A family trust, also known as a credit shelter trust, is a specific type of trust that is used to protect family assets from estate taxes. A family trust can also be used to establish specific criteria for the distribution of trust assets to your beneficiaries, typically your spouse, children or other blood relatives. While a family trust offers many advantages, there are some disadvantages associated with using one to manage your assets.
One of the primary disadvantages of a family trust is the cost required to establish and maintain it. While, technically, you can create a family trust without the assistance, it is not recommended, particularly if you have a large or complex estate. You can expect to spend several hundreds to several thousands of dollars in legal fees to have a qualified estate planning attorney draw up the trust documents. You can also expect to pay ongoing fees to the trustee in charge of managing the estate and administrative staff they may employ. A family trust may also carry certain unanticipated costs; for example, should you need to hire an attorney to defend it against creditor claims.
Testamentary Family Trusts and Probate
You may establish a family trust as a living trust or a testamentary trust. A living trust is one that takes effect during your lifetime while a testamentary trust is enforced only upon your death. With a living trust, you can avoid the probate process for any assets that are included in the trust. If you choose to create your family trust through your last will and testament, any assets included in the trust are then subject to the probate process, which can delay the distribution of your assets to your beneficiaries.
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Potential Lack of Flexibility
A family trust may either be revocable or irrevocable, meaning the trust can be changed or the transfer of assets is permanent. If you choose to establish a family trust as an irrevocable trust, neither you nor your beneficiaries can make any changes to it once it's created, which can potentially be problematic. For example, if you and your spouse divorce with an irrevocable family trust in place and one of you dies, the surviving spouse cannot be denied those assets to which she is entitled under the terms of the trust. If you created a revocable family trust, it automatically becomes irrevocable at your death, which also limits your surviving spouse's ability to make changes regarding the distribution of assets.
Family trusts are typically best suited to individuals who have substantial assets, including real property, automobiles, heirlooms, antiques, jewelry, stocks, bonds or other financial instruments. While a family trust can potentially minimize tax liability for your beneficiaries, this benefit is not guaranteed. Consult a qualified estate planning attorney to determine whether a family trust offers a significant advantage over other types of trusts.
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