Pros and Cons of Setting Up a Family TrustBy Belle Wong
Pros and Cons of Setting Up a Family TrustBy Belle Wong
A family trust is a common tool in the estate-planning process. But while a family trust has many advantages, it's important also to understand the disadvantages.
What Is a Family Trust
A family trust is a legal device set up to benefit family members, most commonly, your spouse and/or your children. It is used to avoid probate, delay taxes, and to protect your family's assets.
While a family trust can be a testamentary trust—one set up under the terms of your will that comes into being upon your death—in most cases, a family trust for estate-planning purposes is a living trust.
Revocable vs. Irrevocable Living Trust
There are two types of living trust—revocable or irrevocable. When a living trust is irrevocable, the grantor of the trust—the person who sets up and funds the trust—is unable to make any changes to the terms of the trust. Because of this, living trusts are more commonly revocable trusts.
A revocable living trust can be changed during the grantor's lifetime. As the grantor, you can continue managing the assets held by the trust as if you still owned them. You can also change any of the terms of the trust, including how the assets will be distributed to beneficiaries after your death. And you can even terminate the trust entirely.
It's important to remember that a revocable living trust becomes irrevocable upon your death. This means that you cannot stipulate in your will how the assets held in trust are to be distributed. The specific terms of the trust govern asset distribution.
Pros of the Family Trust
A revocable living trust set up to benefit your family offers a number of advantages, including :
- Avoidance of probate. This is one of the primary reasons people use a living trust. Normally, when you die, your beneficiaries are unable to access their inheritance right away. Your will must first go through a process called probate. Once probate is granted by the court, your executor can distribute your estate's assets according to the terms of your will. But because the living trust has ownership rights over the assets it holds, those assets aren't considered owned by your estate, so they're not covered by the probate process.
- Privacy. The probate process is an open one. Your assets and debts become a matter of public record, including how they are distributed. On the other hand, a living trust remains private even after your death. No one can access information about the assets held by your trust or how they are distributed.
- Flexibility. While you will need to transfer title (that is, ownership) of any assets you want held in the living trust, its revocability means you retain the flexibility to deal with those assets as you please. This includes transferring title to any asset held by the trust back to yourself, changing the beneficiaries and the assets they will receive, and even terminating the trust if you wish.
- Grantor's incapacitation. If you become incapacitated during your lifetime, your living trust is set up so that a successor trustee takes over the management of the assets. This saves your family from the chaos and costs that can ensue if you're no longer able to manage your financial affairs.
Cons of the Family Trust
While a revocable living trust has a number of advantages, it also comes with certain disadvantages. Cons include:
- Costs of setting up the trust. A trust agreement is a more complicated document than a basic will. In most cases, this means the more prudent approach is to consult with an estate-planning attorney to properly set up your trust. And because the document is more complicated, attorney's fees are typically higher than for a will.
- Costs of funding the trust. Your living trust is useless if it doesn't hold any property. Funding the trust requires that you legally transfer to the trust the title of any assets you want it to hold. Depending on the asset, you will need to prepare and execute the legal paperwork to do this effectively. If you never get around to finalizing the transfer, you will still legally own those assets upon your death. That means they will be dealt with by your will or, if you don't have a will, according to the rules of intestacy.
- No income tax advantages. A common misconception about revocable living trusts is that they provide tax advantages, but this is not true. Because the grantor retains control of trust assets, any income earned by those assets is taxable. Upon the grantor's death, the trust will be required to file a tax return, although it won't be taxed on income distributed to beneficiaries during the first tax year, as that income is taxed in the beneficiaries' hands. If taxes are a concern, consult an estate-planning lawyer to ensure your tax obligations are minimized.
- A will may still be required. Unless you place all of your property into the family trust, you will still need to prepare a will—commonly referred to as a "pour-over" will—to deal with any of your property that stays outside of the trust.
For many people, a family trust that's set up as a revocable living trust may be the ideal vehicle for estate planning. However, the disadvantages of a living trust may outweigh the benefits. Assess both the pros and cons before taking steps to implement a family trust as part of your estate plan.
This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.