What Is a Family Trust? 4 Steps to Setting One Up
We all work hard to save money and set ourselves and our families up for a more promising future. As you age, planning for subsequent generations is one of the most important steps to ensure your loved ones are cared for after you're gone and your assets stay within the family.
A family trust plays a crucial role in estate planning, asset protection, and wealth transfer strategies. It's a valuable topic to understand as you begin to consider how you'll transfer wealth to beneficiaries. Trusts are excellent resources for preserving wealth across generations, but they can be complicated to understand and operate.
What Is a Family Trust?
A family trust is a type of living trust that benefits the children, grandchildren, siblings, spouse, or other family members of the person who establishes the trust. Common in estate planning, family trusts consist of three parties: a grantor, a trustee, and the beneficiaries.
The grantor is the person who establishes the trust and transfers their assets into it. The trustee is a designated person who manages the trust on behalf of the beneficiaries. Beneficiaries are the individuals who receive financial benefits from the trust.
You can use a trust to retain multi-generational relationships, begin to disperse an inheritance during your lifetime, and more. Usually, family trusts help grantors and beneficiaries avoid the probate court process, which can be expensive, time-consuming, and often public. There are several additional benefits, but it also has some drawbacks. It's crucial to get professional guidance when setting up a family trust.
How Does a Family Trust Work?
As the name suggests, family trusts differ from other types because they can only benefit family members, whereas other types of trusts can benefit friends, charities, alma maters, or even pets.
The ultimate goal of a family trust is to ensure your assets are managed according to your wishes on behalf of your beneficiaries. For instance, if you run a family business or have significant real estate holdings and want your children to take over management, a family trust allows you to stipulate ownership details as well as divide cash and other trust assets among them and other family members. With a family trust, you can dictate when each beneficiary can access their share of assets and under which terms. So, if you want your youngest child to earn a college degree before they access their trust funds, you may require that.
Family trusts are useful estate planning tools that allow you, the grantor, to create a clear plan for your wealth distribution to family members. This may help you avoid probate, the legal process of distributing an estate's assets should a person die without a will or have an estate larger than their state government's limit. A family trust facilitates transferring assets to family members during and after a grantor's life, saving time, money, and stress.
Types of Family Trusts
Family trusts can be revocable or irrevocable, depending on the grantor's wishes. A revocable trust may be altered or terminated at any time, such as by adding funds, changing assets in the trust, or adjusting beneficiaries. An irrevocable trust is unalterable once created.
A grantor may also act as their own trustee with a revocable trust, so long as you name successor trustees to take over management if you become incapacitated or pass on. Another person must be named as trustee with an irrevocable trust.
Many types of trusts may make sense, depending on your situation. Some of the most common to be aware of include:
| Trust Type | Benefits |
| Marital trust | Irrevocable trusts established by one spouse for the benefit of the other. |
| Bypass trust | Trusts that become irrevocable upon the owner's death and is established by a last will and testament. |
| Charitable trust | Trusts established to divide assets between designated charities and beneficiaries. |
| Generation-skipping trust | Trusts established to pass assets to grandchildren while allowing children to potentially access tax-free income generated from those assets. |
| Life insurance trust | Irrevocable trusts that holds a life insurance policy for a designated beneficiary. |
| Special needs trust | Established to pay for medical care or day-to-day expenses of special needs dependents, keeping them eligible for government benefits like Medicaid. |
| Spendthrift trust | Trusts structured to limit beneficiary access to avoid misuse. Beneficiaries may access income or interest earned from assets, but may not receive the full principal amount. |
| Testamentary trust | Trust that becomes irrevocable upon the owner's death and is established by a last will and testament, but beneficiaries can access assets only at a predetermined time. |
Each of these types of trusts has specific rules and nuances. Some may have better tax advantages than others or be more suited to your particular needs based on your goals for your estate or your family. This is why working with professionals is essential when going through the estate planning process. They can assess your estate and family situation to determine the right kind of trust for your specific situation.
4 Benefits of a Family Trust
A family trust has many benefits, some of which we've already alluded to throughout this piece. We'll break down some of the primary benefits further here.
Avoid Probate
When a person dies without a last will and testament or with an estate that exceeds the state government's limits for passing on, the estate goes into probate. This court process requires legal teams to go through an estate and divide assets as best as possible. It creates anger and frustration between family members and can rack up exorbitant legal fees.
