What is a Family Trust and Why Create One?
As an individual who has acquired significant wealth, it makes sense to consider estate planning options that will both allow you to preserve your gains and to direct their future distribution. For many successful people, a family trusts – that is, a trust that ensures assets will pass to designated family members – provides an ideal solution.
The term “family trust,” while often used in popular parlance, serves as an umbrella covering several different types of legal instruments, each with its own advantages depending on the situation. The commonality among “family trusts” is that they serve as instruments to distribute personal wealth to those with a familial relationship to the person creating the trust (i.e., the “grantor”).
There are several reasons why trusts are widely used in estate planning for individuals who control significant assets. Perhaps chief among the benefits a trust can provide is the ability to avoid probate, which refers to the court-supervised process of settling an estate upon death. A trust can allow for distribution of assets much more quickly, and with less expense, while also enabling greater certainty that your wishes will be honored.
Other potential advantages of utilizing a trust to guide wealth distribution may include tax benefits, protecting assets from creditors, and ensuring that a family member’s needs are met without jeopardizing governmental assistance. In these and other ways, family trusts may offer an avenue to achieving greater precision in providing for family members while also offering more robust asset protection than alternative approaches.
This post provides a brief overview of family trusts, how they may be used by individuals with personal wealth, and some of the key choices necessary to ensure that your intent will be respected by the courts. While many of the general concepts discussed in this post are straightforward enough for a sophisticated lay person to understand, it is important to remember that trusts are governed by highly detailed state and federal laws that often require strict compliance. Therefore, anyone seriously considering a family trust should seek the advice of legal counsel experienced in this area. Roman Law Firm, P.C., has guided many clients through the process of establishing a trust that meets their unique needs.
What is a Family Trust?
Broadly speaking, all trusts share certain features that distinguish them as legal entities and ensure they will be recognized and respected by courts and regulators. Essentially, a trust is a legal entity that holds and manages assets for the benefit of another in a fiduciary relationship.
There are three necessary players in a trust:
- The “grantor” is the person or entity who creates the trust by defining its terms and transferring assets into it;
- The “trustee” (which may be an individual or an entity) is charged with managing the trust assets according to the terms established by the grantor; and
- The “beneficiaries” are the persons (or entities) for whose benefit the trust is created (by the grantor) and managed (by the trustee).
As you might expect, the grantor has the power to determine when and how the assets will become available to the beneficiaries, while the trustee is charged with carrying out the grantor’s intent in this regard (along with managing the assets in the interim).
Over time, the law has developed a number of different types of trusts that allow grantors to realize various goals . . . provided that the trust instrument is properly created and complies with certain requirements. Thus, while the trust concept itself is fairly simple, utilizing these concepts to achieve your goals often requires the advice of experienced legal professionals.
Family Trust Types
Despite the popular umbrella term, “family trust,” there are actually multiple combinations of trust types that can be used to ensure that your family members will receive the benefits you intend to provide as efficiently and quickly as possible. It is, therefore, important to engage a professional who understands the options to guide you through this process.
Testamentary vs. Living Trusts
At the broadest level, trusts fall into two categories: living trusts and testamentary trusts. Understanding this distinction is important to creating a trust that meets your goals.
A testamentary trust only becomes effective at the death of the grantor. That is, the trust is generally funded upon the death of the grantor. Stated differently, a testamentary trust only comes into existence when the grantor dies.
A living trust is created during the grantor’s lifetime. Generally, this occurs through a transfer of assets from the grantor to the trust while the grantor is still alive. There are both advantages and disadvantages to this approach.
An experienced professional will be best positioned to advise you on whether a testamentary or living trust is the best vehicle to ensure your family members receive the benefits that you intend to convey to them. As the two types of trust can have very different tax and other consequences, it is important to recognize that each situation is different and professional advice is likely a good idea when making this decision.
Revocable vs. Irrevocable
Many people who have considered creating a living trust to benefit family members face the decision whether to make their trust revocable or irrevocable. This decision is important because it affects the extent of control over the assets that you might put into the trust. It can also have important tax consequences depending on several factors.
Stated simply, transfers into living trusts may be revocable (which is to say that the grantor may change the distribution or assets during his or her lifetime) or irrevocable (meaning that, once created, the trust terms cannot be changed by the grantor). In other words, the distinguishing factor between revocable and irrevocable living trusts is whether the grantor may change the terms and/or remove the assets placed in trust.
