your death. A trust lets you control how your money is used in the future. It has the potential to help with taxes and protect your assets from lawsuits or creditors.
If you have family members with special needs or a business to pass down, a trust could be helpful. It's also a good way to plan for the future if you become unable to manage your own finances.
Family Trust FAQs
