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

What are trust funds?

A trust fund is a legal entity in which assets or property are held and managed for the benefit of another person or entity. A trust fund can be revocable or irrevocable. A revocable trust is one that the grantor can change its terms, amend the terms, or remove them at any time. By contrast, a grantor cannot make changes the terms of an irrevocable trust unless he or she gets the permission of the trust’s named beneficiary.

How to terminate a family trust that is revocable

If you have a trust that is revocable, decide where the assets will be transferred to and remove all of them from the trust account.

Create a revocation of the living trust document. List the account information, the trustee, the grantor, and the date. The language must specify that the grantor intends to revoke the living trust account on a specified date. If it is revocable, only the grantor needs to sign the document. If it is irrevocable, the beneficiaries and the grantor will need to sign.

Sign and notarize the revocation of the living trust. For a trust that is irrevocable, the beneficiaries must also sign and notarize the document. Copies of the trust documents must be given to all of the parties. Only the original owner of the account or the trustee of the account can close the family trust financial accounts.

A trust that is irrevocable cannot be terminated at will. Check the state laws concerning terminating a trust that is irrevocable and consult with an attorney for the requirements where you live.

Establishing a family trust can help you to protect your family investments and help you to avoid probate. M1 Finance supports trusts that are revocable and irrevocable.

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4. Revocable trusts can help during illness or disability – not just death

Wills only go into effect when a person passes away, but a revocable trust established during your lifetime can also help your family if you become ill or unable to manage your assets. If that happens, your trustee can make distributions on your behalf, pay bills and even file tax returns for you. You can choose ahead of time who to appoint (through the trust) to manage the assets.

Though no one likes to think about these scenarios, building in provisions like these can safeguard your family from having to make decisions without knowing your wishes during difficult times.

How to Set Up a Family Trust

The first step in creating a family trust is typically talking with an estate planning attorney or financial advisor to make sure this type of trust is right for you. There are a variety of trust options you can use in estate planning. A professional can help you compare different trust options to find the best one.

If you choose to move forward with a family trust, then you’ll first want to 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. 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 complete, 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 a notary 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.

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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.

Benefits and Advantages of Family Trusts

Family trusts offer a variety of benefits. These advantages include:

  • Avoiding legal challenges: A family trust provides the advantage of being airtight legally as opposed to a simple will, which can be challenged. Family trusts can avoid legal challenges to asset dispersal.
  • Avoiding the probate process: This is another substantial advantage over a simple will, as the estate can avoid probate court with a family trust. Avoiding probate allows your assets to be distributed efficiently, avoiding the cost, publicity, and delay that probate court creates. Probate court can cost between 4% and 7% of an estate.
  • Limiting exposure to estate taxes : Family trusts are often part of proper estate planning since they limit potential estate taxes.
  • Limiting exposure to gift taxes: As with estate taxes, family taxes can reduce gift taxes.
  • Offering flexibility: Family trusts are very versatile, as you can adjust and amend the terms.
  • Offering simplicity: With the help of an attorney , a family trust is relatively easy to prepare and account for. Likewise, transferring asset ownership to a trust is relatively simple.
  • Offering a high degree of control: The terms of a family trust will dictate exactly what should be done with your assets if you become incapacitated or die. Trustees must strictly carry out instructions in a trust; if they do not, they will face civil suits and even criminal prosecution. By creating a family trust, you choose the conditions of how and when your assets will be distributed after your death.
  • Protecting your assets: A family trust better protects assets from creditors as well as lawsuits.

Additionally, family trusts allow you to name a successor trustee. A successor trustee will manage your trust after you die. This trustee can also manage your trust assets if you become unable to do it yourself.

Types of Family Trusts

There are many different types of trusts. The main differences between them include who the trust benefits, how the proceeds are taxed and when the beneficiaries receive the assets.

Some common types of family trusts include:

  • Living trust. This type of trust holds your assets while you are still alive, as well as provides a plan for what happens to those assets after you pass away.
  • Marital trust. A marital trust is an irrevocable trust that benefits the grantor’s spouse. This trust avoids incurring federal taxes when it’s transferred from the grantor to the beneficiary.
  • Charitable trust. If a grantor wants to leave assets to a specific charity, they can do so through a charitable trust.
  • Generation-skipping trust. These trusts are created to make large gifts to younger generations without having them incur heavy estate and gift taxes.
  • Special needs trust. An important tool for recipients of Supplemental Security Income (SSI) or Medicare, income from this trust doesn’t count toward income caps for these programs and can be used for a variety of certain related expenses, like medication.
  • Spendthrift trust. A spendthrift trust limits how beneficiaries can access their assets. For example, a beneficiary to these trusts cannot sell or give away their equitable interest in the trust property.
  • Testamentary trust. These trusts are created in a will and are irrevocable once the owner dies. Beneficiaries can only access their share of assets at a predetermined time.

