Family Trusts: Who Needs One, Why and How To Set It Up
Planning for the future isn’t easy, no matter how you slice it. Planning for a future that doesn’t have you in it, however, is about as tough as it gets. It can be unpleasant to think about our own mortality but ironically, the healthiest families among us force themselves to do just that.
When you put a legally binding estate plan in place during your lifetime, you take the ultimate step toward protecting your family. A common way to do that is through the establishment of a family trust.
What Is a Family Trust?
A family trust is a legal document that specifies how someone’s estate should be distributed and passed down to other family members following their death.
Who’s Involved in a Trust:
- An attorney who specializes in estate law and will draft the trust
- A grantor, the person whose estate needs to be passed down
- A trustee, the person who will manage the trust in keeping with the grantor’s wishes
- A beneficiary or beneficiaries
A Family Trust Is Useful For:
- Passing physical and financial assets down to your family and setting guidelines around how this will be done.
- Allowing a loved one who needs specialized care to have financial assets and still qualify for government programs.
- Keeping your estate division out of public records, because trust assets aren’t subject to probate.
- Safeguarding assets from creditors in case you’re sued.
- Keeping estate taxes to a minimum after your death.
Good To Know
Certain financial products — such as bank accounts, investment accounts, 529 funds and ABLE accounts for people with disabilities — may not allow you to specify a trustee as your beneficiary. Even if they do, the designation process you need to follow might be different than if you were specifying an individual.
Make it a point to find out what the beneficiary designation options are for each of your accounts and direct any questions or concerns to an estate attorney.
Who Needs a Family Trust?
Who benefits from having a family trust in place? Here are two types:
- Those with assets they want to pass down. A family trust is a way to designate your home, automobile, bank accounts, investments, heirlooms and more to your family.
- Special needs families. 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?
On average, an attorney is likely to charge you $1,000 to $1,500 to draft a trust. However, if you’re creating an entire estate plan — including a will, advance directive and power of attorney — you should be prepared to pay more.
If you need these documents in place but can’t afford the legal fees, consider using an online service to set the trust up 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
If you’re interested in setting up a family trust, here’s how to go about it.
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- Consult with an estate attorney. Be aware that some attorneys charge, even for an initial consultation. Ask upfront so you’re not hit with an unanticipated expense later.
- Decide who 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.
- 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 up for the responsibility and be prepared to name a backup in your legal documentation.
- 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.
- Decide what to fund the trust with and when. 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.
- 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.
- 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.
Take a Cue from the Pandemic and Put an Estate Plan in Place
The COVID-19 pandemic got a lot of people thinking about estate planning — and in the 18 to 34 age group, almost one in every two people felt inclined to get active about their estate plans. Overall, though, estate planning is less prevalent now than in previous years. In 2021, just 33% of Americans have an estate plan versus 42% in 2017.
The best thing you can do for your family is to be inside of that 33%. You have no way of knowing what their circumstances will be like after you’re gone, but you have the opportunity now to set them up to the best of your ability.
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- Sherrod Brown. U.S. Senator for Ohio. "Brown Leads Senators in Introducing Historic Legislation to Update."
- LegalZoom. "What Is the Average Cost to Prepare a Living Trust?"
- Caring.com. "Caring.com's 2021 Wills and Estate Planning Study."