Setting up a Family Trust can be complex and If you don’t know where to start – or if you want to check that you’ve covered everything – use our step-by-step guide for setting up a Family Trust.
What is a Family Trust?
A Family Trust is a type of structure that holds assets for the benefit of your family (or another group). Generally, the family members are the beneficiaries of the Trust. It is a legal arrangement that allows trustees to hold assets on behalf of beneficiaries.
A Trust can hold all kinds of assets, including property, shares, cash, and investments. You can also use a Family Trust as an umbrella structure to own different assets or businesses.
For example, It’s a bit like a savings account, but instead of putting away cash, you put away things like property and shares.
The trust can be set up so that the money stays untouched until you or your family needs it — for example, for a deposit on a house or to help pay for grandchildren’s education.
Anyone over 18 can set up a Family Trust and appoint people (known as trustees) to look after it. The trustees make sure the money is used in line with your wishes. Depending on how the trust is set up, they might also be able to use the money for certain expenses, such as ongoing living costs.
There are different types of Family Trusts depending on what your goals are. Some allow you to protect your assets from creditors or bankruptcy, while others allow you to pay less tax or support someone who wouldn’t otherwise qualify for government assistance.
You can create and manage a Family Trust yourself, but it’s not recommended unless you have legal expertise or access to professional advice.
Why Do People Set Up Family Trusts?
Family trusts are a popular way to manage assets, particularly when you have children. They can be used for everything from paying school fees and providing an inheritance for young people to protect assets from the risks of business failure.
A family trust is a legal entity that holds your assets on behalf of the beneficiaries you nominate, such as your loved ones or a charity. It’s a separate structure from your personal estate, so you can use it to protect your assets from creditors, lawsuits, and other risks
Your trustee will manage the trust on behalf of the beneficiaries according to the terms of your trust deed. Trustees must act in the best interests of all beneficiaries and comply with relevant laws
It’s important to understand that once money is transferred into a family trust it’s no longer yours. Your trustee makes decisions about how to invest and spend money on behalf of your beneficiaries
You may be able to appoint yourself as trustee or protector of your family trust. This gives you more control over the management of funds in the trust and lets you decide who receives what, when they receive it, and when they’re allowed access to their inheritance
Many people set up family trusts because they can offer certain benefits that other estate planning options don’t provide, such as:
- Simplifying asset transfers at death
- Providing asset protection
- Reducing estate taxes and probate costs
- Avoiding guardianship at death or disability
- Giving money to children or grandchildren while they’re still minors, and specifying how it should be used
- Allowing one spouse to leave money to another in a way that protects the inheritance from creditors of the surviving spouse
- Protect assets from lawsuits
- Pass assets to heirs with minimal taxes and probate costs
- Preserve assets for the benefit of minors or disabled beneficiaries until they are capable of managing the assets themselves.
Types of Family Trusts
A family trust is a legal entity that is created to hold and manage assets on behalf of someone, called a beneficiary. The person who creates the trust is known as the grantor. A trust can be set up during a person’s lifetime or in their will, and it can be structured to be either revocable (the grantor can change their mind) or irrevocable (the trust cannot be changed once it is established).
There are many different types of trusts, but here we’ll focus on some of the most common:
Irrevocable Family Trust
This type of trust can’t be changed after it has been created. The grantor gives up ownership over the assets in question but retains certain rights to them, including the right to receive income from them. These trusts are commonly used for estate planning and asset protection purposes, as well as in Medicaid planning to preserve assets for beneficiaries.
Revocable Family Trust
A revocable living trust is set up during the grantor’s lifetime and may be changed at any time. It can also allow for the management of assets if the grantor becomes incapacitated and allows for easy transfer of assets upon death without probate court supervision. However, this type of trust does not protect against lawsuits or creditors.
Marital Trust
This type of trust is created for the benefit of a surviving spouse after the death of the first spouse and often includes provisions for other beneficiaries as well. For example, you can set up your trust so that children from a previous marriage will receive assets when your current spouse dies or reaches a certain age. This can help avoid conflict between family members in the event that one spouse remarries after being widowed.
Living Trust
A living trust is a written document that establishes both the ownership of property and its management. It goes into effect during your lifetime, but you can set it up so that it won’t be distributed to your heirs until after you’ve died.
What are The Pros & Cons of Setting up a Trust?
If you’re considering forming a family trust, you should also be aware of the Pros as well as the cons. Some of these include:
Pros
A family trust allows you to pool assets and resources rather than deal with each one separately. For example, the property can be held in a single trust, but the income from that property can be split between family members so that each individual pays tax at their own marginal tax rate.
If you’re self-employed and want to set aside funds for your retirement, you can put them into a superannuation fund managed by the trustee of the family trust. This avoids having to contribute to multiple super accounts for different family members.
You can make gifts to younger generations by putting money or property into a trust for their benefit, which could reduce your exposure to future aged care costs or capital gains tax (CGT).
Cons
Cost. While it may not be as expensive as you think to create a trust, there are still costs involved in setting one up and maintaining it. Your estate planning attorney can provide an estimate for setting up your family trust, including any ongoing costs.
Delay of asset distribution. With some trusts, the assets are distributed to heirs outright when they reach a certain age (often 21 or 25), but with others, the trustee decides when or if the heir receives his or her share of the trust. If you use someone other than yourself as the trustee, this could cause delays that are frustrating for your heirs.
Complexity and upkeep. Family trusts require a thorough understanding of both state and federal laws governing trusts and estates in order to set them up correctly, maintain them and distribute assets properly upon your passing. This is one reason it’s important to hire an experienced estate planning attorney who is knowledgeable about family trusts and has experience working with them.
Family trusts aren’t right for every family. If your estate will likely pass through probate without issue, or if it’s small enough to pass through probate without much delay or expense, then a trust might not be worth the time, effort, and expense.
How to set up a family trust - A step by step guide
When you set up a family trust, you create a legal entity that holds your assets. The trust can own real estate, bank accounts, stocks, and other investments. While the trust is alive, you control the assets as a trustee. When the trust ends — when you die or as soon as you transfer control — all the assets in it are transferred to the beneficiaries named in the trust document.
Step 1: Draft your Trust document
A written Trust document describes what’s in the Trust, who gets it and when they get it. It also names a trustee who has the responsibility to manage the assets while they’re in the Trust. You can draft your own trust, or hire an attorney to draw up a revocable living trust for you.
Step 2: Set up your family Trust
After your attorney has drafted the Trust document, he or she will help you sign and notarize it. At that point, your family trust is alive and holds whatever assets you’ve transferred into it (see Step 3). In most cases, this is something you do on your own — with funding from an insurance policy, for example — but if any of your heirs are contributing assets to it and/or receiving benefits from it now, they should also sign and notarize it.
Step 3: Moving your Assets
The third and final step is to move any assets or investments you have into your new trust. You may need to change account titles or retitle property deeds to name your new family trust as the owner of the asset or investment.
Establishing a family trust can be a big decision for you as well as your family so make sure that you talk to them and convey your wishes before taking such a big step for your future and theirs.
