Most people understand that they need a will as part of their estate planning. But there are some limitations to wills, which is why some families decide to create a family trust as part of their estate planning.
Trusts give you more control and flexibility over your assets and their distribution to surviving family members. Additionally, they have certain advantages that may help you avoid certain expenses, taxes and time-consuming legal processes.
At The Law Offices of Kimberly Butler Rainen, we want families to understand all of their options when they begin estate planning. That’s why we’ve created this guide to family trusts to help you decide whether this legal arrangement is right for you.
What Is a Family Trust?
A family trust is any trust with family members designated as your beneficiaries. These trusts are legal arrangements between a grantor and a trustee and the grantor’s beneficiary(ies), which in this case might be children, grandchildren or any other relative.
In this arrangement, the grantor, or the person creating the trust, designates both a trustee and beneficiary(ies) using a trust agreement. The trustee is the person assigned to administer the trust on the grantor’s behalf. The beneficiaries are the individuals to whom assets are distributed.
The grantor then places specific assets, such as real estate or business holdings, into the trust. They may also create terms and conditions for how those assets or earned income on assets are distributed to beneficiaries.
Trusts essentially allow your family to benefit from your holdings after you pass while taking advantage of some unique financial benefits. Because of this, they’re something you might want to consider as you plan your estate and final arrangements.
What Are the Advantages of a Family Trust?
How you and your family benefit from your trust depends on the type of trust you choose, the type of assets you place in the trust and your family’s unique circumstances. A family trust lawyer can help you identify your priorities and select trusts and other estate planning vehicles that are right for you. Some of the general benefits of creating a family trust are:
- Tax savings and exemptions. Many families use a trust to avoid estate and capital gains taxes that beneficiaries might incur through inheritance or gifting of assets.
- Asset protection. Certain trusts can shield assets from creditors or legal judgments.
- Medicaid qualification. Irrevocable trusts can be used to reduce countable assets so that your yearly income falls below the threshold to qualify for Medicaid. This helps defray the cost of nursing home care.
- Avoiding probate. The probate process can be very complicated and can delay the distribution of assets to your loved ones. Most trusts can be administered immediately upon your death and will not be subject to attorney or court fees that may accrue from the probate process.
- More control over asset distribution. Trusts allow you to set very clear conditions for when and how assets are distributed. For instance, you can delay access to assets in the trust until the beneficiary graduates from college, or direct that income from assets only be used toward your grandchildren’s education.
- Protection in the event of disability. In the event that you become mentally or physically unable to oversee your assets, the trustee will be able to manage the trust on your behalf.
It’s important to note that all of these benefits do not necessarily extend to every kind of trust. For instance, an irrevocable trust may help you with nursing home planning but typically doesn’t have the same flexibility as other types of trusts. That’s why it’s best to discuss your options with a family trust attorney before you make a decision.
What Are the Disadvantages of a Family Trust?
While family trusts have many benefits, there are also some disadvantages:
- Ongoing management. The terms of a trust do not automatically adjust to changes in life, such as divorce or the birth of a new child. Trusts require periodic updating and management to ensure that they reflect current circumstances.
- Lack of flexibility. Many trusts offer considerable flexibility, but certain types, like irrevocable trusts, cannot be amended by the grantor once finalized. That could potentially cause future issues.
- Income from assets is taxed. In most cases, income from assets like rental properties and/or stock holdings is taxed at the highest possible margin.
What Kind of Assets Can Be Included in a Family Trust?
Almost any kind of asset can be used to fund a family trust. However, there are some holdings that are an especially good fit:
- Real estate, like a home, vacation, business or rental property
- Stocks, bonds and other brokerage accounts
- Small business interests
- High-value tangible assets, such as artwork or jewelry
Assets that are not a good fit for a trust are those that depreciate significantly over time, such as a vehicle, or those that would potentially incur significant taxes, like a retirement account.
Ultimately, the decision to move assets into a trust should be informed by your goals and your wishes for your family.
When Should You Set Up a Family Trust?
The decision to set up a family trust is personal, so there’s not necessarily a right time. However, many families choose to create a trust when they have their first child or grandchild. Others may set one up as part of estate planning when their children become adults or when they begin planning for their later years.
If you are considering a trust or other estate planning vehicles, however, it’s a good idea to begin discussing your options now, especially if you are planning to use a trust to avoid taxes or qualify for Medicaid. For instance, for Medicaid trusts, there is a five-year lookback period, so you may not be able to take advantage of this strategy if you do not plan ahead.
How Do I Set Up a Family Trust?
The process of setting up a trust can be complicated, especially when you’re considering a trust as part of your estate planning. Additionally, a trust is a legal agreement, which means it could be contested in court if there are disputes among family members or unclear terms.
For this reason, it is strongly recommended that you consult with an estate planning lawyer before you create a family trust. A lawyer can help you ensure that your trust meets your goals efficiently and effectively and that it will protect your assets and your family’s welfare the way you intend.
We’ll Help You Protect Your Most Valuable Asset: Your Family
At The Law Offices of Kimberly Butler Rainen, we know how important it is that your family’s financial welfare is secure — we’re parents ourselves. That’s why our chief goal is to help our neighbors in the Andover, Massachusetts, area feel confident their holdings will benefit their families long after they’re gone.
We offer comprehensive, personalized estate planning services designed to fit your family’s unique needs. We’ll steer you through the ins and outs of wills, trusts, probate and more to help you decide what’s best for you and your loved ones. Contact our firm today to get started.
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