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Setting Up A Family Trust

How to guide for creating trusts

Setting Up A Family Trust

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Family trusts are meant to protect assets, minimize taxes and responsibly distribute estates. In short, they ensure money ends up in the right hands at the right times. These trusts are not solely the domain of wealthy families. They can be used by anyone wishing to leave a legacy after they pass.

This site will cover both revocable and irrevocable trusts. It will also address larger estate planning topics such as Durable Powers of Attorney, Advanced Health Care Directives, choosing a trustee and more.

It is our goal to ensure your family has access to the information needed to make an informed choice when it comes time to establish your estate plan.

Types of Trusts

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The world of trusts can be broken into many categories. A trust should be written specifically for your family and its situation. For this reason, a family trust may encompass several monikers. For example, your family’s trust may be an irrevocable dynasty trust that contains spendthrift provisions and is meant to avoid Generation Skipping Taxes.

It would be unwieldy to refer to such a as an Irrevocable Dynasty Spendthrift GST Skipping Trust, and so we will refer to the entities herein as Family Trusts with the idea that your specific needs can be met by a single trust without needing to get bogged down in nomenclature.

Revocable Trusts

These are the simplest entities available. They avoid probate and can be used to privately title assets. They can be altered, amended or revoked at anytime as their name implies. The creator can revoke them, or a judge if there is a negative credit event.

These trusts are sometimes called Living Trusts or Revocable Living Trusts (RLTs). You will pay no more or less in taxes than if the trust did not exist. They are pass-through entities and will not affect your taxes in any way.

RLTs are the most commonly used trust because of their simplicity. They also avoid court ordered probate and are relatively simple to operate. These are not advisable if your goal is to minimize taxes or provide asset protection.

Irrevocable Trusts

An Irrevocable Trust provides a wider array of benefits than a Revocable Trust. They’re considered their own persons in the eyes of the law and thus provide greater flexibility when planning your estate, or if you desire protection during your lifetime.

Not every trust situs provides the same benefits. This is because your trust will be ruled by the laws of the state in which it was formed, and each jurisdiction has its own set of laws. You are allowed to setup a trust in a state other than that in which you live. This is a common occurrence as families seek more favorable jurisdictions.

Many states have adopted the Uniform Trust Code; Ironically, however, each state has tweaked their set of laws to the extent they can hardly be called uniform. This means each state has its own nuances and you should not take similarities for granted.

Asset Protection Trust

An irrevocable trust provides asset protection in select circumstances depending upon where the trust was formed. All states allow asset protection for third party settled trusts. That is, if you form a trust for somebody else’s benefit. For example, if you form a trust for your children, a charity or even your pets, then the assets will be beyond the reach of their creditors.

A select few states allow you to form an asset protection trust for yourself. These are referred to as self-settled trusts and are meant to compete with the traditional offshore trust havens such as Nevis and the Cook Islands.

Self-Settled

The purpose of this entity is to not only provide asset protection to your family, but to assist you during your lifetime. The assets you place into trust are protected while you are alive, and continue to be controlled by you, but are ultimately distributed as you see fit when you pass.

Dynasty Trusts

Trusts previously had a rule against perpetuities. That is, a trust would necessarily dissolve 21 years after the death of the last named beneficiary. This limitation prevented the trust’s creator from “ruling beyond the grave”.

While 29 states continue to impose this limitation, others have been more progressive with their trust laws and have eliminated it. For example, Wyoming will allow a “perpetual trust” which may last for one thousand years.

Spendthrift Provision

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This provision is an effective tool for protecting trust assets from creditors. In short, it’s meant to protect your beneficiaries from themselves. It can even protect you from your creditors under the right circumstances.

The spendthrift provision stipulates that distributions are discretionary and contingent upon the trustee’s approval. This prevents a creditor, or judge, from demanding assets be distributed to satisfy a debt. Indirect distributions are possible and can be crafted in such a way as to avoid impacting you or your beneficiary’s lifestyle.

Trust Terminology

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Each trust is composed of three parts. Those are the Grantor, Trustee and one or more Beneficiaries.

A. The Grantor is the person or persons who create and fund the trusts. In a family, these would generally be the parents or grandparents.

B. The Trustee is the person or institution entrusted with overseeing the trust’s day to day functions. They ensure the trust is being properly managed and its intentions are met.

C. The Beneficiary is the person who will ultimately benefit from the trust. This would be family members, including yourself, charities and pets (yes this is common enough to mention).

While each trust is different, these three elements remain the same.

Estate Planning

A family trust is the foundation of any estate plan. It ensures your life’s work is protected and responsibly distributed. It’s a little known fact more than half of all inheritances are spent within two years irrespective of the amounts involved. A properly structured estate plan can avoid this tragedy.

Given not all assets will be held in trust, an estate plans also generally includes the following to ensure all loose ends are wrapped up:

A. Durable Power of Attorney: This document allows family members to manage your personal assets in the event of your incapacity. Assets in the trust are managed by the trustee, but as mentioned above not everything will be in your trust.

B. Advanced Health Care Directive: This provides for your end of life wishes. Terry Schiavo is an extreme example of the in-fighting that can occur if you don’t make your wishes known ahead of time.

C. Revocable Trust: This will be used to avoid probate for any assets that were not included in your family’s trust.

D. Pour Over Will: This is for assets which did not end up in either the revocable or irrevocable trust. It is meant for small things such as a favorite set up china, or anything else, that wasn’t named elsewhere. Clearly delineating the distribution of small items can avoid big fights when your estate is settled.