While it isn’t the most exciting or talked-about element of the wealth world, estate planning is certainly one of the more important parts of managing your wealth effectively.
That’s because, without taking the steps to develop the elements of an estate plan, all the wealth that you’ve worked so hard to generate, manage, and grow over your lifetime could be in serious jeopardy once you pass away.
Estate planning is essentially a way to ensure that your future generations and other beneficiaries of your choosing are able to reap the benefits of your careful wealth management even after you aren’t able to anymore. With the right legal documentation, you may be able to guide how decades of dividends from savings and investments are disbursed among your children, how your family handles any invaluable artwork and antiques you’ve amassed, who will take over your role in the successful family business, and more.
Intrigued? Then let’s start where it all begins, with a family trust.
What is a Family Trust?
At the highest level, a trust is a legal entity to which you can assign ownership of your assets — all while setting guidelines as to how these assets should be managed when you’re no longer around to do it yourself.
A trust that is outlined in your will is called a testamentary trust and it is irrevocable, meaning it cannot be changed once it goes into effect — which, since it’s linked to your will, is at the time of your death. While irrevocable trusts can provide the most protection from taxation and debt collection, it’s important to remember that any trust created in conjunction with a will can still go through probate (the legal procedure for administering a will) — mitigating some of the protection and privacy that’s usually associated with trusts.
However, any trust that you create while you’re still alive is called a “living trust” or an “inter vivos trust.” These can be created to be irrevocable as well as revocable — meaning you can update the trust and even regain control of your assets while you’re living.
This brings us to a family trust, which is a type of living trust that you can choose to set up to be either revocable or irrevocable.
What is a family trust, specifically? It’s just what it sounds like — a family trust a trust you use to assign your family members as beneficiaries.
Let’s talk about how that works.
How a Family Trust Works
A family trust starts with a grantor, which is the person who creates the trust to protect and share their assets with family. These assets can include anything the grantor owns; from cash to stakes in businesses, real estate, traditional and modern digital investments, and of course physical possessions like artwork and antiques.
The grantor assigns a trustee to carry out the asset management guidelines outlined in the family trust. These guidelines can include how an asset can be used (like whether or not it’s allowed to be sold) and when an asset can be used (like deciding an age at which certain family members can access their inheritance). Whether the grantor chooses a trustee who is a family member, friend, or paid professional (often an attorney or accountant); it’s very important that they choose someone who is willing to manage the trust for what could be years.
The beneficiaries — or the people who will receive assets or proceeds from the assets in the family trust when it goes into effect — are, in the case of a family trust, almost always the grantor’s family members.
Finally, the document where the trustee, beneficiaries, and the guidelines of the trust are outlined may be called one of several things — a Trust Agreement, a Deed of Trust, or a Trust Deed.
A Family Trust Is Right for You If...
While a family trust can be a useful element of anyone’s estate planning repertoire, it can be especially powerful for grantors to whom the following situations apply.
You Care About How Certain Assets Are Used
Many people who choose to set up family trusts do so to ensure their assets can continue to benefit their family as much as possible, for as long as possible.
For example, a parent might choose to set aside a large chunk of cash that their child can only access once they turn 18 so that they can put it toward furthering their education. Or, a grantor could use a family trust to ensure that their artwork collection stays in the family for another few decades so that it has more time to amass value before being sold off.
You Have a Beneficiary Who Needs Advanced Medical Care
Placing assets in a trust removes them from any one person’s possession, meaning they will be excluded when an organization like Medicaid checks their assets to see if they meet eligibility requirements. This can be extremely helpful when setting up a family trust that includes a family member who requires specialized long-term medical care.
You’re Passing Down Substantial Wealth
Federal estate tax is applied to property when it’s transferred from a deceased person to their beneficiary(ies). In 2020, this tax generally applies when a person's assets exceed $11.58 million. Some states also apply their own estate tax and/or a gift tax. For those who are passing down considerable assets, an irrevocable family trust is a legal measure to mitigate some of the losses due to taxes.
You Want to Avoid Losses Associated with Probate
With a will, an estate is required to go through a legal process called probate. During probate, a professional known as an executor first liquidates whatever assets necessary to pay debts and taxes before distributing remaining assets according to your will — or to state inheritance laws.
An average estate can take anywhere from six months to two years to go through probate, the process could consume up to 8% of the value of the assets going through probate, and any assets that go through probate enter into the public record — making them easier targets for creditors and predators.
Transferring your assets to your heirs via a family trust helps them bypass the probate process and all the mess and expense that comes with it.
How to Create Your Family Trust
While we highly recommend seeking a legal professional (more on that later) when it comes to creating any kind of estate planning documentation, what you can do to help create your family trust all comes down to preparation.
- The name of your trustee. If you’re appointing a professional to this role, remember to include how they’ll be reimbursed for their time spent managing the trust.
- Guidelines for what tasks the trustee will be responsible for and what actions they can take, such as whether they’re allowed to sell any assets from the trust, etc. This step will be more applicable if you appoint a friend or family member to the role.
- The name(s) of your beneficiary(ies) and any conditions you want them to meet before they can receive their assets (reaching a certain age, completing a certain level of education, etc.).
- What assets will be owned by your family trust. Gather any titles or other proofs of ownership you have (think vehicle titles, property deeds, etc.) so that they can be transferred to the trust.
- Outline what you want to happen if the trustee or any of the beneficiaries die or want to end their participation in the family trust.
- If you’re setting up a revocable family trust, you’ll want to set the guidelines around when it goes into effect and under what conditions it can be revoked.
- Determine how you’re going to pay to establish your family trust, which will vary based on complexity and locale. If you’re going to be working with a legal professional, plan to spend at least $1,000, but set aside up to $3,000 for set up and consultation fees.
Once you’ve got all the materials and plans in place for your family trust, we’ll again recommend reaching out to a legal professional — ideally a local trust and estate attorney — to make it official by drafting the paperwork or at least reviewing it for accuracy and legality.
How to Protect Your Family Trust and Other Important Documents
Finally, having a family trust doesn’t just stop at creating the legal entity.
An effective family trust is one that your family can actually find and use when the time comes.
Yes, Kubera is an easy-to-use wealth and net worth tracker that enables users to monitor a wide variety of assets — but our services don’t end there.
Kubera also has a unique “Safe Deposit Box” feature where you can securely store, access, and even share your family trust information with family members and beneficiaries. Then, our beneficiary management feature allows you to name a beneficiary who is automatically granted access to all of your important documents if you become inactive on your account.
Kubera is a truly modern wealth tracker that knows your estate plans are just as important as your assets when it comes to long-term wealth management for your family. You can make sure those plans, as well as your assets, end up in the right hands at the right time with the only digital safe deposit box and beneficiary management feature in the wealth management industry.
Start your affordable subscription to Kubera or sign up for our free trial today and put your long-term wealth and estate management into motion.