Estate planning is an important part of family law. Family trust is one of the most common strategies for estate planning within a family. It is the perfect way to ensure family members receive assets after the grantor (another family member) is gone. This legally binding agreement has many benefits for the person who creates it and the person’s family members or any other relatives. So how to ensure that family wealth is protected over generations and provide financial support for family members with the family trust? Let’s dive into the theory of family trusts! We’ll look at how family trusts work, explain different types of family trusts, and also outline their advantages and disadvantages.
How Does Family Trust Work?
A family trust is a legally binding agreement that operates under the conditions of a settlor. In general, there are typically three parties involved in this estate planning process: a grantor (settlor), the beneficiaries, and a trustee. The grantor is the person whose assets will be distributed among a person’s family members after his or her death. The trustee is the person who legally owns the assets. The trustee’s role is to look after the grantor’s assets on behalf of the trust’s members. The trustee also can be corporate i.e. a company. However, not every company (for example, casino online nz) can be involved in a trust as a trustee. It can only be a company that offers corporate trustee services.
The term “beneficiaries” describes family members and relatives (spouses, children, grandchildren, etc.) who will receive financial assets from the trust according to the trust terms. They also must pay income taxes on the assets but don’t have control over any operations of the trust or trustee. In most cases, the beneficiaries are children, grandchildren, or dependants of the grantor, but there are also other situations. There can also be primary (default) and secondary beneficiaries. An appointor in the trust is the person or company who has the power to replace the trustee.
Discretionary Family Trusts Vs. Other Family Trusts
When referring to family trusts many of us usually mean discretionary trusts even though there are other legal structures. So, the information above is relevant for all types of family trusts, but there are also some specific aspects. A unit trust or property trust doesn’t give an individual or corporate trustee any wriggle room. And hybrid trust is a unit trust with discretion on the income side. If a trust is not discretionary, unit, or hybrid but a bewind trust, the trustee doesn’t have ownership of the assets and legally controls them. A special family trust is a curatorship when a beneficiary is not capable of controlling the assets because of age. When it comes to the vesting family trust, the income is vested in the beneficiaries.
Benefits And Downsides Of Setting Up A Family Trust
A family trust sets funds aside for relatives and future generations and protects the person’s assets. But if you choose to set up a family trust, you’ll first want to know all the advantages and disadvantages of this decision. Some advantages of setting up a family trust include the following:
Risk Management Benefits
Family trust protects personal finances against different unforeseen events and sales to third parties. It also protects beneficiaries against creditors if the donor who is gone has debts.
Family Wealth Protection
Having a family trust lets the family maintain family wealth over generations. Assets in a family trust are not subdivided because of inheritance distribution. And there are also significant tax benefits.
Avoiding Probate
The probate court process is a legal process that distributes a person’s estate after he or she dies. This legal process can be tied to high costs and be time-consuming. Moreover, probate becomes a part of the public record.
For starters, you should know the difference between a living trust vs will. There are some potential disadvantages to be aware of:
Income Taxes
There could be income earned by the family trust. If this income isn’t distributed, it has to be taxed at the top marginal tax rate.
High Set-up And Accounting Costs
To set up a family trust, a person must pay professional costs to prepare the agreement and transfer the assets as well as ongoing (accounting) costs.
Ready for this smart move in your estate plan? Consider all these details before establishing a family trust. When set up correctly, a family trust can protect your assets in your best financial interests.From naming trustees and beneficiaries to completing the trust documents, you should follow all the steps to set up a trust according to your state’s rules. And don’t forget to find an estate planning attorney to work with!
