Is a Family Trust Better Than a Living Trust?

A trust is designed to meet specific wishes of the grantor, and a family trust is neither better nor worse than a living trust. Both types of trusts accomplish certain objectives, with the grantor of the trust determining what he wants the trust to achieve.

A living trust is also known as an inter vivos or revocable trust. Living trust creation is by the grantor during his lifetime, and the living trust grantor can change or rescind the trust at any time. A living trust grantor is the beneficial owner of the assets and even though the assets are in trust name, the grantor retains complete control of the trust property. Since the grantor controls the property, he may still gift funds to family members in need out of the trust assets.

If a trust grantor establishes a family trust during his lifetime, it is typically drafted in such a way that the grantor retains no control over the trust assets. The trust is usually irrevocable, and the grantor has made a gift to the trust for tax purposes. If the intent of the grantor is to provide trust assets to benefit family members while alive, then this trust accomplishes this objective. There are potential tax consequences, and gift tax returns may be required, but lifetime gift exclusion amounts are available to minimize gift tax consequences. The trust grantor decides how trust property disbursement occurs to family members in the trust agreement, such as net income disbursements or discretionary disbursements. Common discretionary disbursement trust language states that fund disbursement is for support, health, and maintenance of family members in the discretion of the trustee. Using this language, the trustee determines whether it is appropriate to distribute funds to a beneficiary, and acts accordingly.

A more common financial drafting technique is to create a living trust that splits into a marital and family trust after the death of the grantor. The marital portion of the trust is to take care of a spouse if there is one, and the family trust is for the benefit of remaining family members. The family trust creation and family funds disbursement is according to the grantor’s wishes, but the grantor still retains control of his assets until death.

Potential estate and gift tax consequences are involved when creating trusts. It is always a wise idea to seek the advice of a trust and estates lawyer when creating any type of trust, and a trust grantor may also need to seek advice from a tax lawyer since trust tax laws change so frequently.