Benefits Of A Family Trust As Part Of My Estate Plan
Many people think trusts are for the affluent, but in actuality, family trusts are a powerful planning tool for individuals and families across the wealth spectrum.
We encourage you to carefully consider the differences between a will and a trust when crafting your estate plan. A will distributes assets outright upon your death. A trust allows you more customization and control over when and how your assets are distributed.
Here are a couple examples:
- In a will, you can state that you’d like a certain sum of money to be given to each of your grandchildren. They will receive that sum upon your death. In a trust, you can state that your grandchildren only receive the sum once they turn 18 and that it may only be used for technical school or college tuition.
- In a will, you can dictate that each of your children receive a portion of your assets. They will inherit those assets upon your death.
- In a trust, you can control how and when the assets are received. For example, you can dictate in your trust that children receive payments in thirds after reaching the ages of 30, 35 and 40.
In a will, you might leave assets to a sibling. If that sibling is in a nursing home, the home could end up with your assets or they could kick your sibling off federal benefits. If you establish a trust, you can dictate that the assets will not be distributed if your sibling is in a nursing home or receiving Medicaid.
In This Article:
- What Is A Family Trust?
- How Does A Family Trust Work?
- What Are The Types of Family Trusts?
- What Are The Benefits of A Family Trust Vs. A Will?
- How Do I Set Up A Family Trust?
What Is A Family Trust?
Put simply, a family trust is a set of instructions that tell others what you want to happen to your assets after you’ve passed, and in some cases, while you’re still living.
A family trust is different from other types of trusts in that the beneficiaries are limited to family members, like a surviving spouse or children.
Whether a family trust is right for you will depend on your financial situation, your family’s unique needs and your goals.
How Does A Family Trust Work?
To protect, manage and distribute assets, there are three key roles.
- A grantor establishes the trust.
- A trustee (an individual or third-party fiduciary) manages the trust and makes decisions or hires someone to make decisions about investments, distributions and other financial matters. Trustees are bound by legal obligations to act in the best interest of the beneficiaries. They distribute assets or income generated from the trust’s assets to the beneficiaries based on the terms of the trust.
- Beneficiaries – in this case family members – benefit from the assets in the trust.
What Are The Types of Family Trusts?
There are two main types of family trusts: revocable and irrevocable.
Revocable family trusts are often used as living trusts to document how you want your assets to be managed and distributed both while you’re living and after you’re gone. They allow you to retain more control because you can change the trust’s terms at any time and can add or withdraw assets.
With a revocable trust, you can serve as trustee and name a successor trustee to take over when you are no longer able to. This can be especially helpful to your family if you reach a point in your lifetime where you become ill or are unable to manage your assets. Your successor trustee can make distributions on your behalf, pay bills, file tax returns and more.
An irrevocable family trust cannot be changed once created. It is often used as an estate planning tool to reduce estate taxes or protect assets from creditors.
There are many additional types of family trusts for specific purposes or benefits. Some common types include:
Testamentary trusts are created in the grantor’s will and take effect after he or she dies. They can be used to distribute assets to beneficiaries according to the grantor’s wishes and to help protect assets from creditors.
Special needs trusts help parents or grandparents ensure that children with disabilities have the financial resources they need to maintain their quality of life without jeopardizing their eligibility for government benefits.
Asset protection trusts help protect assets from creditors and lawsuits. They are often used by individuals and families at a high risk of being sued, such as business owners.
If you are considering setting up a family trust, an estate planning attorney can help you determine which type of trust is right for you.
They will evaluate your needs and goals to not only set up the trust, but also to maintain it properly over time.
What Are The Benefits Of A Family Trust Vs. A Will?
Family Trusts Avoid Probate
Having a will is better than having no plan at all; however, a last will and testament does not avoid probate. Probate is a court system designed to administer your will and pay creditors. All of the assets controlled by your will go through probate to be verified and distributed according to your wishes.
The probate court can be costly and time consuming. According to the AARP, the average estate will lose 5-10 percent of assets when administered through probate. For example, if you have a five hundred thousand dollar estate, at a minimum, you’re going to spend twenty-five thousand dollars administering it through probate.
Not only is it costly, but also it is time consuming. The minimum time to administer a will in probate court is six months, but the average time in most counties is eleven months.
If established properly, a family trust can transfer assets to your heirs while avoiding probate. There will be no probate fees and no no minimum administration time.
Family Trusts Minimize Federal or State Taxes
Without a family trust, an individual who finds themselves over the federal exemption limit could face 40-45% in estate taxes. A family trust can significantly reduce or eliminate these taxes by allowing a surviving spouse to make certain tax elections. This is commonly known as “marital deduction planning.”
A family trust allows the surviving spouse to set aside a portion of the estate, including the growth, tax free. For example, if the federal exemption were $1 million, and a surviving spouse is left with $5 million, with the trust, he or she could set aside $4 million in trust and the entire balance (including growth) after the death of the second spouse, would be tax free. Without the trust, the heirs would be paying 40% on $4 million in estate taxes.
Family Trusts Protect & Preserve Your Assets
If you have minor children, then establishing a family trust becomes a must. A minor child cannot legally inherit your assets.
Family trusts provide asset protection by holding assets in trust for your children’s benefit. Even when your children become adults, the trust still provides asset protection against creditors, litigation, and divorce. For example, if you passed away leaving a large sum to your forty-five-year-old child who has spending issues, a pending litigation, or a divorce in process, the trust would hold the assets until your child is in a better place in life.
Another common asset protection measure occurs when individuals are in their second marriage. In this scenario, there is nothing preventing the remaining spouse from disinheriting children from a prior marriage. For example, a husband and wife in their second marriage care for two children the wife has from her prior marriage. The wife passes away and leaves everything to her husband, and the contingent beneficiaries are her two children. Five years later, the husband remarries and creates a new estate plan naming his new spouse as primary beneficiary of his estate and his two step-children as contingent beneficiaries. When the husband dies, the new spouse inherits everything and the children are accidentally or intentionally disinherited.
Family Trusts Offer Privacy
When you go through probate, all of your information – assets, beneficiaries and more – become public record. Establishing a trust will allow you to avoid probate and maintain your privacy.
Family Trusts Are Cost-Efficient
Having a trust is more cost- effective than a will. Because the trust allows you to avoid 6-18 months of probate costs, more of your legacy is preserved for your family.
How Do I Set Up A Family Trust?
The exact process varies, but the following are key steps that your family trust attorney will walk you through.
- Decide what assets will be placed in your trust. While you might already have an idea of what you’d like to include, your attorney may help you uncover some additional assets that would benefit from being placed in a trust. Assets can range from cash and investments to real estate and other property.
- Choose your beneficiaries. They might include your spouse, your children, grandchildren or other close family members.
- Establish the rules of your trust. For example, will assets be distributed with age requirements or terms for how the assets may be used?
- Determine who will manage the trust. The manager of the trust, called the trustee, could be yourself, someone you know or a third party, such as a financial institution.
Once you are confident in these decisions, your family trust attorney can draft the trust document.
To learn more about how to set up a family trust with Baron Law or to schedule a free consultation, call 216-573-3723 or submit your request online.
