A family trust is an important document to have in place for any family facing a transition on their estate. A trust will allow your family to avoid the stress of probate court while they deal with one of the most difficult periods in their lives. Setting up a family trust is not a hard task. However, it can often remain undone because of human nature– none of us are in a hurry to manage the realities of our mortality. While chores like this are thankless, they truly can dramatically reduce the suffering your loved ones have in their future.
So What Exactly is a Family Trust?
A family trust is simply a type of living trust wherein the beneficiaries are members of your family. A living trust is like a will. There is a basket of assets known as your estate that will be given to someone known as the trustee. The trustee will manage these assets according to rules defined in the trust.
The beneficiaries will benefit from the trust when certain conditions are met. Often the condition is death but can be anything, for example, a beneficiary reaching a certain age. The major difference between a trust and a will is that a trust will operate without the necessity of a probate court, whereas a will is executed within a probate court. This provides a much more streamlined experience with less stress to your loved ones and more flexibility.
What are the Benefits of a Family Trust?
Family trusts can be set up to capture many benefits. We will cover some of the more common use cases:
Probate court can be a long and arduous process. What’s worse is that it tends to be a requirement for people when they are at one of the lowest points of their life, right after a major loss. Oftentimes, that loss can come with expenses or cause mismanagement within a business that requires immediate attention. If assets or responsibilities are held up in probate when they are needed most, it’s a recipe for disaster.
Reduced Tax Burdens
If income from a trust that would have gone to a grantor that is in a high tax bracket is disbursed to beneficiaries that are in a lower tax bracket, the overall tax burden can be dramatically reduced. This allows a higher percentage of the income to end up in the family’s pocket as opposed to a large tax bill.
If a trust is not in place and your assets go into probate, your would-be beneficiaries may have much of the personal information placed on the public record through the court process. Assets, debts, etc. of you and your beneficiaries may become public knowledge. With the execution of a family trust, however, this information remains confidential.
Revocable vs. Irrevocable
As a living trust, a family trust can be set up as revocable or irrevocable. So what’s the difference? Living trusts are given their name because they take effect during your lifetime. Life can change quickly and, depending on your situation, you may want the ability to alter or terminate your trust at any time. This would require a revocable family trust. With a revocable trust, you can also assign yourself (the grantor) as the trustee. Of course, you will want to name a trustee that can take over in the event of your death or incapacitation.
An irrevocable trust is the opposite of a revocable trust where someone other than you is the trustee and the document is permanent.
How to Set Up a Family Trust
Because situations vary so much from person to person, it’s important to sit down with an estate planning attorney and decide whether this type of trust is right for you. An experienced attorney will be able to listen carefully to your needs and talk through what options might be best for you. If you decide to move forward with a family trust, then the next step will be to assign trustee duties to yourself, a trusted person, or a professional trustee. Then you will want to assign all of your beneficiaries as well as what exactly they will be receiving.
Once you have the broad strokes of the trust worked out, you will then work with your attorney to create a trust agreement. In some jurisdictions, you may need to file the agreement with a register or have it notarized. Your attorney will help you navigate this portion of the process. Finally, you’ll need to fund the trust. Funding the trust involves simply transferring ownership of the assets the trust is to manage over to your assigned trustee.
Talk to a Professional
Now that you have a basic understanding of how to set up a family trust, you are armed to have an intelligent conversation with a professional. You may have specific questions for them to answer, like, “Is there a Colorado estate tax?” But more importantly, they will provide answers to questions you didn’t think to ask. We hope this information was helpful. Thanks for reading!