As with any form of trust, a “Family Trust”, is a legal creation involving a Grantor/Settlor (the person establishing and funding the trust), a Trustee (the person managing the trust property, often the Grantor/Settlor during his or her lifetime) and a Beneficiary (the person(s) receiving property or benefits from the trust, again often the Grantor/Settlor during his or her lifetime).A Family Trust can be established during the life of the Grantor or as a testamentary trust at the Grantor’s death through a last will. A family trust describes a trust where the beneficiaries are members of the same family.
Most frequently, a family trust is established during the life of the Grantor (also known as a revocable living trust) because one of the primary goals is to establish a trust to avoid probate, which a testamentary trust will not accomplish. A family trust can be established as an irrevocable trust during the lifetime of the Grantor but will, as all living trusts do, become irrevocable upon the death of the Grantor. There are several reasons why a family trust may be a suitable option for a Grantor, including the desire to restrict a child’s or grandchild’s right to receive property and income from the trust, such as limitations on age specifications, requirements of education and graduation, marriage, or other triggering events.
Additionally, family trusts can be created to avoid estate taxes for families where estate tax may be of concern. For example, with a large estate in excess of the estate tax exclusion ($5.34 million for 2014) a grantor may put the amount of the estate in excess of the exclusion in trust so that upon death the estate passing to the surviving spouse or beneficiaries would not be subject to estate tax. There are also benefits to having family trusts for smaller estates and all options should be explored before determining the best tool to accomplish desired goals.
Of course, there are some disadvantages to family trust as well including most particularly, the cost of establishing and maintaining a family trust which can be significant. Although a trust can be established and managed by the Grantor(s) without assistance, doing so is highly risky, especially for a large or complex estate. The potential lack of flexibility can also be a concern, especially with an irrevocable trust. Once an irrevocable trust is created, subsequent changes are both problematic and costly.
SMART TIP: Estate planning must be tailored to the specific circumstances and goals of the individual. A family trust, while a good option for some is not the best option for everyone and there are alternatives to establishing trusts, as well as a variety of trusts which may be more appropriate for others.Before deciding whether a family trust is necessary or desirable, we encourage consulting with experienced estate planning professionals, attorneys, and tax advisors.