Comprehensive Guide to Family Trusts and Their Benefits

Understanding Family Trusts and Their Role in Estate Planning

A trust occurs when an individual (the ‘trustee’) holds ownership of assets on behalf of another person to provide benefits. A family trust specifically is established to pass benefits to family members.

The main goal of a family trust is to transfer ownership of assets into the trust, so that legally, you no longer own the properties personally, yet you continue to enjoy their benefits. These trusts can be set up either during your lifetime or after death.

While this guide emphasizes trusts created while you're alive, allowing you to benefit from the trust during your lifetime, family trusts are also known as ‘trust funds’—valuable estate planning tools. They are beneficial not just for the wealthy but also for middle-class families, helping to avoid probate and support family members unable to manage their finances.

Establishing a family trust is a strategic alternative to a last will. Its primary purpose is to protect assets from creditors or legal claims, ensuring your property remains within your family. The goal is to transfer assets from personal ownership into the trust, reducing personal liability while maintaining benefits as a beneficiary.

By transferring assets into the trust, individuals can shield their properties from potential threats, including business debts or claims from ex-spouses under property laws. Understanding how trusts function and their reasons for formation is essential for effective estate planning.

How a Family Trust Works

The person creating the trust is called the grantor, who often also serves as the primary trustee. A secondary trustee may be appointed to manage the trust if the grantor becomes unable to act. Beneficiaries typically include family members or charitable organizations.

Family trusts allow the designation of family members as beneficiaries, often including extended relatives or charities, depending on state laws.

Types of Family Trusts

Family trusts can be revocable or irrevocable. A revocable living trust can be modified or revoked during the grantor’s lifetime, providing flexibility. An irrevocable trust, once established, cannot be altered, offering stronger asset protection. Most individuals prefer revocable trusts, as they retain control until death when the trust becomes irrevocable.

Assets Managed by the Trust

The trust document lists all assets owned by the trust, specifying who inherits them after the grantor’s passing. Real estate, bank accounts, and investments are often retitled in the trust’s name to facilitate management.

Common Objectives of Family Trusts

Family trusts aim to achieve various estate and tax planning goals, such as credit-shelter trusts and generation-skipping trusts.

Credit-Shelter Trusts protect assets from estate taxes by using exemptions and allowing assets to pass tax-free to heirs. Generation-Skipping Trusts facilitate transferring wealth to grandchildren or future generations, often used for education funds or specific inheritance planning.