With regards to testamentary trusts, the issue, while not wholly absent, is very different. A testamentary trust is necessarily irrevocable in the sense that a deceased grantor cannot change the terms – once a person dies, that person cannot change his or her mind. However, in a practical sense, a testamentary trust does offer some flexibility during the grantor’s lifetime because it is capable of being changed or destroyed until death, at least in most cases. For example, the grantor retains the option to change his or her will (or other instrument creating the trust) that would otherwise create the trust upon death.
Revocable vs. Irrevocable Living Trusts
Although it is, in practice, possible to revoke many testamentary trusts, the terms “revocable” and “irrevocable” are most frequently employed in discussion of living trusts. The reasons for this are fairly straightforward.
The advantage of a revocable living trust is flexibility. The grantor may change the terms – including the assets included and the distribution thereof – during his or her lifetime.
However, there are advantages to irrevocable living trusts for persons with significant assets. These may include tax advantages that affect particularly large estates. In any event, it is generally wise to discuss the specific advantages and disadvantages to these two types of living trusts – revocable vs. irrevocable – with an attorney prior to making decisions about how to proceed in planning for the distribution of the assets in your estate.
What type of trust makes the most sense when a person aims to provide for family members by creating a trust (i.e., through a “family trust”) will often depend heavily on the person’s particular situation, as well as the factors that may affect their fami9ly members who are intended to be the beneficiaries of the trust. Accordingly, the only sound advice is that each individual considering a family trust should consult with a knowledgeable attorney, such as the lawyers at Roman Law Firm, P.C.
Family Trusts for Specific Purposes
In certain situations, individuals of means may find that the creation of a trust is the most effective way to meet their goal. Such situations may include the presence of a special needs beneficiary or the desire to provide resources to someone who might ordinarily struggle to maintain wealth in the face of creditors.
A special needs trust, for example, is often an ideal way to ensure that a family member is able to have their unique needs met despite their engagement with public benefit programs. Such trusts may provide for the individual’s needs in a manner that does not affect that person’s ability to receive government assistance (such as Medicare or Medicaid).
A spendthrift trust offers a means for the grantor to provide assets to a family member in a manner that is generally unreachable (or only reachable to a limited extent) by that family member’s creditors. Such trusts may, for example, allow passage of assets to a child despite the risk that the child may face significant liability.
If you believe that these more tailored types of trust may best serve your needs, or those of the family members that you intend to name as beneficiaries to a trust, it may prove especially important to engage the services of experienced professionals when preparing the documents that create your family trust. The situations requiring a special needs trust, spendthrift trust, or other type of more specialized trust often require the expertise of attorneys well-versed in both federal and state law to ensure that your assets are not only directed in the manner you intend, but also protected from consequences that may arise where a beneficiary has depended on government benefits or faces claims by various types of creditors.
Why Create Family Trusts?
Acquiring wealth over a lifetime does not occur without effort. Successful individuals often seek to ensure that their family members will ultimately benefit from that effortful acquisition, regardless of the challenges the family member may face.
Whether testamentary or living, revocable or irrevocable, trusts often provide a means of ensuring your family members will receive the benefit of the wealth that you have acquired, whatever their circumstances. Ultimately, that is why many successful individuals utilize trusts to control the distribution of their assets.
Still, determining the type of trust that will best meet your goals can be a daunting task in the best of circumstances. Add in a complicating factor, which most people face, and the task can seem overwhelming.
Hiring an experienced law firm, such as Roman Law, P.C., can make the process much more manageable. More importantly, experienced lawyers can ensure that any trust you may seek to create is likely to survive the challenges ahead and yield the results you seek.
It probably is not possible to decide whether a family trust is right for you from reading blog posts or even articles on the internet. Every situation is unique.
The attorneys at Roman Law Firm, P.C., recognize that each individual’s (and family’s) situation require attention to the specific circumstances presented. This particular post is intended only to provide an overview of what are popularly known as “family trusts.”
The legal documents that actually create “family trusts” tend to be very complex if they are to actually meet an individual’s goals. As such, knowledge of the law, and experience in seeing how it is implemented by the courts in a given state and in federal courts, can make all the difference in ensuring that 7your goals in creating a family trust are met.
Thus, after a lifetime spent working to acquire the wealth needed to provide for your family – and, perhaps, give them a head start when making their way in the world – it is important to see that what you have earned will actually be distributed in the way that you envision. That, in a nutshell, is the reason that family trusts exist.
Still, bringing the concept of a “family trust” to fruition, so that your goals are actually met when the time comes, isn’t always as simple as we might like to think. While this post has, hopefully, exposed you to some of the questions that you might face in the journey of making your vision a reality, there is literally no substitute for knowledge and experience on this road. The lawyers at Roman Law Firm, P.C., are available to guide you as you move forward with these important decisions.