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Family trusts are one of the many ways to transfer generational wealth. They are used to ensure your family members can inherit the things you own quickly and easily after you die. They are highly customizable and depending on how they’re structured, they may carry other benefits too, such as shielding your assets from lawsuits.
In this article, we’ll dive into what family trusts are, how they work and why people choose to use them.
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A family trust is any type of trust that lists one or more of your family members as beneficiaries. It’s a legally-binding estate planning product that outlines who inherits your property and wealth after you die.
A family trust involves three primary parties:
Family trusts are a type of living trust, which simply means it takes effect during your lifetime. A family trust can be either revocable or irrevocable.
Family trusts can also spare your family from owing estate taxes after you die, but this benefit is limited to those with significant assets. In 2023, a gross estate value of $12.9 million or more is required to trigger federal estate taxes. A handful of states levy their own estate tax at lower limits.
A family trust fund is more of an informal term than a legal one. In reality, a family trust can be any type of trust that passes assets from one family member to another.
Here’s a brief overview of a few different types of trusts and how they work:
Special Needs Trust Designed to support individuals with disabilities, this trust ensures the beneficiary receives financial assistance without jeopardizing their eligibility for government benefits.
Spendthrift trust This trust allows a beneficiary to receive regular distributions, while protecting the assets from the creditors or the beneficiary’s own reckless spending. The trustee has control over the trust’s assets and manages distributions according to the trust’s terms.
Testamentary trust This trust is created through a will and only goes into effect after the grantor dies. It allows for the management and distribution of assets for the benefit of specific beneficiaries.
Generation-skipping trust This trust allows assets to skip a generation and pass directly to the grantor’s grandchildren. It can be a useful tool for estate tax planning.
Consider getting advice from a financial advisor or an estate planning attorney to determine which type of trust aligns best with your specific circumstances.
One of the biggest advantages of creating a family trust is that it avoids probate, a lengthy and often costly legal process that determines the validity of a will. With a family trust, assets skip the probate process, ensuring a smooth transition of assets from your estate to your beneficiaries.
Unlike wills, which become public record during probate, trusts offer a higher level of privacy, so details about your assets and who receives them remain confidential.
Irrevocable family trusts can also shield assets from creditors and lawsuits, providing an extra layer of protection for your wealth.
Not everyone needs a family trust. People with modest to average estates can pass down assets to family members through an effectively-executed will, and avoid the extra cost and complexity of establishing a trust.
If you’re trying to determine if a family trust is right for you, here are some pros and cons to consider:
A family trust fund is a complex legal document, so you should consult an estate planning attorney to set one up.
Here are the general steps you’ll need to follow to establish a family trust fund:
A family trust is used in estate planning to pass along assets to your family after you die. A trust has certain advantages over wills, including bypassing probate. It’s a complex document, so consulting an estate planning attorney and a financial advisor could be a smart move.
Bankrate writer Rachel Christian covers investing and wealth management. She became a Certified Educator in Personal Finance (CEPF) with FinCert, a division of the Institute for Financial Literacy in 2021.
