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Guide to Setting Up a Family Trust

How does a Family Trust work? Are there different kinds? And how can you set up your own Family Trust? Use our step-by-step guide to get started!

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Patrick Hicks, @PatrickHicks

Head of Legal, Trust & Will

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A Family Trust can be a good idea if you want to put something in place to care for your loved ones, and your legacy (even when you’re no longer around to care for them yourself). If you’re looking for a way to set up your estate to offer financial benefits and more, then you might want to consider a strategic plan like a Family Trust.

Learn more here, as we cover what a Family Trust is, the different types that are available for you to consider and the wide-spread advantages of this unique Estate Planning option (we’ll also explore any potential drawbacks). 

So whether you’re thinking you want to set up a Trust for your family, or if you’re just looking to educate yourself on the topic so you can make an informed, intelligent decision, our Family Trust guide will offer you all the information you need.

What is a Family Trust?

A Family Trust is a legally binding Estate Planning tool that’s set up to financially protect and benefit you and your family. Like other Trusts, a Family Trust might be able to help you avoid probate, delay or reduce taxes and protect your assets.

What is the Purpose of a Family Trust? 

The purpose of a Family Trust is to establish a way for your family to reap direct financial benefits from your Estate Planning efforts. 

Trusts, by definition, are three-party relationships. There’s the grantor (you, the person creating the Trust), the Trustee (the person or people you name to manage and administer the Trust) and the beneficiaries (the person or people who will financially benefit from your estate upon your passing).

There are many reasons to consider a Family Trust. For example, if you have assets you want to split between your children, your Trust can outline what and how that should look. You can be broad in your directions, or you can be fairly specific and include stipulations and/or conditions as to when and how beneficiaries should get money in the future (for example, at a certain age; after a college graduation; upon marriage; etc).

Whereas other types of Trusts can list any number of friends, family members or organizations as beneficiaries, Family Trusts only involve your own family members. We’ll delve deeper into the different types of Family Trusts below. 

Are There Different Types of Family Trust Funds? 

There are several types of Family Trusts. Below we’ll share a brief overview of the main ones, and discuss more about whether a Marital Trust vs Family Trust really means anything to you based on the goals you have for your family. 

  • Irrevocable Family Trust: A Trust that cannot be canceled or easily changed after you create it. The Grantor (the person who creates the Trust) loses access to and control over assets once the Trust is funded. Because assets then become Trust-owned, Irrevocable Trusts are often used for asset protection. 

  • Revocable Family Trust: Can be easily modified or dissolved anytime you decide to do so. These are flexible Trusts. 

  • Living Trust: A Living Trust is a legal document that holds all your assets while you’re still alive. It also can explicitly detail your wishes for assets after you pass away. 

  • Marital Trust: A Marital Trust, also known as an “A” Trust simply establishes that assets automatically pass to a surviving spouse upon the death of the first spouse. Once both have passed, the Trust then goes to designated beneficiaries. 

What Are the Pros and Cons of a Family Trust? 

As with most Estate Planning efforts, there are pros and cons to Family Trusts. Understanding each can help you decide if this is a path you want to further explore. 

PRO: AVOID PROBATE

One of the biggest advantages to any Trust is the ability to avoid probate, which is a costly, timely, often stressful process for families to go through after the death of a loved one.

PRO: SIMPLE AND FLEXIBLE

A Family Trust can be simple and flexible - from the creation stage, all the way through the funding stage and into the management stage. Additionally, they’re very accessible, making them easy and convenient to update or modify at any time (as long as they’re not Irrevocable).

PRO: LIMIT ESTATE TAX EXPOSURE (AND OTHER TAX BENEFITS)

Effective Estate Planning can be very useful in limiting estate taxes.

PRO: AVOID LEGAL PROCEEDINGS

When the time comes for a Family Trust to be distributed, legal challenges will be virtually impossible, as Trusts are - for the most part - legally airtight. With the right Trust, assets can be protected from the threat of lawsuit, bankruptcy or divorce. 

