A family trust is a subset of trusts that focuses on passing assets or money to your family members.
Family trusts are just regular trusts where a family member is the beneficiary
Revocable trusts help you avoid probate
Irrevocable trusts offer additional tax advantages, like avoiding estate tax
A trust is a legal entity that you can put your money and assets into so that you can then pass it on to one or multiple beneficiaries, typically after your death. A family trust is any type of trust that you use to pass on assets to one or multiple family members.
Anytime you talk about trusts, there are a few terms to make sure you understand:
A family trust is just a type of trust that has family members as your beneficiaries. So a family trust is a subset of trusts and not its own distinct type of trust. Just as with regular trusts, there are two main types: revocable and irrevocable trusts.
A revocable trust is one that the grantor can make changes to. For example, you could change which assets are in the trust and who the beneficiaries are. The grantor can also cancel the trust entirely.
There are multiple types of revocable trusts, but one most commonly used for family trusts is a living trust.
This is any type of trust that is created and takes effect while the grantor is living. The grantor transfers ownership of all assets, like real estate, investments or a life insurance policy, to the trust. The assets in a trust are recorded on the trust document.
(Learn more about how life insurance works with wills and trusts.)
Then the grantor names a trustee, or trustees, to manage the trust when the grantor either passes away or becomes incapacitated. What qualifies as incapacitated is usally something the grantor can define when opening the trust.
Living trusts usually allow you to avoid probate. Probate is a public process where a court decides how to distribute the assets from someone’s estate after they pass away.
Read more about the different types of assets.
An irrevocable trust is one that the grantor cannot change or cancel after creating. Once assets are moved into this type of trust, the grantor loses all control and access to them unless the grantor is also the trustee and/or a beneficiary. The trust becomes the owner of the assets and the trustee is placed in full control of the trust.
There are multiple types of irrevocable family trusts and they’re mostly used by wealthy individuals and couples who want to minimize or avoid estate tax, gift tax, and other forms of taxation.
One example is a bypass trust, which allows a grantor to pass assets to their spouse, free of gift tax, and then to another heir when the spouse dies. Credit shelter trusts also provide a way for one spouse to reduce their tax bill while passing their estate on to their partner.
If you have a large estate that you’re looking to pass on, reach out to a lawyer or financial advisor to help with your tax planning.
A testamentary trust is created through a last will and testament. It only takes effect after the grantor passes away and during the probate process. Because the grantor has passed away by the time the trust is created, it is irrevocable.
Testamentary trusts are often easier and cheaper to create than living trusts, but they still require your assets to go through a probate court. And since probate isn’t free, the total cost of a testamentary trust may end being more than the cost of living trusts.
Read more about testamentary trusts.
Family trusts provide a clear way to pass your money, property, and other assets to your family members. That’s an advantage in and of itself. You can also dictate what each beneficiary gets and when they get it. There are additional benefits depending on what type of trust you have.
Revocable trusts generally allow you to avoid probate. The main advantage here is that people do not have the opportunity to challenge the terms of the trust in the same way that they can challenge the terms of a will. When challenges arise in probate, the process can take more than a year and cost a significant amount. (Read more about the difference between trusts and wills.)
A notable exception is that a testamentary trust does not avoid probate. After you pass away, your assets go through probate, at which time a trust is created based on your will. However, once your assets enter the trust, they will not go through probate again when they are distributed to beneficiaries. A testamentary trust can shorten probate by forcing beneficiaries to address any disputes about distribution in the context of the trust rather than in probate.
The details of what’s in your estate will become public during probate. So if you avoid probate by using a trust, you can protect the privacy of your estate holdings.
An irrevocable trust has additional tax advantages related to avoiding estate tax. Placing assets in a trust is also a way to decrease your countable assets so that you meet the threshold to receive Medicaid.
The process to create a family trust is straightforward and it’s the same as creating other trusts.
You start by drafting and executing a trust document. The trust document states what assets are in your trust and when you execute it, you will also be transferring the assets into the trust. However, there are some assets, such as your house, that may require further attention.
You may be able to draft a simple trust document yourself, but an online service or app can provide more guidance. (For example, the Policygenius app takes you step-by-step through creating a revocable trust.) For more complicated situations, you may need to work with an estate planning attorney.
Next you need to make sure you move your assets into the trust. This includes transferring deeds, titles, and any other ownership rights from the grantor to the trust. If you don’t do this, the trust won’t be effective (and your assets still have to go through probate after your death).
If you need help transferring property into your trust, it’s best to talk with an estate attorney. Having professional help is especially useful when you own property in multiple states.
You can create a trust agreement document either with the help of an attorney or online. Using an online service will be cheaper and quicker, but working with an attorney is useful if you have complicated finances.
An attorney can also help because there are different kinds of trusts to consider depending on who you want to pass money to and what assets you have. For example, a qualified terminable interest property (QTIP) trust is an option for people who want to pass assets only to specific relatives.
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Derek is a tax expert at Policygenius in New York City. He has written about multiple personal finance topics in the past, and his work has been covered by Yahoo Finance, MSN, Business Insider and CNBC.