Family trusts are an important and very popular tool in estate planning. At its heart, a family trust is set up by a “settlor” or “grantor”, to benefit the settlor’s family members, known in trust law as “beneficiaries”. The settlor appoints a trustee to manage and administer the family trust. A family trust can take a myriad of forms. These forms can be classed under two rubrics: revocable trusts, and irrevocable trusts. Regardless of the form it takes, a family trust is designed to earn estate tax savings, avoid probate, and protect the settlor’s assets.
The type of trust you choose to set up will depend upon your particular needs. In this article, we will go through the pros and cons of setting up a family trust.
Revocable and Irrevocable Trusts
A revocable trust is a trust whose terms can be changed at any time. Not only can the terms be changed, the trust itself can be dissolved at the discretion of the settlor. A revocable trust is useful for a number of reasons, including:
It gives the settlor control over the trust’s assets and the flexibility that comes with control.
Upon your death, your assets will not have to go through probate. Distribution of our assets occurs immediately, as per the terms laid out in your trust.
By avoiding probate, a trust ensures that your assets do not enter the public record. Consequently, your family’s privacy is preserved.
A popular example of a revocable trust is a living trust. A living trust is implemented while you are still alive. Ultimate control remains in the settlor’s hands, and this makes a living trust immensely popular in estate planning.
With a living trust, the settlor often chooses to appoint themselves the trustee. In that event, the settlor can appoint a successor trustee to oversee the estate in the event that the settlor becomes incapacitated.
An irrevocable trust cannot be changed once it has been set up. The terms are unchangeable and the trust cannot be dissolved. Each type of irrevocable trust has its own advantages. So, you need to consult with an expert to learn more about your options. Irrevocable trusts can be very complex, so it’s crucial to seek expert advice. Broadly, irrevocable trusts have numerous advantages, such as:
Beneficiaries who are disabled or have some long-term medical condition, can receive assets or income from an irrevocable trust without impacting on your beneficiary’s ability to get aid from Medicaid and other such federal and state programs.
An irrevocable trust is more secure against creditors than a revocable trust. If you are concerned that creditors may prevent you from being able to leave your assets to your beneficiaries, this is a great way to go.
The most popular type of irrevocable trust is the testamentary trust, The terms of a testamentary trust are laid out in your will. It can only be created upon your death. Once you die, the testamentary trust is created according to the terms laid out in your will. The terms of your will cannot be changed.
Pros of Setting Up a Family Trust:
Avoids probate. Quite possibly, this is the biggest reason for setting up a family trust. Without a family trust, your beneficiaries will have to go through probate to authenticate your will and have an executor distribute your assets in keeping with your will. A living trust retains ownership of your assets, so they are not part of any probate process and can be distributed outside the probate process.
Privacy. Probate is conducted publicly. There is no privacy. Your assets and liabilities and how your assets are distributed, become part of the public record once they enter the probate process. A living trust is a private affair, before and after your death.
Flexibility. Though you have to transfer ownership of your assets to a living trust, you retain flexibility in terms of how your assets are managed and distributed. Indeed, you can even decide to dissolve the trust.
Settlor’s incapacitation. In the event that you become incapacitated, your living trust will have a mechanism through which a successor trust will be able to take over, and run your trust and look after you, in accordance with the terms of your trust. This ensures that there is minimal disruption in the running of your assets and businesses and your family can focus on your health provided by the best animal hospital.
Cons of Setting Up a Family Trust
Costs of setting it up. Because a trust agreement is considerably more complex than a will, you will have to consult with an estate-planning attorney. This can prove very costly.
Costs of funding the trust. Your trust is built upon two things: the trust agreement and the assets and funds you transfer into it. Transferring ownership of your assets can be costly, given the paperwork involved and the associated lawyer’s costs.No income tax advantages. Many people mistakenly believe that there are tax advantages to setting up a revocable trust. Given that the settlor retains control over the assets in the revocable trust, all income earned by those assets is subject to tax. So, upon the settlor’s death, the trust will have to file an income tax return, although the returns won’t apply to the income distributed to your beneficiaries in the year that it is distributed.