PRO: NO RISK TO PUBLIC BENEFITS ELIGIBILITY

Trusts allow any beneficiary who’s entitled to public services or benefits to keep their established eligibility without having to run down the value of an estate. 

CON: POTENTIAL LOSS OF CONTROL AND/OR LACK OF FLEXIBILITY

If you choose to use an Irrevocable Family Trust, you do risk loss of control over your assets. 

CON: COST

It can be costly to establish and maintain a Family Trust. There can be ongoing fees for the Trustee, who is charged with managing the estate. There are also potential drawbacks of ending up having to hire an attorney to defend the Trust, if ever needed. And finally, the Trust may have to file taxes each year, which will also result in preparation and filing costs. 

CON: WORKS BEST IF AN INDEPENDENT TRUSTEE IS USED

While an outside, independent Trustee can offer the most protection, this would result in limited control over assets. And, there’s also the matter of ongoing fees to compensate an Independent Trustee. 

Do You Have to Pay Taxes on a Trust Fund from a Deceased Family Member?

Unfortunately, there’s just not one, clearcut answer to this question. A very high-level, basic answer is this: any distribution by a Trust might mean the beneficiary is responsible at his or her tax rate. If the Trust still has income at the end of the year, the estate or Trust would pay any tax due. If a beneficiary owes taxes, he or she will receive a K-1 from the Trustee. 

Caveat: there is not a comprehensive end-all-be-all answer to this question.  

How to Set Up a Family Trust

  1. Draft your Trust document

  2. Set up your family Trust (which you can do online!)

  3. Move your assets into your new Trust

Despite some of the seemingly confusing aspects to a Family Trust, in reality, it’s actually fairly easy to set up. 

Step 1: Draft a Trust document

A Trust Agreement document simply lists all assets and names all beneficiaries associated with the Trust. Of course, for a Family Trust, beneficiaries will all be, you guessed it, family members of the Grantor (the person creating the Trust). 

The agreement will also name a Trustee(s) and include instructions that concretely detail how assets the Trust holds should be managed. Remember, one of the best parts of a Family Trust is you can make it as specific or general as you want.

Step 2: Set up your Family Trust (online!!) 

You’ve got a few different options for creating your Family Trust. Of course, you can always go the old fashion route, using an Estate Planning attorney. But that can be pretty expensive, and it’ll likely be a fairly long process. Then, there are the DIY options, which can be tricky to get right. And let’s face it...you’ve got a lot at stake here. Many people have tried to create their own Trust, only to inadvertently make things exponentially more difficult on their loved ones in the end.

The last option is an exciting alternative to both the traditional attorney and the DIY Trust routes that are available. Using an online, trusted option like Trust & Will makes the process simple, affordable, and best of all, effective and safe.

Trust & Will has streamlined the process of creating all your Estate Planning documents. From your Will, to your Trust, to appointing guardians for your children, we’ve taken the middleman out of the process, so everything you need is in one place. You can create the perfect Estate Plan with our help, in a matter of just minutes. You do not need the help of an overpriced attorney. We’re totally confident in our process, and with our attorney-designed, state-specific documents, you can be too. 

But we know it’s a lot to ask for your trust in us, so if our thousands of reviews and our 4.9 rating on Trustpilot aren’t enough to put your mind at ease, don’t worry - Trust & Will offers attorney support for a small additional fee. 

Step 3: Move your assets into the Trust

The final piece of the puzzle is to transfer your assets into your new Family Trust. Really, this just means you need to formally retitle assets to make them Trust-owned. This is usually a fairly simple process and only requires you to reach out to each financial institute where you have accounts, policies and/or assets. You’ll want to ask what their specific process is and find out what paperwork is needed. 

Establishing a Family Trust can be a smart move for many reasons. If you’re thinking you want to create a protective Family Trust, now is the time to get started. 

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