A trust is a legal entity that you can put your money and assets into so that you can eventually pass on to one or multiple beneficiaries, typically after you die. A family trust is any type of trust that you use to pass on assets to one or multiple family members.
Anytime you talk about trusts, there are a few terms to make sure you understand:
Trust document: The legal agreement with the details of the trust
Grantor: Also known as the settlor, the person who creates a trust
Trustee: The custodian of the trust, who manages the trust assets
Trust beneficiary: The individuals, businesses, or organizations that receive assets from the trust
What is a family trust?
A family trust is just a type of trust that has family members as your beneficiaries. So a family trust is a subset of trusts and not its own distinct type of trust, since it can fall into a few other categories. Just as with regular trusts, there are two main types: revocable and irrevocable trusts.
Revocable and irrevocable family trusts
A revocable trust is one that the grantor can make changes to. For example, you could change which assets are in the trust and who the beneficiaries are, like adding a child or grandchild. The grantor can also dissolve the trust entirely.
Grantors typically act as the trustee of their revocable trust and name a successor trustee to manage the trust when they pass away or become incapacitated. (What qualifies as incapacitated is usually something the grantor can define when opening the trust.)
An irrevocable trust is one that the grantor cannot change or cancel after creating. Once assets are moved into this type of trust, the grantor loses control and access to the assets, which are managed by a trustee who is someone other than the grantor.
There are many types of irrevocable family trusts and they're mostly used by wealthy individuals and couples who want to minimize or avoid estate tax, capital gains tax, and other forms of taxation. One example is a bypass trust (also known as a credit shelter trust) which allows a grantor to pass assets to their surviving spouse, free of gift tax, and then to another beneficiary when that spouse dies.
Family trust vs living trusts
Living trusts, also known as inter vivos trusts, are created and take effect while the grantor is still alive. If you open a trust right now, you’ve got a living trust — and if your beneficiary is a family member, then it’s also a family trust.
A living family trust can provide you with both flexibility and control. For example, it can operate as the family trust fund that lets you distribute an allowance to your child while he’s in college, but you can also use the trust to transfer family assets, like your home, to your beneficiaries once you pass away. If you have created a revocable living trust, you’ll be able to change the details of the trust as your circumstances change over time.
Living trusts usually allow you to avoid probate. Probate is a legal process where the deceased person’s estate (the collection of their assets) is distributed to the rightful heirs and beneficiaries. Assets in a living trust aren’t subject to that process, so your beneficiaries can receive their inheritance faster.
Testamentary trusts
The opposite of a living trust is a trust established upon your death — through the terms of a will — which is a testamentary trust. Because the grantor has passed away by the time the trust is created, it is irrevocable. However, it does not come with some of the same advantages of irrevocable trusts, like asset protection or tax advantages, because the property hasn't been transferred into the trust yet.
Testamentary trusts can be easier and cheaper to create than living trusts, but they still require your assets to go through a probate court, and probate isn’t free.
Benefits of a family trust
Family trusts provide a clear way to pass money, property, and other assets to your family members. That's an advantage in and of itself. You can dictate what each beneficiary gets and when they get it, which can be helpful if a child or relative is a spendthrift. Opening a trust doesn’t have to be expensive either; you can get a free will and trust with Policygenius.)
There are additional benefits depending on what type of trust you have. As mentioned before, living trusts generally allow you to avoid probate. The main advantage is that people do not have the opportunity to challenge the terms of the trust in the same way that they can contest the terms of a will. Your chosen trustee will distribute trust assets according to the wishes you laid out in the document.
If you avoid probate by using a trust, then you can also protect the privacy of your estate holdings. Trusts are usually not public record the way wills are.
Read more about the difference between trusts and wills.
An irrevocable trust has additional tax advantages related to avoiding estate tax. An asset protection trust can also shield family property from creditors or decrease your countable assets so that you meet the threshold to receive government benefits like Medicaid.
How to create a family trust
The process to create a family trust is straightforward and it's the same as creating other trusts, which you can read more about in our guide: how to set up a trust.
You start by drafting and executing a trust document, which explains how you want the trust to work and lists your beneficiaries. You may be able to make a simple trust document yourself, but an online service can provide more guidance.
Next you need to make sure you fund the trust with assets. This includes transferring deeds, titles, and any other ownership rights from the grantor to the trust. If you don't do this, the trust won't be effective (and your assets still have to go through probate after your death).
Learn more about transferring real estate into a trust.
For more complicated estates and irrevocable trusts
If you need help transferring property into your trust, and for other complex situations — like when you want to minimize taxes — it's best to find an estate attorney. A lawyer can also help structure your trust the way that best meets your situation, depending on who you want to pass money to and what assets you have. For example, a qualified terminable interest property (QTIP) trust is an option for people who want to pass assets only to specific relatives. Having professional help is also useful when you own property in multiple states or have complicated finances.
