The primary purpose of a family trust is to manage assets and distribute them to beneficiaries in a private, controlled, and tax-efficient manner. A family trust aims to: Avoid probate by transferring asset ownership to the trust, which passes directly to beneficiaries upon death.
Rigidity: Family trusts are often inflexible, making it difficult to alter the terms once they are established. This rigidity can be problematic if family circumstances change, such as in cases of divorce, remarriage or changes in financial status.
You designate a trustee who will manage the assets for your benefit and the benefit of your chosen beneficiaries. The key distinction is that you retain full control and ownership over the trust and its assets while you are living.
When placing your house within a trust, it protects the public from seeing specific details about your property that you might want to keep within the family. It also allows your beneficiaries to receive the house in private, without subjecting them to public scrutiny.
Parents and other family members who want to pass on assets during their lifetimes may be tempted to gift the assets. Although setting up an irrevocable trust lacks the simplicity of giving a gift, it may be a better way to preserve assets for the future.
One of the biggest mistakes parents make when setting up a trust fund is choosing the wrong trustee to oversee and manage the trust. This crucial decision can open the door to potential theft, mismanagement of assets, and family conflict that derails your child's financial future.
The trust remains revocable while you are alive; you are free to cancel it, replace it, or make changes as you see fit. Once you die, your living trust becomes irrevocable, which means that your wishes are now set in stone.
A trustee is in charge of the trust and manages the trust assets on behalf of the grantor and according to the trust agreement. A trust beneficiary receives the assets of the trust.
That may not always happen, but that's the way it's supposed to work under California Trust law. The bottom line: Beneficiaries enjoy the Trust assets at some point but, until then, they do not control or manage those assets.
Consider a living trust if you: Want to avoid probate: Living trusts allow assets to be distributed directly to beneficiaries without going through the probate process, which can be time-consuming and costly. Value privacy: Trusts are private documents, whereas wills become public records when they go through probate.
Rich people frequently place their homes and other financial assets in trusts to reduce taxes and give their wealth to their beneficiaries. They may also do this to protect their property from divorce proceedings and frivolous lawsuits.
But generally, the trustee is entitled to use trust funds to pay for things like: Funeral and burial expenses for yourself or a trust beneficiary. Expenses related to properties included in the trust, such as repairs or property insurance. Repaying any debts owed by your estate when you pass away.
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.
It can be advantageous to put most or all of your bank accounts into your trust, especially if you want to streamline estate administration, maintain privacy, and ensure assets are distributed according to your wishes.
The main benefit of putting your house in a trust is to bypass probate when you pass away. All your other assets, regardless of whether you have a will, will go through the probate process. Probate in real estate is the judicial process that your property goes through when you die.
Disadvantages of Family Trusts
If you continue to treat the assets as your own, any trust could be open to challenge as a sham. Additional administration – If you establish a trust, you need to allow for the time and cost involved with meeting the trust's annual accounting and administrative requirements.
A family member acting as trustee may better understand the family dynamic, and make better discretionary decisions when it comes to your loved ones.
Trusts are useful for many purposes, including avoiding probate, reducing/eliminating federal estate taxes, and managing property for a beneficiary when direct ownership by the beneficiary is not desired.
Funds received from a trust are subject to different taxation rules than funds from ordinary investment accounts. Trust beneficiaries must pay taxes on income and other distributions from a trust. Trust beneficiaries don't have to pay taxes on principal from the trust's assets.
The trustee generally has the authority to withdraw money from a trust to cover the cost of third-party professionals, as well as any other expenses arising as a result of administration.
For example, Gargiulo and Ertug (2006) identify what they call the 'dark side' of trust as occurring when the trustor strays beyond a critical threshold of confidence such that her trust in another becomes inappropriate and ill-judged.
Trusts offer amazing benefits, but they also come with potential downsides like loss of control, limited access to assets, costs, and recordkeeping difficulties.