What is a family trust?
What are trust funds?
A trust fund is a legal entity in which assets or property are held and managed for the benefit of another person or entity. A trust fund can be revocable or irrevocable. A revocable trust is one that the grantor can change its terms, amend the terms, or remove them at any time. By contrast, a grantor cannot make changes the terms of an irrevocable trust unless he or she gets the permission of the trust’s named beneficiary.
What are family trusts?
Family trusts are fiduciary relationships that are agreed to by two or more parties. A grantor gives another party called a trustee the right to hold the legal titles of the family’s assets or property for the benefit of the beneficiaries.
The grantor or trustor is the person or organization that creates the trust by transferring money or assets into it. The trustee is an individual or entity that maintains and administers the assets.
A beneficiary is a person or organization that either gains profits or distributions from the trust. Setting up a trust allows you to ensure that your assets will be distributed according to your wishes. It can also help you to minimize the inheritance or estate taxes that might otherwise be assessed after you die.
Why would I want to set up a family trust?
Trusts for families are generally revocable living trusts that are created by a family member during his or her lifetime for the purpose of passing assets to the named beneficiaries after the grantor’s death. It provides a way to distribute wealth to surviving family members.
A trust for families can also be created for other reasons, including providing for minor children, surviving spouses, and adult children. A trust for families is generally for people who have accumulated significant assets and wealth. They can potentially minimize the taxes for the beneficiaries.
Trusts in the U.S.
During the most recent year for which data is available, the IRS reports that more than 3 million fiduciary tax returns were filed by trusts and estates. These returns reported incomes totaling more than $141 billion. Of that amount, $10.3 billion was interest income.
According to the American Bar Association, trusts are a type of estate planning document. Several states allow people to create asset protection trusts that protect the assets held in them from the reach of creditors.
Trust funds normally include a grantor, trustee, and beneficiary. For trusts that are revocable, the income that is earned during the life of the trusts is distributed to the grantors. After they die, the property transfers to the beneficiaries. If the grantor’s assets are all included in the revocable trust, it will allow the beneficiaries to avoid probate. There are no tax advantages for the grantor.
When the trustors open irrevocable trusts, the property that is placed in the trust is owned by it for the benefit of the named beneficiaries. The grantor removes his ownership of the assets. The purpose of establishing a trust that is irrevocable includes tax, estate, and legal reasons. They are safe from legal judgments and creditors. They also help by removing the tax liability of the income generated by the assets.
They can be living trusts or testamentary trusts. Living trusts are created by grantors while they are living. Testamentary trusts are trusts that are created by the provisions of a will only after the grantor’s death.
The types of trust funds that can be set up may differ depending on the state in which you live. You can use trust funds to make certain that your wishes are followed after you die, to pay for educational expenses for your beneficiaries, to protect your assets from the reach of creditors, and to gain substantial tax advantages when you will be transferring large amounts of money.
A “trust fund baby” is a term that is used to describe a person who has a trust account that is funded with enough money for them to live off of it. These funds are normally created by the parents of the person. A trust fund baby may have access to the money when he or she reaches a specific milestone or age. The money may be maintained by a third party, the trustor, or the child.
Purposes of a family trust
A family trust may be created for a variety of purposes. It may give the family protection from creditors when the ownership of the property has been transferred to the trust. When you place assets in this type of trust, the assets become the assets of the trust rather than your personal property. Your children can continue to receive the benefit of those assets. This means that they are not subject to relationship property claims from their partners, depending on the laws of your state.
You can also create a special needs trust, which is a type of trust that is created for children or family members who have special circumstantial needs. The terms of the trust can be provided in such a way to protect the named person from other family members who might try to take over the assets.
Spendthrift trusts are created to benefit a beneficiary who has trouble managing his or her own financial affairs. This type of trust can provide long-term protection. Instead of receiving a direct lump sum transfer, accessing the funds in the spendthrift trust will be contingent on need.
For minor children, a family trust can provide financially for their health, welfare, and education. The trust may be a way for a family business to distribute income to the family members, to reduce the overall taxes, or to pass the business down.
