A family trust is a specific type of trust that can be used in some cases 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. While a family trust offers many advantages, there are also some disadvantages associated with using one to manage your assets.
Reviewing family trust pros and cons will help you make a more informed decision regarding which is best for your situation.
Revocable vs. Irrevocable Trust
A family trust can either be revocable or irrevocable. A revocable trust can be changed or even shut down entirely. The transfer of assets is permanent with an irrevocable trust, and its terms are set in stone. Neither you nor your beneficiaries can make any changes to it once it's created. This type of trust can't be modified, or revoked, explains the IRS.
You can create a revocable trust if you want to put the assets in the name of the trust and be able to modify its terms of the trust while it's in effect, such as distributing assets before someone dies. The individual who sets up a revocable trust can also act as the trustees, but this type of trust offers no protection from estate taxes for this reason.
Cost of a Family Trust
One of the primary disadvantages of a family trust is the cost required to establish and maintain it. You can technically create a family trust without legal assistance, but it's 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 if you set up an irrevocable trust, because you won't personally be able to act as trustee. A family trust may also carry certain unanticipated costs. You might need to hire an attorney to defend it against creditor claims.
Testamentary Family Trusts and Probate
You can establish a family trust as a living trust or as a testamentary trust. A living trust is one that takes effect during your lifetime. A testamentary trust is formed and enforced only upon your death.
You can avoid the probate process for any assets that are included in the trust if you form a living trust. But any assets included in the trust are subject to probate if you transfer them via a testamentary trust, which is formed by the executor of your probate estate according to terms set in your last will and testament. This can delay the distribution of your assets to your beneficiaries.
Potential Lack of Flexibility
The surviving spouse cannot be denied assets to which they're entitled under the terms of the trust if you and your spouse divorce with an irrevocable family trust in place and one of you dies. A revocable trust automatically becomes irrevocable at your death, and this limits your surviving spouse's ability to make changes regarding the distribution of its assets.
Things to Keep in Mind
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 an irrevocable family trust can potentially minimize tax liability for your beneficiaries, this benefit is not guaranteed with a revocable trust.
Consult a qualified estate planning attorney to determine whether a family trust offers a significant advantage over other types of trusts. They'll also be able to tell you about state laws governing the formation of family trusts in your location.
Rebecca Lake is a freelance writer and virtual assistant living in the southeast. She has been writing professionally since 2009 for various websites. Lake received her master's degree in criminal justice from Charleston Southern University.