Planning for what will happen to your wealth when you’re gone can be hard to think about. Doing so now, though, can benefit you and your family, and it can help ensure your assets are protected and distributed the way you want.
A family trust is an estate planning product that can help you legally determine who will get your assets when you die, as well as how much they will get. There are a variety of family trusts available depending on your needs and goals. They also can protect your loved ones from incurring additional costs or taxes in the future.
What Is a Family Trust?
A family trust is any trust you set up that benefits members of your family. It’s often used as a legally binding agreement to establish who will receive portions of your wealth after you pass away.
This type of living trust can be either revocable—meaning you can alter the terms or cancel it entirely—or irrevocable—meaning you cannot modify the trust at all without the approval of everyone within it—depending on the type.
There are typically three parties involved in a family trust: a grantor, a trustee and the beneficiaries. The grantor is the person who establishes the trust and whose assets will be dispersed according to what’s laid out in it. The beneficiaries are the family members who will receive financial assets from the trust. A trustee is the person responsible for managing the assets in the trust on behalf of the beneficiaries.
Types of Family Trusts
There are many different types of trusts. The main differences between them include who the trust benefits, how the proceeds are taxed and when the beneficiaries receive the assets.
Some common types of family trusts include:
- Living trust. This type of trust holds your assets while you are still alive, as well as provides a plan for what happens to those assets after you pass away.
- Marital trust. A marital trust is an irrevocable trust that benefits the grantor’s spouse. This trust avoids incurring federal taxes when it’s transferred from the grantor to the beneficiary.
- Charitable trust. If a grantor wants to leave assets to a specific charity, they can do so through a charitable trust.
- Generation-skipping trust. These trusts are created to make large gifts to younger generations without having them incur heavy estate and gift taxes.
- Special needs trust. An important tool for recipients of Supplemental Security Income (SSI) or Medicare, income from this trust doesn’t count toward income caps for these programs and can be used for a variety of certain related expenses, like medication.
- Spendthrift trust. A spendthrift trust limits how beneficiaries can access their assets. For example, a beneficiary to these trusts cannot sell or give away their equitable interest in the trust property.
- Testamentary trust. These trusts are created in a will and are irrevocable once the owner dies. Beneficiaries can only access their share of assets at a predetermined time.
Why Do You Need a Family Trust?
If you have assets that you want to pass on to your loved ones after you’re gone, then a family trust will legally make sure they are left on your terms.
A living family trust also ensures that your family will hopefully be able to avoid the sometimes painful, long and expensive process of probate. Probate refers to the legal process of distributing assets in an estate and usually occurs when the person who dies doesn’t have a will, or their estate is larger than the state government’s limit. Taking care of the process now, through a family trust, avoids the financial and emotional costs of the probate process.
How to Set Up a Family Trust
There are online options that can help you set up a family trust yourself. However, since this is an important, legally binding document, it’s best to meet with an estate planning attorney or financial advisor to determine the best type of family trust for you and to ensure the trust is set up correctly. For example, some states require that a trust is notarized and/or filed with a local register of deeds. Failing to follow the laws of your state could make your trust invalid.
After finding the appropriate professional to work with, you’ll need to identify who you want your beneficiaries and trustee to be. For family trusts, the beneficiaries will be certain members of your family, while you can designate yourself or someone else as the trustee.
After identifying the involved parties, you’ll then determine how you want your assets split among your beneficiaries. Once the trust document is created, you’ll transfer the relevant assets into it. For example, if you’ll be leaving your home to a beneficiary through your trust, then you’ll transfer the home to the trustee by transferring the actual deed.
Since there are many moving parts to setting up a family trust, as well as legal and tax implications, it’s important to work with a qualified financial advisor or estate planning professional to ensure your trust is established exactly as you want it to be.
Ridgetown Investments is here to help you get this started! Please call us at 616.606.9100 to begin the discussion.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.