8. Transfer title of property to yourself as trustee

his is a crucial step that, unfortunately, some people never take. But to make your trust effective, you must hold title to trust property in your name as trustee — for example, if John Smith wants to hold real estate in his trust, he must prepare and sign a new deed transferring the real estate to “John Smith, trustee of the John Smith Revocable Living Trust dated June 4, 20xx.”

4. Choose someone to be your successor trustee

Your trust must name someone to serve as “successor trustee,” to distribute trust property to the beneficiaries after you have died. Many people choose a grown son or daughter, other relative, or close friend to serve as successor trustee. It’s perfectly legal to name a trust beneficiary—that is, someone who will receive trust property after your death. In fact, it’s common. Once you’ve made your choice, discuss it with the person you have in mind to make sure he or she is willing to take on this responsibility.

Do You Need an Attorney?

Living trust forms are relatively simple to complete and finalize for some people. If your property is easily transferable and there are few complicating factors regarding it, you can likely finish the document and property transfers on your own.

However, all legal documents should undergo attorney review. Even if you believe your situation is simple and the living trust covers all aspects, schedule a consultation with an estate planning attorney to read over the living trust document and ensure it is correct and enforceable.

But not all situations lend themselves to a do-it-yourself approach. Consider securing legal advice for your living trust matter if you face any of the following:

  • You own a business or multiple business interests
  • You have extenuating issues like intense family conflict or adult children with spending or addiction problems
  • You require additional estate planning documents to supplement your trust, like medical care trusts for adult dependents, charitable trusts, or a will to address property or matters not handled by living trusts
  • You have a chronic or terminal illness that may result in future incapacity

While this article offers a thorough explanation of making a living trust, speaking with a knowledgeable attorney is the best way to ensure your estate planning documents provide for your loved ones and enforce your last wishes. Use our helpful attorney search page to find an estate planning lawyer in your area.

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.

2. Trusts may provide tax benefits

Trusts can either be revocable or irrevocable, essentially meaning that they can either be amended after they’re created – or not. A revocable trust gives you the option to make changes to it after it’s signed, but, depending on its terms, it may or may not lead to tax advantages further down the line.

An irrevocable trust, however, is one that you cannot usually change after the agreement is signed. Because you’ve transferred assets out of your estate, there may be transfer tax benefits with an irrevocable trust. Contributions to the trust are generally subject to gift tax requirements during your lifetime. However, if certain conditions are met, assets placed in this type of trust (and appreciation on those assets over time) will be sheltered from estate tax after your death.

In addition to initial funding, you can make an annual exclusion gift to an irrevocable trust each year without having to pay additional gift tax on that contribution. The current gift tax exemption rate is up to $15,000 for individuals or $30,000 for married couples filing a joint return. Speak with your trust administrator and attorney about whether a revocable trust and/or an irrevocable trust might be a good estate planning option for you and your family.

How is a Living Trust Different From a Will?

A last will and testament, or will, is a legal document that states how you want assets distributed after you die. It is the primary estate planning document for most people. Wills address assets, debts, safe deposit boxes, real estate, personal property, and preferences regarding your memorial service and guardians for any minor children.

The will appoints an executor, who manages the disposition of your estate and honors your wishes. When you pass away, the executor submits your will to probate court to start the process. The court acts as an overseer to ensure all transactions are legitimate and debts paid (if those creditors submit proof of claim). These proceedings are part of the public record.

A living trust is a legal document that creates a fiduciary relationship where another party handles property to benefit third parties. As discussed above, the trustor appoints a trustee to manage the property you place into the trust. Beneficiaries may include your spouse or live-in partner, children, dependent adults, or anyone who receives your support and care.

Unlike a will, property in the living trust passes immediately to your beneficiaries when you die. There is no need to probate a will or undergo the court process.

However, you cannot designate a guardian for minor children or disinherit wayward relatives in a trust. Fortunately, trusts and wills are not mutually exclusive. You can draft a living trust to facilitate the instant transfer of some property while also preparing a will to name guardians, distribute property outside the trust, set up charitable or other types of trusts, and disinherit those who deserve it. While your executor still needs to initiate probate, your essential property transfers quicker through the living trust, so those beneficiaries do not have to wait. Then, probate only has to handle the less critical property transfers and finalize any guardianships.

The Bottom Line

Trusts can be extremely useful arrangements for designating assets for specific purposes. Differences in legal structure and terms significantly affect trusts’ tax impact, asset protection, and benefits. In some cases, alternative vehicles that can be more efficient and less costly may be preferable. Careful evaluation is critical, and professional advice may be necessary. Moreover, because of a history of abuse of trust structures for tax evasion, the proper structuring and operation of trusts are essential. 

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