How to Create a Family Trust

By Mike Obel | AUG 30, 2023

There are many different types of trusts. Overall, trusts are typically used to manage and reduce tax burdens while keeping your assets safe so that you can eventually pass them on to future generations when you’re no longer around. A family trust can serve these same purposes, but it’s important to be familiar with what a family trust can do for you and your assets and how you can go about setting one up. A financial advisor can help you decide whether a family trust should be part of your estate plan.

What Is a Family Trust?

Family trusts aren’t too different from other types of trusts, or what you might think of as a “normal” trust. They are made up of three parts: a grantor, a trustee and the beneficiaries of the trust.

The grantor of a trust is the one who owns the assets that are housed within the family trust. The trustee manages the assets in the trust and is in charge of distributing them among the beneficiaries after the grantor dies. In some instances, the grantor and the trustee can be the same person. The beneficiaries are the people that receive the assets after the grantor passes away.

As the name suggests, a family trust will typically have family members listed as the beneficiaries. There isn’t much of a limit to which family member you can include as beneficiaries of your family trust. You can usually name children, grandchildren, cousins and even aunts and uncles. You can also include your spouse as a beneficiary of your family trust.

How a Family Trust Differs From Other Types of Trusts

The fundamental way that trusts function is pretty consistent across their various versions. There’s usually a grantor, who populates the trust with their assets. Then there’s the trustee who manages the trust and is in charge of distribution. And finally there are the beneficiaries, who receive some type of benefit from the contents of the trust at some point in time. Family trusts are a type of living trust, meaning that they take effect during the lifetime of the grantor.

However, the types of beneficiaries and the structure of different trusts may vary significantly. For example, charitable trusts are designed to distribute assets to one or multiple charities. Generation-skipping trusts allow grantors to pass assets directly to grandchildren, while still potentially allowing their children to access income streams from the assets in the trust. Martial trusts allow one spouse to pass assets, tax-free, to their surviving spouse. However, in the case of a marital trust, heirs may still need to pay taxes on the assets they receive from the trust. In turn, family trusts are relatively simple and straightforward in comparison.

Setting Up a Family Trust

The first step to take if you’re interested in creating a family trust is to speak with an estate planning attorney or a financial advisor. They’ll be able to run through the options with you and determine if it even makes sense for you to set up a family trust. If you decide a family trust is in your best interest, you’ll then be able to work with your chosen professional to make it official. If you go with a financial advisor, choose one that has an expertise in estate planning.

Setting up your family trust isn’t as painstaking a process as you might think. First cover the basics and decide who the trustee and beneficiaries of your trust are. You’ll also want to determine what assets you’ll be putting in the trust and how your beneficiaries will eventually receive them. Assets may include real estate, liquid assets, income from assets, family heirlooms and more.

Creating the trust agreement is the next step in the process. While it’s typically a good idea to work with a financial advisor or attorney, there are online software platforms that can help you create the agreement. Some are free, while others may charge a fee.

Next, you’ll want to populate or fund your trust with the assets you decided on. This process involves transferring these assets to the trustee (if it’s not you), such as the deed to a house. After you fund the trust, you can go ahead and get the agreement notarized, meaning your trust is complete. Remember, if you make it an irrevocable trust, you won’t be able to amend it after it’s created. A revocable trust, on the other hand, can be changed.

Bottom Line

If you want to create a trust so that you can easily pass down assets to family members and avoid paying certain taxes, a family trust may be a good idea for you. If you decide to create a family trust, you should consider working with a financial advisor. Even though the process of creating a trust isn’t particularly complex, it’s still a good idea to consult a professional who can help you decide on the specifics of your trust agreement and who can help you put the trust agreement together. However, you’ll need to be the final decision maker when it comes to figuring out if a family trust is the right way to pass your assets down to your family members.

Tips for Estate Planning

• A financial advisor can help you create an estate plan for your family’s needs and goals. SmartAsset’s free tool matches you with up to three vetted financial advisors in your area, and you can have free introductory calls with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• Many people plan their estates on their own, and that may be a good idea for you. If you take this approach, make sure you’re aware of the dangers of DIY estate planning.

Photo credit: iStock.com/fizkes, iStock.com/Kobus-Louw