Many people choose to set up different types of trusts to manage their funds for their families, including after they pass away. Generally, a family trust is any trust set up for the benefit of someone's relatives and a living trust is one set up while its creator is still alive. The two can overlap, but these terms can also be used informally in a variety of ways.There are many different options to choose from when setting up a trust that can have consequences for inheritance, taxes and legal liability for the people setting up the trust and their heirs. It's often good to talk to a lawyer or financial advisor about the options available and precise legalities involved.
One of the most important distinctions between a living trust and a family trust is the fact that only family members (including extended family members) can be named as beneficiaries in a family trust. This differs from a living trust, which can include a variety of individuals as beneficiaries.
Understanding Irrevocable Trusts
To set up a trust, a person legally known as the grantor or settlor takes some of his or her property and transfers it to the trust, which is a new legal entity. The trust is set up to operate for the benefit of a specific person or set of people, called the beneficiaries, and to be managed by someone known as a trustee. If the beneficiaries are relatives of the grantor, the trust can be called a family trust.
The trustee can be a family member, a lawyer, a financial advisor or financial firm. The trustee is legally obligated to act in the best interest of the beneficiaries, though trustees often still have considerable latitude in how money is spent and invested. If the trustee is a professional or company, it is more likely that the trust will have to pay for the trustee's services.
In some cases, people can set up irrevocable trusts, in which case the grantor loses authority over whatever was transferred to the trust and how the trust itself is run, with no ability to change his or her mind or undo the trust's creation.
Exploring Testamentary Trusts
Someone can also specify in a will for a trust to be created when he or she dies, in which case it's called a testamentary trust. In that case, the estate will likely have to go through a probate court process to formally handle any inheritance matters before the trust is fully established and funded. That's sometimes seen as a disadvantage to trust creators, since it can lead to additional legal fees and delay the beneficiaries of the trust from getting what its creator intended.
Defining Revocable Trusts
Other trusts, called revocable trusts, can be more easily modified by the grantor, who often also serves as trustee while still alive. A trustee is usually designated who will take over when the grantor dies. Some people use the term living trust to refer exclusively to revocable trusts, while others use the term to mean any trust set up to exist while the grantor is alive.
Irrevocable trusts can convey certain tax advantages, mostly beneficial to people who will have estates worth more than the federal estate tax exemption, which was $5,490,000 in 2017 and is $11,180,000 in 2018. They can also do a better job of shielding assets from creditors of the trust grantor, since the grantor has less control over the trust's property and will be much less likely to be ordered to turn it over by a court. Since assets are transferred to the irrevocable trust before the settlor dies, they're less likely to be tied up in probate court after someone does pass away.
- CNN Money: Ultimate Guide to Retirement: What Kinds of Trusts Are There?
- Legal Zoom: Family Trust vs. Living Trust: What's the Difference
- Revocable Trusts vs. Irrevocable Trusts: Which Trust Is Right for Your Clients? | ThinkAdvisor
- IRS: Estate Tax
- LegalZoom: 10 Things You Should Know About a Testamentary Trust
- IRS.gov. "Basic Trust Law." Accessed Aug. 29, 2020.
- IRS. "Tax Forms and Instructions, Tax Rate Tables," Page 10. Accessed Aug. 30, 2020.
- IRS. "IRS provides tax inflation adjustments for tax year 2020." Accessed Aug. 30, 2020.
Steven Melendez is an independent journalist with a background in technology and business. He has written for a variety of business publications including Fast Company, the Wall Street Journal, Innovation Leader and Ad Age. He was awarded the Knight Foundation scholarship to Northwestern University's Medill School of Journalism.