A family trust is a fund set up in the family’s name to plan, manage, and allocate family wealth and properties for protection for future generations. It shelters a family from creditors’ estate taxes and eases the process of passing family wealth on to future generations.
A family trust protects the financial heritage and inheritance of a family. Not every family needs to set up a family trust fund. It can vary from one family situation to another. To assess your current family’s financial situation to see if you need to set up a trust fund, consider seeking advice from your local financial advisor.
Will vs Trust
Both a will and trust involve a transfer of an estate to heirs. However, a will is only revealed to family members after the estate owner’s death. It is a legal document drawn by a court, abiding by the country’s estate laws, regarding transference of wealth, properties, land, or any other valuable items of the deceased to their family members. It also includes the deceased’s last wishes, including guardians of any minors and a portion for charity. Furthermore, it only activates once a person dies and must go through legal.
On the other hand, trust does not require interference from the court. A trust fund can be set up during the owner’s lifetime. A trust fund also corresponds to the trust put in another family member, where the granter gives the trustee the right to hold the title to an estate or property for a third party’s benefit. The third-party typically refers to future generations.
Reasons to Create a Family Trust
It is now quite easy to set up an online living trust anywhere, from the comfort of your home. You do not need to be a millionaire to set up a family trust. The purpose of family trust is to protect the family inheritance to make sure it stays within the family. It protects the family estate from any fraudulent activities and theft. It also puts the granter at ease, knowing that their estate is protected long after death.
Let us look at other reasons you might need to set up a family trust.
Uncontested
While a family member who is not happy with the will can contest it in court, trust is hard to contest. Additionally, it might make the granter happy to establish trust during his life because it can easily go uncontested.
However, this does not mean it is impossible to contest a trust. A trust can be contested under one of the two conditions: that the granter was not of a sound mind while drawing up the trust, or that they set up the trust under pressure or someone’s influence. Therefore, it is important to be of a sound mind, alert and attentive when drawing a family trust. This means that if you set up your family trust during your good years and do not wait to grow old, the chances are that your trust will be safe from being contested.
Skip the Probate Process
The probate process occurs in the case of wills, not trusts. Probate is a process by which a judge validates the will’s authenticity. This process can take as long as one to two years, during which no family members have any rights to claim any of the inheritance. However, the court allows a certain amount to withdraw each month for daily expenses until the probate period is over.
In the case of a family trust, there is no need for a probate period since the granter is alive. This means that the family assets are quickly transferred to the trustee. This also helps you avoid the probate fee, nearly the entire estate’s value.
Protection from Creditors
Once a family trust is set up, it is no longer in possession of the granter. This means that creditors cannot claim their credit from the family estate. This, of course, comes with certain conditions set at the time of the agreement.
It also means that the granter can start a new venture without putting the family estate at risk, as it is now an independent entity and cannot be used as collateral either. If the granter dies a premature death, the family estate would be protected from creditors.
Protection against Relationship Property Claims
If you place your family estate in a family trust, it protects your assets from relationship property claims. This means that if you are married with kids, your children can reap the benefits of the assets under the trust without claiming personal property rights. It is also not subject to claims from your partner but comes under relationship property.
However, in case you decide to separate from your spouse or get a divorce, the estate must be divided equally between the two. This is subject to applicable relationship laws in your country.
Major Disadvantage of a Trust: Inconvenience
While a trust is established as an independent entity, banks and other financial institutions might create hurdles. You would have to declare your assets under the trust and pay a legal fee for changing names on the legal documents binding the trust. Moreover, your trust might not be safe if you have set it as collateral against a loan borrowing from the bank.
Additionally, some people mistake drawing up a trust but never actually finalize transferring those assets under the trust. This can create hurdles because assets outside the trust and still under your possession would pass through your will. If you have not drawn up a will because you set up a family trust, it will go through state laws regarding the will.
Creating a trust could give you a little tax benefit, but not entirely. In death, a new taxpayer is selected during the probate process. This new taxpayer can draw up their tax plan and personal exemptions, which may not be compliant with the original benefactor. Additionally, if the benefactor is a tax filer, any tax levied on the trust will be reported on the benefactor’s tax statement.
Summing Up
Setting up a family trust fund is solely to protect the family estate. Setting up a trust reduces conflicts among beneficiaries by eliminating sole ownership of a property. Trust comes with several strings attached, unlike the distribution of property in the case of a will, where the beneficiary is free to use the property as they please. However, in the case of a trust, protection of family assets is assured. This comes under relationship property claims, equal ownership rights of all the beneficiaries involved, protection from creditors, and the need for probate.
Nonetheless, one major drawback of setting up a family trust is the inconvenience. Since it comes with strings attached, it might create hurdles for beneficiaries since the property is not under their ownership. This means they would have to declare the assets as part of the trust to the bank via the trustee’s discretion. This might even lead to resentment between the beneficiary and the trustee. The beneficiary might feel that the trustee is not acting in their best interest or that the trustee is not the right person for the job.
Despite the disadvantage, the advantages and reasons for setting up a trust trump the inconveniences. It assures protection of the family estate and makes sure that it stays within the family. Therefore, consult your financial advisor or solicitor that deals in family law matters before setting up a trust to avoid mishaps.
