Family Trusts: Who Needs One, Why and How To Set It Up

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A family trust is a legal arrangement that allows you to manage, protect and distribute your assets to loved ones or beneficiaries while you’re alive or after you’ve passed away.

It’s a handy tool to avoid the probate process and maintain privacy. 

Who’s Involved In a Trust? 

These are the key parties that are involved in establishing a trust: 

• Attorney. A lawyer is responsible for drafting the trust documents. You don’t necessarily need a lawyer, but for complex estates, it may be helpful to hire an attorney. 
• Grantor. This is the person who creates the trust. 
• Trustee. A trustee is a person or institution that manages the distribution of the trust. 
• Beneficiary. These are family members or others who will benefit from a distribution of the trust assets. 

Types of Family Trusts

There are several types of family trusts that can offer various protections. Here are a few common types: 

Benefits of a Family Trust 

A trust can be an especially helpful tool when surviving family members are grieving and do not have the bandwidth to handle asset distribution. Here are some of the benefits: 

• Avoids probate. With a family trust, you bypass having the court handle your estate. 
• Control over distribution. Using a family you can pass  physical and financial assets down to your family and setting guidelines around how this will be done.
• Minimizing taxes. A family trust keeps estate taxes to a minimum after your death.
• Maintain privacy. With a family trust, your estate division is out of public records, because trust assets aren’t subject to probate. 
• Establish specialized care. If a loved one needs specialized care, a family trust allows for financial assets and still qualifies the loved one for government programs.

Drawbacks of a Trust 

Although setting up a trust can have its benefits, there are a few drawbacks: 

• Costs of setting up. It can be expensive to set up a family trust. 
• Can be complex. Requires long-term maintenance that is ongoing. 
• Annual maintenance. May have to update yearly and also pay trustee fees. 

Who Needs a Family Trust?

If you have a large amount of assets, own real estate, or have dependents, you may want to consider a family trust. You might need a family trust if you: 

• Want to avoid probate. If you prefer privacy and want an efficient way to transfer your estate, a family trust is a good tool. 
• Have minor children. A family trust allows you to control how assets are distributed to your children instead of them inheriting everything at 18. 
• Own real estate. You can avoid probate and can simplify the transfer of property to your heirs. 
• Don’t want to worry about lawsuits. An irrevocable trust can protect assets during a divorce, from legal claims and financial mismanagement. 
• Have family who has special needs.  If a member of your family has a disability, it’s critical for that family member’s future that you put a special needs trust in place. If you don’t, the family member will need to spend their inheritance down to $2,000 before becoming eligible for federal benefits, such as Supplemental Security Income.

How Much Does It Cost to Put a Trust in Place?

The cost of setting up a trust can vary depending on the type of trust, how complicated your estate is, and if you’re using a DIY service or an attorney. 

If you’re using an attorney, the cost to establish a family trust starts at $1,000. Revocable trusts may cost between $1,000 to $3,000, and irrevocable trusts may cost $2,000 to $5,000. Specialized trusts may cost several thousand.

If you need these trust documents in place but can’t afford the legal fees, consider using an online service to set up the trust yourself or consult your nearest Legal Aid office to see if they can help. Legal planning can be expensive, but once it’s done, your family is protected forever.

How to Establish a Family Trust

Here’s how to set up a family trust:

Step 1. Consult With an Estate Attorney

Family trusts can be very complicated and meeting with an estate attorney can make the process easier. Be aware that some attorneys charge even for an initial consultation. Ask upfront so you’re not hit with an unanticipated expense later.

Step 2. Decide Whom You’d Like to Name as the Trustee

The person you name for this role will have the responsibility of paying your creditors, liquidating parts of your estate if need be and distributing it according to your specifications.

You should have a great deal of confidence in this person’s financial knowledge, decision-making ability and organizational skills. If you don’t know anyone who would be up to this level of responsibility, there are corporate trustees available, such as banks and boutique wealth management firms.

Ask around and do your research until you find an option you’re comfortable with.

Step 3. Ask Your Preferred Trustee If They’re Willing to Accept the Role

Remember, what you’re going for here is no surprise after your death. Make sure that your chosen trustee is willing to take on the responsibility, and be prepared to name a backup trustee in your legal documentation.

Step 4. Draft the Trust or Have It Drafted By an Estate Attorney

Make sure you get a chance to review it in full and ask any questions you have before moving beyond this step.

Step 5. Decide How to Fund Your Trust

If you need to liquidate any of your assets, you can designate them for the trust without placing them in it. Think through your own needs carefully before funding a trust and consult with an estate attorney if you have questions about this.

Step 6. Sign the Trust Into Place and File It

You’ll need to be in the presence of a notary, and you’ll likely need to file your trust document with the state that you live in.

Step 7. Evaluate Your Trust and Trustee at least Once a Year

Trusts and all other estate documents are meant to be fluid. People and circumstances change, so it’s important to be looking at your trust relatively often and making any needed adjustments to your plan.

The Bottom Line

Having a family trust can keep your heirs from having to go to probate. It also allows grantors to manage their estate before and after death. Although the upfront costs of establishing a trust may seem expensive, it can save your heirs money in the long-term.

Make certain you choose the right trustee to manage your trust. Keep in mind trusts aren’t just for the wealthy. If you have children, own real estate, or want more control over your estate, a family trust is a good option.

Kelli Francis contributed to the reporting of this article.

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