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What Is a Family Trust?
What is a family trust? You might think that creating a trust fund is only for the rich and famous. But setting up a family trust can be a good way of building multi-generational wealth. It allows you to ensure your assets are managed in line with your wishes. It also has tax, Medicaid, and probate advantages.
Let’s take a look at what is a family trust and how a family trust could benefit you.
Family Trusts Explained
A family trust is a type of living trust. You would use a family trust to pass your assets on to members of your family. This makes you the grantor of the trust.
A living trust can be revocable or irrevocable, depending on your needs. If you choose a revocable trust, the terms of the trust can be changed at any time, and the trust can be ended. With a revocable family trust, you can act as your own trustee. This means you can manage the assets in the trust on behalf of your family members. You can name a successor trustee to take over the trust if you become incapacitated or pass away.
If you choose an irrevocable trust, the terms agreed upon in the trust document are permanent. The trust cannot be altered or terminated. With an irrevocable family trust, you cannot act as the trustee of the trust. You would have to name someone else to act as the trustee. This means you will not manage the assets in the trust. The trustee will be managing the assets on your behalf.
Types of Trusts
What is a family trust? We have already seen that there are two main types of living trusts: revocable and irrevocable trusts.
A revocable trust is one that you can make changes to. For example, you could change which assets are in the trust and who the beneficiaries of the trust are. You can also terminate the trust entirely.
There are many different types of revocable family trusts. A living trust, one that is created and takes effect while you are still alive, is a popular choice. You transfer the ownership of your assets, like property, investments, and your life insurance policy, to the trust. You name a trustee to manage the trust after you pass away. You list your family members as the beneficiaries of the trust. This way, they will be able to access the assets in the trust when you die.
Why not just leave your assets to your family in your will? Living trusts usually allow you to avoid probate. This is convenient since probate can be expensive and take a long time to conclude. It also allows your family to have some privacy, as the assets in a trust do not become a matter of public record.
An irrevocable trust is one that you cannot change or cancel after creating. Once your assets are moved into an irrevocable trust, you lose all control and access to them unless you are a trustee or beneficiary.
Different types of irrevocable trusts include:
- A bypass trust is a form of irrevocable trust that allows you to pass your assets to your spouse without paying gift tax on it.
- Credit shelter trusts also provide a way to reduce your tax when passing assets on to your spouse.
- A testamentary trust is a form of the non-living, irrevocable trust. This type of trust is created in your testament and only takes effect after you have passed away. A testamentary trust is easier to create than a living trust but requires your assets to go through a probate court.
Irrevocable trusts are often used by wealthy families who want to minimize or avoid tax. If one of your beneficiaries is disabled and you’re worried that if they inherit assets from you, they will not be able to access Medicaid or other government programs, you can allow them to have access to your assets through a family trust. An irrevocable trust also provides more creditor protection than a revocable trust can.
What Does a Family Trust Do?
A family trust has only family members as the beneficiaries. This means that your children, grandchildren, siblings, cousin, etc. can benefit from the trust. Family trusts can also include spouses.
A family trust ensures that your assets are managed according to your wishes on behalf of your family. You can use a family trust to specify when family members can access their share of your assets and under what terms. For example, you can include a stipulation in the trust agreement that your children cannot access the trust money until they complete college, or after they turn a certain age.
Depending on how you set up your trust document, a family trust can have many benefits to a testament.
You can use a family trust to avoid probate, decrease tax, insulate your assets from creditors, or protect a family member who requires specialized medical care.
How to Set up a Family Trust
You can set up a trust online or through an estate planning attorney. Although setting up a trust online is cheaper, working with an attorney will be useful if you have complex financial needs.
Here are the basic steps to set up a family trust:
- Draft the trust document – The trust document states what assets are in your trust when you execute the trust, and who are the beneficiaries of your trust.
- Choose a trustee – You need to decide on a trustee that you trust to manage the assets in the trust and to execute the trust document faithfully. If you have a revocable trust, you can act as the trustee yourself.
- Transfer assets into the trust – This includes transferring deeds, titles, and other ownership rights to the trust. If you don’t do this, the trust won’t be effective. You can place real estate, vehicles, fine art, heirlooms, bank accounts, and investment instruments into a family trust.
Benefits of a Family Trust
A family trust is a clear way to pass assets on to family members. It allows you to add all of your money, property, and assets to the trust. You can also clearly state what each member of the family gets. This is a benefit in and of itself. The division of your assets is clear and final.
Revocable trusts generally allow you to avoid probate. This means your family members cannot challenge the terms of the trust. It also means the assets are accessible to your family members immediately. This can save you time and money.
Irrevocable trusts have some tax advantages. You can avoid estate or gift tax. Placing assets in a trust can also decrease the countable assets of your family members, which allows them to still receive government benefits like Medicaid.
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Setting up a family trust is not for everyone. Hopefully, you now have a better understanding of what a family trust is, and some of the benefits of setting up a family trust. If you think your family might benefit from a trust, contact an estate planning attorney to see which type of trust would best suit your needs.