In-Laws And Family Trusts: Who's Included?

A family trust is a legal relationship where a trustor gives a trustee the right to hold title to property or assets for beneficiaries. It is a useful tool for protecting and sharing assets with the next generation. Family trusts can be revocable or irrevocable, with the former allowing the trustor to change the trust's terms at any time or terminate it altogether. The latter becomes unchangeable once set up. Family trusts can be used to reduce estate settlement costs and taxes, maintain privacy over financial affairs, and ensure that a dependent with a physical disability or mental health condition receives care. While the specific laws may vary by jurisdiction, family trusts can be a flexible way to plan for the future and ensure that assets are distributed according to one's wishes.

Family trust as a tool for estate planning

A family trust is an effective tool for estate planning, offering a range of benefits, especially concerning asset protection and estate planning. It is a legal relationship where assets are entrusted to a trustee who holds legal title and manages the assets until they are distributed to the eventual beneficiary. The trustee can be a trusted individual or a corporate entity, such as a bank or trust company.

One of the primary advantages of a family trust is its ability to protect family assets from creditors, lawsuits, or other financial vulnerabilities. It can also help reduce or avoid estate taxes, ensuring that more wealth is passed down to future generations. This is particularly beneficial for families with members who require long-term care or need assistance with money management.

Family trusts provide control over assets, allowing for strategic management and investment by trustees. This ensures that the benefits from the trust's assets are utilized as intended, such as funding beneficiaries' education, health, or other specific needs. Additionally, family trusts offer increased privacy compared to the probate process, as the distribution of assets is not made public.

There are two main types of family trusts: revocable and irrevocable. A revocable family trust allows for flexibility, as the terms can be modified or terminated at any time. This means that the grantor retains control over the assets and can make changes as needed. On the other hand, an irrevocable family trust becomes unchangeable once it is set up, and it is often used to minimize or avoid estate taxes. It is important to consult with a tax expert when considering an irrevocable trust to understand its complexities and ensure alignment with your specific needs.

When establishing a family trust, it is crucial to identify and value the estate assets. The ownership title of each asset must be changed from the individual's name to the name of the trust. This process, known as funding the trust, can be complex, and it is essential to consult with an estate planning attorney and financial advisor to understand the implications, costs, and benefits fully.

Revocable vs. irrevocable family trust

A family trust is a type of living trust that can be revocable or irrevocable. The type of trust you choose will depend on your specific situation. Here is a detailed comparison of revocable vs. irrevocable family trusts to help you determine which option is best for you:

Revocable Family Trust

A revocable family trust, also known as a "living trust," offers flexibility and control to the grantor or creator of the trust. It allows the grantor to make changes or even cancel the trust at any time. This includes modifying the terms, updating beneficiaries, changing the assets included, and deciding when the contents of the trust will be distributed. For example, you may want to include your grandchildren in your trust as they are born or as your family grows. It is good practice to review a revocable trust every three to five years to ensure it aligns with your current wishes and circumstances.

One of the advantages of a revocable trust is that it allows the grantor to retain control over the assets they have placed in the trust. These assets do not need to go through the probate process, which is a public process that can expose your financial affairs. Instead, the distribution of assets can take place more quickly and privately according to the terms of the trust.

Irrevocable Family Trust

An irrevocable family trust, once established, becomes unchangeable and cannot be easily changed or cancelled. It is set in stone unless all beneficiaries agree to proposed updates, which must go through a lengthy approval process, possibly involving a judge. The grantor of an irrevocable trust must give up control of the assets, which are now managed and controlled by the trustee.

Irrevocable trusts are more complex and typically require the expertise of an experienced attorney to manage. They may be subject to higher income tax rates than individual income tax rates at the federal level. However, they can be beneficial for minimizing or avoiding estate taxes and protecting assets. If one of your beneficiaries is disabled, an irrevocable trust can provide for them without significantly impacting their ability to receive government aid.

In conclusion, a revocable family trust offers flexibility and control, while an irrevocable family trust provides more permanence and potential tax advantages. It is important to carefully consider your individual circumstances and, if necessary, consult with a tax expert or estate planning lawyer to determine which type of trust is most suitable for your needs.

Benefits of a family trust

A family trust is a legal entity that allows you to manage, protect, and distribute your assets for the benefit of designated family members. It offers several benefits, including:

Asset Protection

A family trust can help protect your family's assets from creditors, lawsuits, or other financial vulnerabilities. This is especially beneficial if you are in a high-risk profession or business where there is an increased risk of being sued. By placing your assets in a trust, you can also reduce or avoid estate taxes, thereby safeguarding the wealth to be passed down to future generations.

Control Over Assets

A family trust gives you control over your assets and how they are distributed. You can decide who will receive your assets and when, ensuring that your wishes are carried out. This strategic management of assets can include funding beneficiaries' education, health, or other specific needs.

