What Is a Family Trust? Key Types and How To Set One Up

Planning for your family's future takes time and thought. One tool that can help is a family Trust: a legal arrangement that lets you decide how your property gets managed and shared with the people you care about.

Every family Trust is built on one of two legal structures: revocable or irrevocable. Which one you use shapes how much flexibility you keep, how your assets are protected, and what happens when you pass away. Keep reading to learn how family Trusts work, what structure might fit your situation, and how to get one set up.

Family Trust definition and key roles

A Trust is a legal arrangement where one person manages assets on behalf of others. A family Trust uses that same structure with a specific purpose: keeping assets within the family and controlling how they get passed on.

Every family Trust involves three key roles:

• Grantor/settlor: The person who creates the Trust and decides how it works.
• Trustee: The person who manages the Trust. This includes distributing the Trust property to beneficiaries.
• Beneficiaries: The family members who receive assets or income from the Trust.

A family Trust is also different from a Will. Though both are estate planning tools, a Trust can take effect during your lifetime, not just after you pass away.

Types of family Trusts

Every family Trust is built on one of two legal structures:

• Revocable Trust: A Trust the grantor can change or cancel at any time during their lifetime. It offers flexibility but doesn't shield assets from creditors.
• Irrevocable Trust: A Trust that generally can't be changed once it's created. It offers stronger asset protection and potential tax advantages, but you give up control over the assets once they're transferred in.

Within those two structures, a Trust can be set up to serve more specific purposes:

• Spendthrift Trust: Limits a beneficiary's direct access to Trust assets. This is typically used when a grantor wants to prevent misuse of inherited property, and can be built into a revocable or irrevocable Trust.
• Marital Trust: Created by one spouse to benefit the other. Often irrevocable and used to manage how assets pass between spouses.
• Bypass Trust: Designed for married couples to help reduce estate taxes and protect assets for future beneficiaries when one spouse passes away. Typically irrevocable.
• Life insurance Trust: The Trust owns a life insurance policy, which keeps the policy and its proceeds outside of the taxable estate.
• Supplemental Trust: Provides support for a beneficiary who needs extra assistance, helping pay for their medical care, therapy, or assisted living services. This may be a part of a revocable or irrevocable Trust, or be a separate Trust. 

‍Benefits of a family Trust

Understanding what a family Trust is means recognizing its benefits to family members. These benefits can include:

• Avoiding probate court: The probate process can be delayed when family members can’t easily receive family property. If there’s contentious litigation, it can also drain money from the deceased’s estate.
• Greater privacy: The probate process is public. By transferring property through a Trust, you keep family details private.
• Shielding assets from creditors: It’s difficult for creditors to access the Trust property in an irrevocable Trust.
• Protecting assets from misuse by beneficiaries: Some family members lack enough maturity. A family Trust can offer guardrails in these situations.
• Property management continuity: A Trustee ensures consistent management even if the Trust’s creator dies. 
• Supplemental estate planning options: Family Trusts can provide benefits to family members who need extra help, such as those with disabilities. Yet this assistance won’t count toward most government eligibility requirements if the trust is drafted correctly.
• Reducing conflicts among family members: Misunderstandings can often lead to interpersonal conflicts. A Trust can make it clear who gets what property and when. 
• Limiting estate taxes: Putting property into an irrevocable family Trust can remove it from the estate of the person who created the Trust. This can reduce the estate's size, making it easier to qualify for the estate tax exemption.
• Greater control over asset distribution: The Trust's terms and its trustee can ensure the wishes of the Trust’s creator are honored. This is possible even after the person who created the Trust passes away.

How to set up a family Trust

State law determines how to set up family Trusts. Most states will require the following steps:

Step 1: Choose the type of Trust

There are several to choose from based on why you need the family Trust. 

But one of the most important decisions is deciding between a revocable and an irrevocable Trust. This is a critical decision because irrevocable Trusts are much harder to change. However, revocable Trusts don’t offer the same level of asset protection as irrevocable Trusts.

‍Step 2: Select a trustee

You’ll need to find someone you can trust. This person should also be willing to take on the necessary responsibilities. If you’re making a revocable Trust, you can choose yourself. Regardless of who you choose, you’ll also want to pick a successor trustee. This reduces the risk that a court would have to step in to appoint a trustee. 

Step 3: Identify the Trust beneficiaries

You’ll need to choose which family members will receive the benefits of the family Trust. You’ll also need to decide how you want the Trust property (or income generated from the Trust property) distributed to the beneficiaries. 

Step 4: Create the Trust agreement

The exact documents and methods for preparing them depend on what state you’re in. Your state’s law will also determine what provisions you must include in the Trust. The Trust might also need tax language included. Consulting with or hiring a lawyer to help with your Trust is recommended. 

Step 5: Execute the Trust

The requirements for creating a legally binding Trust also vary by state law. Usually, the grantor(s) and trustee(s) are required to sign, along with witnesses and a notary.  

Step 6: Fund the Trust

This is where you move property into the Trust. This can include assets like your home, stocks, bank accounts, or a life insurance policy. Depending on the property, you may need to sign and/or notarize property ownership papers. This may include documents like a Deed, financial accounts, car titles, and assignments of business interest.

Once you've decided a family trust is right for your situation, the next step is understanding how much a living trust costs to set up — whether you use a DIY service, an online platform, or an attorney.

‍When to consider a family Trust

A family Trust can help in a wide range of situations, with a specific focus in mind: to keep as much money and property as possible within the family. However, there are other situations where a family Trust can be a key piece to an estate plan:

• You’re a business owner. A family Trust is a great tool for keeping ownership and/or key decision-making authority within the family. Your operating agreement should align with your trust terms so there is no conflict later on. 
• You have family members who need extra help. Using a family Trust is an ideal way to support a family member with a disability. It also prevents the Trust assets from disqualifying that family member from state or federal benefits.
• You have a blended family. Navigating relationships and responsibilities across a blended family can be emotionally complex. A family Trust can help make sure everyone is taken care of and that your wishes are carried out clearly.

LegalShield® provider lawyers can help with your family Trust

In theory, you can create a family Trust without the help of a lawyer. But it’s not always a good idea to take this approach. In some cases, it could lead to an invalid Trust, resulting in probate, or you might leave out an important tax consideration. 

With a LegalShield membership, you get access to the legal guidance you need at an affordable price. LegalShield connects you to a provider law firm that can guide you through estate planning. This includes explaining what a family Trust is and which type will meet your specific needs. If you’re ready to learn more about LegalShield Personal Plans, contact us today.

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