You understand the benefits regarding protecting your assets, but do you know why it is essential to protect your assets by setting up a family trust?
A family trust represents a legally valid document that defines how assets should be protected after a grantor of the trust dies or becomes unable to make financial decisions. Grantors establish family trusts to pass on assets that remain protected for current and subsequent generations.
The grantor is the individual who transfers assets into a trust, making the trust the owner of the assets. A family trust may be either irrevocable or revocable. A revocable trust provides privacy and avoids probate, but only an irrevocable trust provides asset protection.
Advantages of a Family Trust
Protecting your assets after transferring them to current and future generations of your family is the most common reason why grantors establish family trusts. However, there are seven other compelling reasons to set up this type of trust.
Probate is an expensive and public process. It is time consuming and can tear families and businesses apart. Making your wishes known ahead of time helps avoid probate and keep your assets from being documented and made public in court.
Protection Against Creditors
Any assets that you transfer into an irrevocable family trust are not accessible for creditors. Since the assets are no longer owned by the grantor or any of the beneficiaries, a creditor cannot file a claim to liquidate the assets to pay off a debt. With protection against creditors, the grantor can ensure the availability of family money to support beneficiaries well into the future.
Takes Care of Sick Family Members
You can use the assets protected in this type of trust to provide financial resources for sick family members or members of your family that have special needs. A family trust is a beneficial financial tool for grantors to provide for family members who cannot conduct basic daily activities. This is generally done via a Special Needs Trust to ensure continued eligibility for government programs.
Prevents Beneficiaries from Throwing Away Money
A family trust with spendthrift provisions is ideal for a grantor to create for one or more beneficiaries who cannot properly manage their finances. For example, a grantor establishes a trust for a family member who is a chronic gambler. The trust pays out money to meet the family member's financial obligations as needed instead of handing over a lump sum to the family member.
Protection Against Property Claims
According to relationship property laws, if a relationship ends, one partner's assets are available to the other partner. By setting up a family trust, you protect your assets from property claims after a relationship ends. Your children still have access to the assets, but the assets are not directly in their names and are thus outside of the marital estate.
Planning for Business Succession
According to the Family Business Institute, just 30 percent of family-owned businesses make it into the second generation of family ownership. One reason for the lack of succession is that a subsequent generation of family members either do not want to run the business or are incapable of running it. Another reason for the lack of family business succession is the loss of assets due to estate taxes or probate.
A family trust protects all business assets that are passed on to subsequent family generations, and provides the option of appointing professional managers.
Once a grantor's assets go into a family trust, the assets are no longer eligible to become part of the grantor's estate. This means the assets in the family trust are no longer part of the settlement of estate taxes if done properly.
Planning Your Family Trust
When the time comes to plan for the distribution of your wealth, you should first decide whether a family trust meets your financial goals. Carefully considering how you establish the trust and how it is managed moving forward determines whether you enjoy one or more benefits of setting up the trust. If you fail to finalize the specifics of the trust, then the trust can lose one or more of the benefits associated with setting it up.
An attorney who handles family law cases can work closely with you to set up a family trust that allows you to enjoy the many advantages of setting up this type of trust. Contact our law firm to learn more about establishing a family trust.