There are many kinds of trusts, but the basic idea is generally the same. A trust is a legal tool where an individual (grantor) transfers ownership or management of specific assets to a third party (trustee). Assets are pieces of property such as cars, homes, or cash.
Family trusts are usually revocable living trusts, because they can be changed within the grantor’s lifetime. In contrast, an irrevocable trust, once established, cannot be altered.
The trustee manages the trust’s assets for the benefit of others. In the case of a family trust, the trust is set up to benefit the relatives of the grantor.
There are many benefits to establishing a family trust.
- Control: the grantor can establish terms of the trust so that the grantor’s wishes can be fulfilled even after the grantor becomes incapacitated or dies.
- This means, for example, that if a father owns a sports car but doesn’t want his newly-licensed teenager to drive the car in high-speed races, the father can put the sports car in the family trust and even if the father passes away, the trustee will still fulfill the father’s wishes and limit the use of his sports car.
- Avoiding Probate: probate is a legal process where a deceased individual’s assets (their estate) are appropriately distributed by the court among their heirs. Any debts the deceased person has at the time of their death are also settled in probate.
- The probate process may apply to the deceased individual’s assets if the individual did not leave a will, if the will was not clear, if the will was not valid, or if someone contests the will.
- Probate can be a complicated process that requires significant time and money. For that reason, many people arrange their assets in trusts to avoid those assets being subject to the probate process.
- Preventing Payment of Estate Taxes: oftentimes estates may be worth enough money to qualify for federal estate taxes. As of 2019, the current federal estate tax threshold is $11.4 million, meaning an individual may transfer by will up to $11.4 million in gifts before being subject to an estate tax.
- However, grantors may transfer assets into a trust so that they do not contribute to the $11.4 million estate.
- For example, if a grantor has an estate worth $15 million, the grantor can transfer $4 million into a family trust so that the estate is only worth $11 million. This estate does not exceed the federal minimum amount to qualify for estate taxes and therefore would not be subject to the federal estate tax.
Not every asset can or should go into a family trust. Here are several assets that can:
- Cash accounts (including checking and savings accounts);
- Investment accounts (except for 401ks);
- Personal property such as computers, jewelry, books, antiques, furniture, art, cars, and even pets; and
- Real estate including the family home, vacation homes, or commercial property.
No matter how hard a grantor may try, conflicts and disputes over money within a family may still happen. There are several things a grantor can do to minimize the risk of conflict with relatives.
- Constant Updates: a family trust should be reviewed and updated regularly. Families are constantly changing. With marriages and divorces, births and deaths, there are numerous issues that could impact the family trust.
- A grantor should proactively update the trust when these major life milestones happen in order to ensure that there are as few conflicts as possible, particularly after the grantor passes away.
- Open Communication: misunderstanding is often at the root of many conflicts. Communicating to family the grantor’s wishes while the grantor is still alive may help prevent family from disputing the grantor’s wishes when they pass away.
- Determine the Grantor’s Goals: part of effective estate planning is understanding what the grantor’s goals are.
- Does the grantor wish to simply avoid probate taxes? Does the grantor want to provide for a child after the grantor’s death? Does the grantor want to maintain control over assets even after the grantor has died?
- Identifying the grantor’s goals will help ensure that a family trust is the best estate planning tool for the grantor.
There are numerous factors that determine the best way to plan an estate. A family trust may help a grantor avoid probate taxes, manage family conflicts, or continue to have some control over the estate even after the grantor’s death.
A wills, trusts, and estates attorney can help you identify your goals and the best course of action to achieve those goals. Reach out to a family trust attorney to find out if funding a family trust is the best course for you.