For anyone thinking about and researching estate planning, trusts can sometimes become a source of confusion. There are so many different types of trusts out there in the marketplace today, and many of them have overlapping themes and purposes. Some are all but indistinguishable from one another. Under different circumstances, this hodgepodge of clever names and purposes might even be amusing. When you’re talking about planning for your legacy, however, confusion is never a welcome thing. Take the debate about the living trust vs family trust, for example. How is the average person supposed to know which one is right for his needs?
Confusion Abounds
If you do any research on these two types of trusts, one of the first things that will catch your attention is the fact that there seems to be some disagreement about what the terms even mean. Sure, everyone understands the living trust – though some seem to think that living trusts only encompass the revocable variety, even though there are living irrevocable trusts too. A living trust is, quite simply, a trust that goes into effect while you’re alive. As a result, living trusts can be either revocable or irrevocable, depending upon how they’re set up.
The family trust, however, seems to be a source of confusion for many people. Some use the term almost interchangeably with “living trust” – and choose to separate the two only by the nature of their beneficiaries. Using that definition, a living trust is created when your beneficiaries include not only relatives but friends, foundations, and charities as well. In that light, the family trust is then relegated to covering only those trusts that are designed to provide assets to family members.
There are some who also use the term “family trust” to refer to trusts that are created in a testamentary fashion, and that only go into effect when the will is probated. These are irrevocable trusts designed to pass on assets to specified family members – a spouse, minor children, or other. Unfortunately, these trusts don’t help your estate to avoid probate, since the trust isn’t actually created until the will goes through the probate process. When people refer to these trusts as family trusts, they’re really talking about testamentary trusts.
Living Trust vs Family Trust
When trying to decide which type of trust is right for you, it’s important to know your needs. If your heirs are all members of your family, and your estate has no need to avoid probate, then the testamentary family trust may be the right option for you. If you do need to avoid probate – or wish to limit estate taxes or maintain more privacy for your estate settlement, then a living family trust may be a better option. Of course, if you have beneficiaries outside of your familial structure, then a standard living trust should be your first choice.
Revocability
With a typical revocable trust, you can retain control over the assets as the trustee, and change or revoke the entire trust at any time prior to your death or incapacitation. That can be a great way to manage those assets if you have no concerns about estate taxes or asset protection issues. The living family trust can be used in much the same way, and can provide a streamlined way to distribute assets to family members if something happens to you. Alternatively, you can make your family trust irrevocable and provide those trust assets with estate tax and creditor protections.
With a testamentary family trust, the trust is automatically irrevocable when it is created, since you’re already dead and not around to change it. Thus, that trust provides those estate tax exemptions and creditor protections from the moment it is created, just as any other irrevocable trust would. Because of that, this is a fairly common trust option for families that want to shelter some portion of their assets from estate tax liability.
Adding Discretion to the Mix
With most revocable living trusts, there is no need to add a discretionary clause to the terms of the trust. Since most grantors name themselves as trustees, they have no need to provide themselves with any more discretion than they already possess. When setting up an irrevocable trust, however, it can sometimes be helpful to provide trustees with extra discretion so that they can better protect the assets and administer them for the heirs’ benefit. That’s especially true for family trusts that are created to manage a minor child’s inheritance, since it can ensure that a more responsible adult is properly positioned to exercise control over the trust assets.
The Choice is Yours
Ultimately, the choice of which trust to use will come down to a matter of need and preference. If you want to maintain more control over your assets while you’re alive, then either a revocable living trust or revocable family trust can work. In that case, the difference really comes down to the name and the types of beneficiaries you name in the trust terms. If you’re looking for something with greater protections against the estate tax and possible creditor action, then an irrevocable trust is the better option. In that case, you then need to choose between the living family trust and the testamentary variety. They’re close enough in benefits that it might just come down to the difference in setup costs.
Usually, family trusts are better options for people who have assets that include physical property, financial accounts, antiques, vehicles, securities, jewelry, and other heirlooms. Those estates more commonly need the tax liability benefits that a family trust can provide. When making the decision between the living trust vs family trust, however, it’s important to have professional advice and assistance. The experts at Fouts Law Group, LLC can help you to evaluate your circumstances and needs and make the right trust decision for your estate planning needs. If you’d like to learn more about how to choose between these important estate planning tools, contact us online or give us a call at (404) 596-7520 today.
