The concept of a family trust—also known as a revocable living trust—isn’t very well understood by many people. The differences between a trust and a simple will, for instance, are frequently confused.
While it’s somewhat more time consuming—and therefore, more expensive—to have a family trust prepared than a will, there are significant benefits of the trust for many individuals. I have many clients that feel that they “have to setup a trust“. I think many want to avoid probate at all costs. Please keep in mind that probate is NOT a four letter word.
I don’t want to discourage you from setting up a family trust, but it’s not a requirement in every situation.
How a Family Trust Functions
A family trust is a legally binding document that covers an individual’s assets during one’s lifetime and specifies the terms of dispersing those assets after one’s death or incapacity. The person establishing the trust—generally referred to as the grantor—transfers all of his/her assets so that the trust itself is the owner, not the individual.
In practical terms, the distinction is a technical one; the grantor will still have full control over and use of all his his/her assets.
A trustee—the person(s) who will carry out the terms—is appointed at the time that the trust is formed, but has no role until the grantor is deceased or incapacitated. The trustee can be a family member, close family friend or even a financial institution (think bank for brokerage firm).
I’ve had clients select all the above to be their primary trustee or successor trustee. Keep in mind that choosing a financial institution as a trustee will be the most costly. The cost can be justified as these institutions specialize in these matters where a family friend may be burdened with all the responsibilities that trust brings on.
The terms of the trust—and the exact assets included—can be changed at any time. For example, if a new car is purchased, it can be added to the trust. This is true with all significant purchases and sales of tangible property (homes, vehicles, etc.) and intangible assets (securities and other financial investments). Similarly, the identities of the trustee(s) and beneficiaries can be changed by the grantor at any time.
What also can be changed is how the assets are dispersed. For example, you could setup the family trust to disperse the assets at various ages of your surviving child. The could get 1/3 of the income at age 45. The other 1/3 at 55. And the final disbursement at age 65. This is just one example of the thousands of possibilities of how a family trust can be setup.
Just to make sure I covered my bases, I reached out to a friend and colleague Adam Lawler of Adam B. Law Firm, LLC. Here’s what he had to add:
In my world, a “family trust” normally refers to a joint tenancy revocable trust (think husband and wife) as grantors (settlors), trustees and beneficiaries (trustee and beneficiary during life times). When just one individual is involved it’s normally called living trust, revocable trust, grantor trust, etc.
FYI- the initial trustee is almost always (99.99%) the grantor/settlor of that trust. The professional fiduciaries normally only enter the picture after death and if no competent kid, uncle, etc is around.
Benefits of a Family Trust
Among the numerous advantages of a family trust are:
- Avoidance of the probate process. If the grantor dies, the estate can avoid probate court, a substantial benefit over a simple will, where probate is commonplace for any assets not specifically enumerated.
- Avoidance of legal challenges of asset dispersal. A family trust is essentially air tight legally, another potential advantage over a simple will.
- Limitation of exposure to estate taxes, as part of a proper estate planning process.
- Simplicity and Flexibility. A family trust is a relatively easy document to prepare and account for, particularly with the help of an estate planning attorney. Transferring asset ownership to the trust is an easy task. The ability to amend and adjust the terms at any time makes it a very versatile vehicle.
- Control. The terms of the trust dictate exactly what will be done with your assets in the event you are incapacitated or deceased. The trustee must carry out your instructions to the letter, or face civil suits and possibly criminal prosecution.
The Bottom Line – What a Family Trust Does
A family trust is a relatively simple and inexpensive, but potentially powerful legal vehicle, with many benefits for a wide swath of individuals. The family trust essentially makes certain that your assets will be allocated as you wish, should something happen to you and makes certain that the beneficiaries that you designate will have access to their inheritance—in the manner you intend—quickly and fully. The peace of mind in that fact alone may be enough to recommend the process.
I hired a local attorney to draft our will and testamentary trust, but their are online options that are cheaper. One example is NOLO. If you haven’t setup a will yet or interested in a FREE Living Trust, give them a try.