Keeping your wealth and assets within your family is a worthwhile desire, and trust family planning makes this possible. However, trust family planning can be a complicated endeavor. As with most financial planning, the proper guidance can simplify matters. In fact, this blog is an excellent place to start.
In the following contents, we outline the most important questions to ask when considering a family trust.
What is a Family Trust?
A family trust is an estate plan designed to protect your assets and benefit your family members financially.
Who is Involved in a Family Trust?
As with all trusts, a family trust consists of three primary parties: a grantor, a trustee, and beneficiaries.
- Grantor: the grantor makes the trust and transfers assets.
- Trustee: the trustee represents the beneficiaries, managing the assets in the trust for them.
- Beneficiaries: the beneficiaries benefit from the trust; for family trusts, the beneficiaries are family members, including spouses, siblings, children, etc.
What Are the Different Types of Family Trusts?
There are several varieties of family trusts to choose from, depending on your goals. We’ll review the most popular options: irrevocable, revocable, marital, and living.
Irrevocable Family Trusts: an irrevocable family trust is, as the name implies, irrevocable. In other words, it cannot be easily adapted or changed once it is created. The grantor loses control over the assets within the trust. The benefit of these trusts is that they can be utilized for asset protection.
Revocable Family Trust: revocable family trusts are easily adaptable or dissolvable should the need arrive. If you are looking for a flexible option, revocable family trusts are a good choice.
Marital Trust: marital trusts, or “A” trusts, automatically set the spouse as the beneficiary once the first spouse dies. After both have passed away, the trust passes to designated beneficiaries.
Living Trust: a living trust is used while the grantor is still alive and mentally competent, including their wishes for asset dispersion after death. The benefit of living trusts, as with revocable family trusts, is the option of making changes if needed. However, they are not as secure as irrevocable family trusts, which require all beneficiaries to agree upon changes before they are made.
What Are the Benefits of Family Trusts? What About Downsides?
The benefits of family trusts are many.
- Family trusts sidestep probate. As with any trust, a major advantage is avoiding probate, a time-consuming and stressful process. Unfortunately, probate always occurs after the death of a loved one and is best avoided entirely when possible.
- Family trusts help limit estate taxes. Using the right financial advisors, family trust planning can limit estate taxes.
- Family trusts are legally impermeable. Most family trusts bypass the time-consuming, frustrating legal proceedings that often accompany the death of a loved one.
Are there any downsides to family trusts? Here are a few potentially negative aspects to consider.
- Family trusts can be costly. Establishing and maintaining a family trust plan is not cheap. For example, most trustees require ongoing fees for estate management. Typically, however, the cost pays off in peace of mind.
- Family trusts can lead to lack of control over assets. If you choose to establish an irrevocable trust, changes are difficult to make.
How to Set Up a Family Trust
With professional advisors on your side, the following steps to set up a family trust are straightforward.
1. Talk to a Trusted Professional Advisor
Before getting too invested in the planning process, we recommend chatting with a trusted professional advisor to determine which family trust type is best for your situation.
2. Draft a Trust Document
Next, draft a trust document. This is simply a record of all the assets and associated beneficiaries within your trust. In the case of a family trust, these beneficiaries will all be family members. Additionally, you will choose your trustee. We recommend selecting an outside trustee, even though the fees associated may be a bit higher.
3. Set Up a Family Trust
You can set up your family trust in multiple ways, from an online application to one-on-one consulting with an Estate Planning Attorney. Choosing the best method for setting up your family trust will likely depend on the extent of your assets. If you have substantial wealth or assets, working with an Estate Planning Attorney is often the best option.
4. Fund the Trust
“Funding” a trust is simply transferring your assets to your trust and into the ownership of your appointed trustee. A trust may be funded with any number of items, including real estate, stocks, heirlooms, vehicles, art, etc.
Once your assets are transferred into the hands of your trustee, you may need to notarize your trust documents. This depends on your state laws. Make sure you complete this step completely and correctly to avoid legal difficulties when your beneficiaries attempt to receive your trust assets.
Trust vs. Will
What’s the difference between a trust and a will? Which do you need?
Simply speaking, both trusts and wills are created to transfer assets to heirs. However, trusts can bypass probate after the grantor’s death and cannot be contested. Investopedia offers a succinct description of both terms and their differences:
A will is a written document expressing a deceased person’s wishes, from naming guardians of minor children to bequeathing objects and cash assets to friends, relatives, or charities. A will becomes active only after one’s death. A trust is active the day you create it, and a grantor may list the distribution of assets before their death in it, unlike a will.
Once again, we recommend speaking with a professional advisor to determine if a trust or will is best for your situation!
DHJJ: Financial Advisory Services
Our financial advisory services are completed by the professionals at DHJJ Financial Advisors, a boutique wealth management firm. The team at DHJJ Financial has been providing investment and financial planning services to clients since 1988, committed to excellence. Our clients include individuals, families, trusts, and retirement plans.
To speak with a professional advisor today, please reach out at (630) 420-1360 or via our online contact form. We look forward to starting a conversation!
