As a common strategy for estate planning, a family trust offers advantages and disadvantages. Typically created under the terms of your will, a trust is designed to benefit your family by protecting your assets and helping your family avoid probate. Let’s look at the pros and cons of this type of trust.
Advantages of a Family Trust
The primary advantage of setting up a family trust is to ensure your immediate family members get the financial resources they need after you die. Family trusts do an outstanding job of protecting assets such as your home, automobiles, and liquid financial instruments.
Here are the other reasons why setting up this type of trust might be in your best financial interests:
After someone dies, the beneficiaries of the estate cannot access the assets that are a part of the deceased’s estate. The beneficiaries must participate in a legal process called probate. After the court grants probate, the beneficiaries have the right to receive the estate’s assets. Since a family trust has ownership rights over the assets held in the estate, it does not get involved in the probate process.
This means your beneficiaries have much quicker access to the assets tied up in the estate.
Although you must transfer the title of all assets that you want to be held in a family trust, the fact that the trust is revocable means you have the flexibility to handle the assets any way that you want. You can transfer the title to any of the assets in the trust back to yourself, as well as terminate the trust whenever you want. A family trust allows you to change beneficiaries and the assets each beneficiary receives.
Forgoing the probate process keeps your financial affairs private because probate is handled publicly. Probate lists your debts and assets on a public notice and describes how you plan to distribute your assets. With a family trust, no one but you and your family knows about the financial arrangements established for the trust.
Ease of Succession
If for some reason you become incapacitated, your family trust produces a quick process of succession to ensure prompt management of the assets listed in the trust. The ease of succession prevents your family from getting embroiled in a legal dispute over the distribution of the assets.
Disadvantages of a Family Trust
The disadvantages of a family trust are all about expenses. Funding the trust requires you to transfer the title of the assets held in the trust. You must prepare and submit legal documents, which the court charges a fee to process. The second financial disadvantage of a family trust is the lack of tax benefits, especially when it comes to filing income taxes. When the grantor dies, the trust must file a federal tax return.
The Bottom Line
For many grantors, setting up a family trust as a revocable living trust is the perfect tool for effective estate planning. You get to avoid probate, which allows your beneficiaries to gain access to the estate’s assets faster and keep all financial arrangements private. The flexibility to make changes and the ease of succession are two more reasons why the pros of a family trust far outweigh the cons. To learn more about setting up a family trust, contact Cloud Peak Law Group to schedule a free consultation.