What is a family trust?

You work hard to support your family during your lifetime. But how can you make sure that your loved ones are taken care of after you pass away?

Creating a family trust can help.

A family trust is any type of trust that lists one or more of your family members as your beneficiary. Family trusts are a great way to provide for your family and ensure your assets are distributed according to your wishes. Not every family needs a family trust, but they do have many benefits, from avoiding probate to preventing conflict between family members after your death.

Let’s explore how you can use a family trust to take care of your family’s needs after you’re gone — and how you can set one up today.

What is a family trust?

A trust is a legal arrangement in which one person gives another person the legal authority to manage assets, all for the benefit of a third party.

The person who creates the trust is often called the "grantor." They assign a "trustee" to manage the trust. They also name "beneficiaries," who receive the assets in the trust according to the trust terms (for example, after the grantor dies).

The term “family trust” describes any trust that benefits the grantor’s family members. The grantor’s children, grandchildren, siblings, spouse, or any other relative can be the beneficiaries of a family trust.

A family trust does more than provide financial support for your loved ones. It can also make sure that your property and other assets stay within your family from generation to generation.

What kind of trust is a family trust?

There are many different types of trusts that perform different functions. Most family trusts are a type of living trust, which is a trust you establish during your lifetime.

Revocable living trusts (RLTs) are an especially popular option for family trusts. “Revocable” means you, as the grantor, can make changes to the trust at any time (or cancel it altogether). This can include changing what assets are in the trust, who your trustees or beneficiaries are, or the terms of any gift from the trust.

You can also create an irrevocable family trust, but they are less common. Irrevocable trusts are often complicated and have more restrictions. As a general rule, you also can't make changes to an irrevocable trust once it’s established.

Benefits of a family trust

Setting up a family trust can offer you and your loved ones several important benefits, including:

• Avoiding probate. Probate is the legal process of distributing a person’s estate according to their last will and testament after they pass away. Trusts don’t have to go through the probate process, saving your loved ones time, money, and stress.
  
  
• Flexibility to make changes. A revocable trust lets you make changes or additions at any time. This can include what assets are held in the trust or who your trustee(s) or beneficiaries are. You can even choose to cancel the trust entirely. You can also add stipulations to the terms of the trust. For example, you can specify if you want your children to reach a certain age before they can access any funds.
  
• Having control over your final wishes. In your trust, you get to lay out exactly what you want to happen after you die. You write these instructions into the trust documents, which your trustee must follow. This gives you control over important decisions, like who should manage and invest trust funds on your children’s behalf.
  
  
• Preventing conflict. Having a trust can make it harder for your family members to challenge your intentions. Since you’ve outlined your wishes in your trust documents, there’s less risk of family members disputing how your assets are distributed.
  
  
• Protecting privacy. Because a trust doesn’t have to go through the probate process, its contents don’t become a part of the public record. This helps ensure privacy for both you and your beneficiaries.

An irrevocable family trust can also offer some benefits — as well as certain restrictions. With an irrevocable trust, you can still avoid probate, secure privacy, and potentially steer clear of family conflict. However, you generally can't make changes to this type of trust after it's created.

Still, irrevocable trusts have their merits. They can minimize estate tax exposure by removing assets from your taxable estate, which can lessen the financial burden on your family.

How to set up a family trust

Choosing the right type of trust for you is a personal decision. Creating a family trust may be a great way for some people to support their families, but it may not offer the protections that others need.

Family trusts generally work best for people with larger estates, or for those who want to keep their wealth and assets in their family. Family trusts can also be a great choice for people who want to ensure care for family members with special needs or specific care requirements.

Setting up a family trust is like creating other living trusts. You’ll decide who and what to include in the trust and complete the trust documents. Then you’ll “fund” the trust with the assets you want to pass on to your loved ones.

You can take the following steps to create your family trust:

1. Decide what type of family trust you want to create. People with simple estate-planning needs usually opt for a revocable trust. People with more complex needs may prefer an irrevocable trust.
   
2. Draw up trust documents. What documents you'll need to complete may depend on your state’s laws and requirements. An estate planning attorney can guide you through the process and answer any questions you have. You can also use a resource like FreeWill to create your living trust online without paying expensive attorney fees.
   
   
3. Appoint your trustee. If you create a RLT, your trustee can be yourself, another person, or an organization. If you choose to manage the trust yourself while you're alive, you should name a "successor trustee." Learn more about a trustee's responsibilities and how to choose one.
   
   
4. Name your beneficiaries. In a family trust, your beneficiaries will be the family members you name to receive your assets. In your trust documents, you should include instructions for how you want those assets distributed.
   
   
5. Execute your trust. Once you've completed your trust documents and named your trustee and beneficiaries, it's time to make it official. The exact process to finalize your trust will depend on your state’s laws and requirements. Often, this includes signing your trust documents alongside witnesses. In some states, you may also need to have your trust notarized for it to be valid.
   
   
6. Fill the trust. The final step is to transfer your assets to the trust. These can include any real estate or property you own (like your house), financial accounts, non-cash assets (like stocks), or even a life insurance policy. It can be a good idea to speak with a financial advisor about the assets you’ve chosen for your trust. They can help you understand how your trust assets could be taxed.

Each state has its own rules and processes for creating a trust. Depending on where you live, you may have to take additional steps to set up your trust.

If you have questions or your estate is more complex, an estate planning attorney can help. They can address any concerns you have and make recommendations based on your situation.

Create your own family trust today

Creating a family trust can be a wonderful way to protect yourself and your family. Because most family trusts are set up as revocable living trusts, you can maintain control over the trust assets during your lifetime. which means the funds are also there if you need them.

There are many benefits to setting up an RLT, including avoiding the lengthy (and often expensive) probate process, preventing conflict between family members, and offering privacy for you and your beneficiaries.

Ready to take the next step in establishing a trust of your own? FreeWill offers many great resources to help you get started.

If you're ready to make your trust, consider using FreeWill’s living trust tool, which will guide you through the process. It’s secure, easy to use, and takes less than 30 minutes.