A trust can be set up for the benefit of a surviving spouse. It can pay for the care of the home and the estate for the widow or widower. The benefits include avoiding probate and can provide for the surviving spouse without costing estate taxes.
In cases of divorce, a family trust allows the money to be spread out over time and to prevent others from accessing the money other than the adult children. This means that the funds should not be accessible in the property division portion of a divorce case.
A generation skipping trust is usually set up for the grandchildren to transfer funds from one generation to the next. However, the beneficiaries do not have to be the grandchildren. The age difference between the beneficiary and the grantor must be greater than 37.5 years.
A dynasty trust is irrevocable, and the distributions can be made to the beneficiaries without any assessment of additional transfer taxes. They are typically set up by families who have massive amounts of wealth.
Costs associated with a trust
There are costs that will be required to establish and maintain a family investing trust. The legal fees can be higher when the estate is very complex. The maintenance fees are the costs that are charged for managing the estate. There may be unanticipated legal costs if claims are made against the trust.
For a grantor trust, the grantor maintains his or her control over the income of the trust or the assets. The trust will not have to file a separate tax return. Any income or deductions from the trust assets will be included on the grantor’s individual tax return and may have to file a Form 1041.
For a non-grantor trust, the grantor has no right, title, or interest in the principal. This type of trust will require a trust tax return. The trust will have to pay income tax on any income that is generated by its assets. If there is a distribution to the beneficiary, it will be taxed on the beneficiary’s tax return. The person or entity that manages the trust will be responsible for filing Form 1041 and issuing a Schedule K-1 to each beneficiary.
Advantages of a family trust
There are several advantages of setting up a trust for family investments. This avoids probate, which makes the estate information public. For larger estates with more than $2 million, a trust can reduce the amount of estate taxes that will be owed after you die.
An irrevocable family trust avoids estate taxes by paying the gift taxes on property at the time of deposit into the trust. Gift taxes are usually lower than estate taxes.
There are some limitations to a family trust. When you transfer your ownership of the assets to the trust, you will no longer have control over them. The assets will no longer be your own.
You may also have to pay administration costs and fees for the time and expense involved with accounting and administration. There will also be costs involved with creating the trust and the transfer of your assets. If there are changes to the trust law, it might affect some of your original objectives. This makes it important for you to include provisions in your trust document that provides for flexibility in the laws.
Preparations in setting up a family trust
When you want to create a trust for family investing, decide on the name for the trust. Appoint an alternate person to manage the trust who has confirmed that he or she will fulfill this role. It can be either an individual or an entity.
To legally create your trust, you will need to draft a declaration of trust. Name the trust grantor, the person who will manage and administer the trust, the alternate, and your beneficiaries.
Set the terms about how the assets will be managed and distributed. Create a property schedule that lists the trust property and the family investments that are included in the trust.
When a final draft is completed, you should make copies of the declaration of trust and the property schedule. The final copies must be signed and notarized, and you will keep a copy and provide one to the alternate.
The legal title of the property will be transferred from your name into your name as the administrator of the trust. Keep in mind that assets cannot be added to the trust that legally belongs to your spouse without his or her consent.
DISCLAIMER: These are not the actual steps to form a legal family trust but are steps that may assist in preparation.
How to terminate a family trust that is revocable
If you have a trust that is revocable, decide where the assets will be transferred to and remove all of them from the trust account.
Create a revocation of the living trust document. List the account information, the trustee, the grantor, and the date. The language must specify that the grantor intends to revoke the living trust account on a specified date. If it is revocable, only the grantor needs to sign the document. If it is irrevocable, the beneficiaries and the grantor will need to sign.
Sign and notarize the revocation of the living trust. For a trust that is irrevocable, the beneficiaries must also sign and notarize the document. Copies of the trust documents must be given to all of the parties. Only the original owner of the account or the trustee of the account can close the family trust financial accounts.
A trust that is irrevocable cannot be terminated at will. Check the state laws concerning terminating a trust that is irrevocable and consult with an attorney for the requirements where you live.
Establishing a family trust can help you to protect your family investments and help you to avoid probate. M1 Finance supports trusts that are revocable and irrevocable.
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