Should I set up a family trust?
Most people don’t quite understand what a family trust is—also known as a revocable living trust— how it works, and if they need one.
The differences between a trust and a simple will, for instance, are often confused.
Many people believe a trust replaces a will; that is absolutely wrong. The trust needs to be accompanied by a will.
While it can be time-consuming—and more expensive—to have a family trust prepared, there are numerous benefits of the trust for many families.
A family trust is not a requirement in every situation, but in many, it’s quite necessary.
The most common misconception of a trust is that it reduces or eliminates estate tax. That is false! A trust does help to avoid probate and directs assets to its beneficiaries.
How a Family Trust Works
A family trust is a legal document that covers an individual’s assets and specifies the terms of dispersing those assets after one’s death or incapacity. The person who sets up the trust—usually referred to as the grantor—transfers all his/her assets so the trust itself is the owner, not the individual. It’s important to understand that any asset that is not transferred into the name of the trust will not be protected by it. This commonly goes overlooked.
The grantor does not give up full control of the assets.
A trustee—the person(s) who will carry out the terms—is appointed at the time the trust is formed but has no role until the grantor is deceased or incapacitated. The trustee can be a family member, close family friend or even a financial institution.
Typically, choosing a financial institution as a trustee can be costly. The cost can be justified as these institutions specialize in these matters where a family friend may be burdened with all the responsibilities a trust brings. In many instances, a financial institution can be named as successor trustee.
The terms of the trust—and the assets included—can be changed at any time. If there’s a new significant purchase of an asset ( Real estate. Automobile, etc.) these can be added to the trust at any time. Also, intangible assets (securities and other financial investments) can be added at any time as well. Similarly, the trustee(s) and beneficiaries can be changed by the grantor at any time as the grantor maintains full control.
The way assets are dispersed can be established any way the grantor sees fit and can be changed at any time. For example, you could set up the family trust to disperse assets at different ages of your surviving child. They could receive 1/4 of the assets at age 40; The next 1/4 at 45. And the last half at age 50. This is one example of the multiple ways a family trust can be established.
Benefits of a Family Trust
Some of the many advantages of a family trust include:
Avoiding the probate process. If the grantor dies, the estate can avoid a long probate process, a considerable benefit over a simple will, where probate is common for any assets not specifically counted.
Avoidance of legal issues at the time of asset distribution. A family trust is essentially air tight legally, another potential advantage over a simple will.
Limited exposure to estate taxes, which is part of the estate planning process.
Simple and Flexible. A family trust is a relatively easy document to prepare. estate planning attorney. Transferring asset ownership to the trust is an easy task. The ability to amend and adjust the terms at any time makes it a very versatile vehicle.
Control. The terms of a trust order what will happen to your assets in the event you are incapacitated or deceased. The trustee must carry out your instructions, or face civil suits and possibly criminal prosecution.
In Conclusion – What a Family Trust Does
A family trust is a relatively simple and inexpensive, but potentially powerful legal vehicle, with many benefits for a wide variety of individuals. The family trust makes certain your assets will be allocated per your instructions, should something happen to you. It guarantees your beneficiaries will have access to their inheritance—in the way you intend. The peace of mind in that alone may be enough to recommend the process.
You can hire an attorney to draft your will and trust, or there are online options that are more cost-effective, such as LegalZoom.
Ready to find out more?
Drop us a line today to speak to you about setting up a Family Trust!