What Is a Family Trust?
A family trust is a trust that has been set up by an individual, family or business with the primary intent of benefitting family members who are minors or who may not be ready to handle their own finances.
Basically, this allows family members to receive income and principal distributions while still under the watch of a trustee until they are legally entitled (and capable) of handling funds on their own.
As family wealth often needs to be passed on from one generation to another via inheritance, a family trust can provide tax benefits and estate planning benefits.
What Are Family Trusts Used For?
A family trust prevents family members from having free access to family wealth by placing the family assets into the family trust; however, it also allows family members to gain access over time under the supervision of a trustee.
A family member can receive an allowance for living costs via distributions, which will be set out in the family trust deed.
Through setting up a family trust, family wealth can be preserved and grown, while family members are monitored by the trustee who will make sure that funds are used appropriately.
Who Should Consider Creating a Family Trust?
Anyone who has family wealth and family members they wish to provide for and protect should consider creating a family trust.
In particular, anyone who is setting up an estate plan should ensure their family trust is part of their estate plan.
When family wealth needs to be passed on to family members, a family trust can help family members gain access to family wealth by taking into account family members’ age and financial needs.
How to Create a Family Trust
In order to set up a family trust, family members must first create a family trust deed. This family trust deed is the contract between family members who will be involved in family trust distributions.
During this family meeting, family members should discuss how much money each member will receive from the family trust, as well as how and when money will be distributed.
The family trust deed should include the family meeting date and the family member who created the family trust as trustee.
It is important to note that family members cannot have access to family trust funds until they are of legal age or if they have a specified disability as defined in the family trust deed.
For tax purposes, family trusts are best created as Grantor Retained Annuity Trusts (GRAT).
This means that the grantor (the family member setting up the family trust) transfers assets into the family trust in exchange for a specified number of annuity payments.
These family trust assets will then be used to fund family trust distributions.
After the family member creating the family trust passes away, family members who have been receiving family trust distributions can continue to benefit from family trust distributions without being taxed.
Remember, family trusts are best created as GRATs, because family members do not need to pay gift tax when they transfer assets into a family trust.
How to Make a Family Trust Beneficial for Everyone
To ensure family members receive family trust distributions as intended, family members who set up the family trust should always consult with a qualified estate planning attorney.
It is important that family wealth and family assets be placed into the family trust and that family members receiving distributions from the family trust receive those family trust distributions as intended.
If family members do not receive family trust distributions as intended, they could end up paying family debt and tax penalties.
The family member setting up the family trust should also ensure that family members who will be receiving family trust distributions understand how to handle family wealth appropriately. This is why it is important to set up a family trust as a GRAT.
It is also important to note that family members must be of sound mind in order to manage family trust distributions.
If family members are receiving family trust distributions, but do not know how to handle family wealth appropriately, they could end up wasting family trust assets and spending money inappropriately, thus leading to family debt.
Common Mistakes When Creating Your Own Family Trust
While family trusts sound very beneficial, family members must realize that family trusts can be misused if family members cannot manage family wealth properly.
There are several reasons why a family trust may not work as intended:
- If family members receiving family trust distributions do not know how to handle family wealth or end up wasting family assets, family trust distributions will pay family debt.
- If family members receiving family trust distributions end up mismanaging their own funds, they could end up paying family tax penalties on any money that is not spent appropriately.
- If family members receiving family trust distributions do not know how to handle family wealth, they could be more inclined to spend family money on frivolous items instead of family necessities.
You have to be family that are on the same page throughout because this family trust document will remain in effect even after family members pass away.
If family members do not agree to family trust distributions, they could end up suing one another for money.
To ensure family wealth remains within the family, it is important to have a family meeting to discuss family trusts, family wealth, family debt and family assets.
While family members may be able to avoid family debt with a family trust, the only way they can eliminate family debt is if they are all on the same page at all times.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.