Living Trusts vs. Family Trusts
Making decisions regarding your own estate plan can be very challenging. Not only is it a complicated topic but thinking about how you are going to be settling your affairs after death means thinking about death, and for many, the thought of dying and leaving everything behind is uncomfortable.
The thought that passing away means leaving behind a lasting and thoughtful legacy that will go on to help your family for generations, however, can be pleasant. It means that no matter what, even if one day you do have to go away, some part of you – the part that worked tirelessly and chased ambitious dreams – gets to exist for years and years to come. That memory, in the form of your estate, goes on.
But if you do not plan it right, then an estate can quickly turn from a boon for the whole family, into a massive headache accompanying the loss of your life. A thorough and effective estate plan can help your family focus on your passing, rather than put time and effort into sorting out the inheritance.
A fundamental part of many estate plans is the trust. Trusts can be great for transferring wealth from one generation to the next, but it is important to know which trust to use – and when not to use one at all. Just because trusts are versatile does not mean they are universally useful, and there are times when a trust can be a waste of resources for your specific estate. At other times, the most common type of trust – the living trust – may not accurately suit your needs.
While this is not a roadmap to guide you to the type of estate plan you need, it will help you better understand estate planning, and give you a greater understanding of trusts and estates – so that when you contact a local professional to help you craft the ideal plan, you will have a better idea of how your wealth will go towards your children.
Trusts are legal agreements between grantors, trustees, and beneficiaries. The grantor or creator of the trust places their designated assets “in trust”, to be managed by either both the grantor and the trustee, or just the trustee. Once certain provisions are fulfilled – usually the death of the grantor – the contents of the trust pass onto the beneficiary.
A trust does not always completely dissolve upon the grantor’s passing – some trusts are designed to hand over control of the contents of said trust piece by piece, over years, or over a lifetime. Trusts are highly flexible, and exist for many purposes, including taking care of special needs relatives, providing for surviving pets, providing an allowance to children that struggle with financial responsibility, and giving to charities.
Living Trusts in Detail
A living trust is a type of trust that goes into effect as soon as the pertinent trust document is signed and notarized. Living trusts transfer ownership of all assets contained within the trust document into the trust, as soon as you change their ownership details (deeds and other papers) to indicate such.
As grantor of the living trust, you maintain a certain amount of control over the contents of the trust. A living trust can be revocable or irrevocable. Usually, living trusts are revocable.
Family Trusts in Detail
Family trusts are simply trusts set up solely for the benefit of the family – more directly, all beneficiaries of a family trust are members of your family. However, this is not a difference at all. A family trust can be a type of living trust, and a living trust can be a family trust and just not be called that.
The difference arises when you choose to set up a family trust as a testamentary trust. The fundamental difference between a living trust and a testamentary trust is when the trust goes into effect. A testamentary trust goes into effect once you pass away, instead of as soon as it is created.
Family trusts can be living trusts and living trusts can be built solely for beneficiaries within your family without the added nomenclature.
Revocable or Irrevocable?
Aside from living and testamentary trusts, another significant factor in creating a trust is whether it should be revocable or irrevocable. Revocable trusts can be changed, allowing you to expand the trust and its contents over time, giving you more options as to how you manage your estate as it grows. While adding to a trust is not quite as simple as amending a will, it is doable.
An irrevocable trust, on the other hand, cannot be added to. Canceling an irrevocable trust takes a lot of time and paperwork, and you usually need to present a strong and valid argument as to why you have decided to take your trust apart, such as new federal tax laws or changes in state law.
The benefit to irrevocable trusts is that they offer a significant form of asset protection. Not only do irrevocable trusts seal you off from editing the trust, but they seal you off from the contents of the trust, as well, giving you no control. You, as grantor, give up all rights to the property and assets in an irrevocable trust.
As such, it is essentially removed from your estate, and does not count towards your gift tax or estate tax. Furthermore, if you are in debt, an irrevocable trust allows you to safeguard your assets for your children while keeping creditors away from the contents of the trust.
Choosing the Right Trust for You
Trusts come in many different shapes, designed for different purposes. While all trusts generally hold what was originally your property “in trust” on your behalf for someone else, the mechanics of different trust tools vary wildly.
Besides living and family trusts, other examples include charitable trusts that put a designated portion of your estate aside for charitable use once you pass away, special needs trusts that cater to beneficiaries that cannot manage their own finances due to certain disabilities, and other trusts, such as spendthrift and asset protection trusts to keep your estate safe from creditors, while giving your beneficiaries the benefit of receiving incremental amounts of money to keep them safe as well.
Be sure to explore your options thoroughly with an estate planning specialist. While trusts are one way to plan your estate, there is more to planning an estate.