Estate Planning

A family trust facilitates the seamless transition of wealth to your beneficiaries and can be particularly beneficial if you have a large estate that will flow directly to your spouse or children. It can reduce estate settlement costs and ensure that your assets are managed and distributed according to your wishes after your death.

Privacy

By avoiding probate, a family trust keeps your financial affairs private. Probate is a public process that exposes your financial assets to the public record, while a trust agreement remains confidential.

Flexibility

A revocable family trust offers flexibility by allowing you to change the terms of the trust agreement at any time. This includes the right to modify the terms or terminate the trust altogether.

Types of family trusts

A family trust is a type of living trust that can be revocable or irrevocable. A revocable family trust allows the grantor to change the trust's terms or terminate the trust at any time, giving them more control over the assets they've placed in the trust. On the other hand, an irrevocable family trust becomes unchangeable once it is set up, and specific types of irrevocable trusts offer advantages like minimizing estate taxes.

• Crummey Trust: An irrevocable trust that allows the transfer of assets to beneficiaries without consuming the lifetime gift tax exemption. Beneficiaries are provided with a short-term withdrawal right, usually within 30 to 60 days, over the contributions made to the trust.
• Discretionary Trust: An estate planning tool that gives trustees the power to decide how and when to distribute trust assets and income to beneficiaries. Trustees have complete discretion, meaning beneficiaries do not have an automatic right to receive anything.
• Dynasty Trust: An irrevocable trust designed to transfer wealth across multiple generations without incurring estate or generation-skipping transfer taxes, enabling long-term wealth growth for beneficiaries.
• Funeral Trust: This type of trust sets aside money specifically for burial and funeral costs, providing peace of mind that these expenses will be covered and reducing the financial burden on loved ones.
• Generation-Skipping Trust (GST): This type of trust is designed to transfer assets to beneficiaries who are two or more generations younger than the grantor, allowing for wealth transfer to grandchildren, for example. While this type of trust is subject to the Generation-Skipping Transfer Tax, each individual has a generation-skipping tax exemption.
• Grantor Retained Annuity Trust (GRAT): An irrevocable trust set up for a specified period to minimize taxes on large financial gifts to family members or other beneficiaries.
• Special Needs Trust: This type of trust is typically created for individuals with disabilities who are eligible for government benefits. It allows for additional financial support while ensuring they remain qualified for government assistance.
• Domestic Asset Protection Trust (DAPT): Also called a self-settled trust, this type of trust can be used to protect assets from future creditors, although it's not available in every state. A DAPT can be set up to keep assets within the family in the event of a divorce.
• Irrevocable Life Insurance Trust (ILIT): This type of trust is used to set aside funds for estate taxes, especially relevant for those who own a family business they wish to keep in the family. By gifting the premium on life insurance into the ILIT each year, the proceeds can be distributed to beneficiaries to pay estate taxes, ensuring the business doesn't have to be sold.

Setting up a family trust

A family trust is a great way to protect and share your assets with the next generation. It is a legal relationship where assets are entrusted to a trustee who holds legal title and manages the assets until they are distributed to the beneficiary. The trustee can be a bank, a trust company, another professional, or one or more family members.

There are three primary roles in a family trust: the grantor, the trustee, and the beneficiary. The grantor is the person who creates the trust and transfers assets into it. The trustee is the person or people who manage the trust for the beneficiary. The beneficiaries are the people who will inherit the assets or gain financially from the trust after the death of the grantor.

The process of setting up a family trust involves the following steps:

• Identify the assets to be placed in the trust: This can include anything from cash to real estate, stocks, bonds, investments, and business interests.
• Determine the beneficiaries: Identify who will be the beneficiary or beneficiaries of your trust. In a family trust, all the beneficiaries are family members of the person who created the trust.
• Draft the trust document: The document should include the names of the beneficiaries, what each will inherit, a list of the assets in the trust, and the name(s) of the trustee(s). It is important to incorporate state rules and ensure that all required signatures are obtained to create a valid family trust.
• Fund the trust: The grantor transfers assets, such as bank accounts, investment accounts, and real estate, to the trust by retitling them in the name of the trust.
• Meet with the trustee: The trustee will contact you to set up a meeting to go over the details of the trust documents. During this time, understand your rights regarding the assets and ask any questions you may have.

It is important to note that family trusts can be either revocable or irrevocable. A revocable family trust allows you to change the terms at any time, including modifying the terms or terminating the trust. It gives you more control over the assets and avoids the probate process, keeping your financial affairs private. On the other hand, an irrevocable family trust becomes unchangeable as soon as it is set up, and you cannot change the terms or cancel the trust. Specific types of irrevocable trusts can help minimize estate taxes and protect government program eligibility for disabled beneficiaries.

Frequently asked questions