The probate process is financially and emotionally draining, so it's imperative to avoid it if possible. Establishing a family trust is one of the best ways to do that.
Minimize Estate Taxes
The federal estate tax ranges from 18% to 40% but generally only applies to assets over $13.99 million in 2025. Most estates fall below the threshold for estate taxes, but if that's not the case for you, family trusts can help reduce estate taxes. If a grantor transfers assets into an irrevocable trust, they are removed from their ownership in the eyes of the Internal Revenue Service (IRS). This could significantly lower the amount of your taxable assets.
Income over $600 generated by trust assets is often taxable, so work with a financial advisor to determine how to structure trust assets and trust property to reduce estate taxes and gift taxes on your beneficiaries.
Maintain Privacy
Probate is a public record, allowing any interested party to see your assets, including real estate holdings, stock holdings, and more. This can lead to significant privacy violations, especially for family members of individuals in the public eye. Nobody wants strangers showing up at the family beach house because the probate made the address public.
Flexibility and Control
Finally, perhaps the most significant benefit of a family trust is simply giving you greater control over your assets. Depending on the type of family trust, you can set up funding for a special needs family member to continue getting the support they need after you pass on, set up an allowance for your children to ensure they always have a safety net, or even motivate a troublemaking grandchild to get their act together by restricting access to their trust until certain conditions are met.
Drawbacks of Family Trusts
While there are several key benefits, trusts aren't without their drawbacks. It's important to understand that there are potential complications before you decide to move forward with a trust.
Cost
Although family trusts save you and your family money in the long run, the upfront cost to set them up can be significant. You'll have to hire an estate planning attorney to set up the trust, and you may have to pay court fees and compensation to your trustee to manage the trust. Moreover, hiring a financial advisor or planner to help you determine how to disperse assets is an additional cost.
While these costs may pale in comparison to the cost of probate, they're still something to consider.
Paperwork and complexity
Establishing a trust is a serious legal process that requires extensive documentation. This can be a major hassle for unorganized individuals. Creating trusts and transferring assets requires complex paperwork and record-keeping and may require delving into years' worth of paperwork to find what you need to move certain assets. You'll also have to retitle all assets into the trust's ownership, which can be time-consuming and stressful.
Many elect to hire individuals to handle much of this work. That can save you some time and stress, but you'll still be responsible for knowing where to find the documentation you need to establish the trust and move assets.
Higher tax rate
Trusts have their own tax brackets, and the threshold for the highest bracket is lower than that for individuals. Trusts may pay higher taxes on the income their assets generate than you would if you still held the assets yourself. Discuss this with a trust advisor, as you may benefit from establishing a revocable trust and withholding certain assets until you're ready to move them into the trust.
Potential for misuse
Although trusts give grantors greater control over their money, they can become a crutch for beneficiaries if not executed properly. For instance, grandchildren who receive full access to a large sum of money at a young age may not have the financial literacy necessary to preserve that money. This is another reason why it's essential to think through trust rules when setting it up.
How to Create a Family Trust in 4 Steps
Creating a family trust isn't a highly complex process, but it does require the assistance of an estate planning attorney and a financial advisor. Consider consulting other professionals depending on the size and complexity of your estate. The basic four-step process, however, looks like this:
- Choose the type of trust: First, you'll need to determine the kind of trust that best suits your and your family's needs. Professional guidance will be useful here to help you understand the nuances of different types of trust so you can be absolutely sure about what will make the most sense for your situation.
- Draft the trust document: Your trust document must include the names of your family beneficiaries, what each will inherit, and a list of all trust assets and property. You'll also need to name your trustee(s). Some consider hiring a corporate trustee with professional experience managing a trust, like a bank or other financial institution.
- Execute and sign the trust: When you're satisfied the trust document is complete and you understand how the trust will work, you must sign it to make it legally operational.
- Fund the trust: Finally, you must transfer assets like bank accounts, investment accounts, and real estate by retitling all assets in the name of the trust. Once transferred, the trust owns these assets.
Get Professional Guidance With Arden Trust
Family trusts have a host of benefits for individuals and families alike. However, if done poorly or incorrectly, they can also lead to many headaches and problems.
While you can't control how beneficiaries will feel about your estate planning decisions, you can ensure that your will is executed legally and according to your wishes. Contact Arden Trust for professional guidance on setting up your family trust and planning for the future.