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For financial and estate planning, you should understand the differences between a living trust vs a family trust. You might be advised to get a trust to protect your assets, but each type of trust serves a different purpose.
When looking at family trust vs living trusts, you’ll see they aren't structured the same. You should use one that suits your unique financial situation and goals. This guide will explore the key differences between a family trust and a living trust.
Definitions: Living Trusts vs Family Trusts
A living trust allows you to transfer assets to your beneficiaries while you’re still alive. This ensures a smooth transition of your wealth to your beneficiaries. A major advantage of having a living trust is that it avoids probate. While it isn't inherently bad, the probate process is often time-consuming and costly.
What is a family trust? Family trusts, sometimes called family revocable living trusts, are a wise decision to secure assets for family members. This document ensures the secure and organized management of your family's assets.
This can include assets like bank accounts or businesses for their exclusive benefit. The setup is designed to give you control over the trust's assets. It can also safeguard them and minimize taxes for the beneficiaries.
Is a Family Trust a Living Trust?
While a family trust can be a living one, not all living trusts are family living trusts. Technically, any trust with family members as the beneficiaries is a family trust. The differences may vary based on the context and specific provisions of the trust.
You might ask yourself if you should get a living trust vs a revocable trust. In both cases, they can actually be structured as revocable trusts or irrevocable trusts. This depends on how your lawyer decides which is best for you.
With a revocable trust, the trustee can modify the trust terms or remove beneficiaries. Once set up, irrevocable trusts are pretty set in stone. You can't change, tweak, or end them unless the beneficiary of the trust approves, or a court decides otherwise. However, keep in mind that these rules aren't universal and may differ depending on where you live.
Trusts can be complicated because there are many different options, and the terms depend on your needs. You should work with a financial advisor and lawyers to help you decide which one you need.
What's the Purpose of a Living Trust vs a Family Trust?
When comparing a living trust vs a family trust, you need to consider the main purpose of each. Both living and family trusts can help avoid probate and the expenses and legal fees of the process. They will both simplify the distribution of assets.
With a living trust, there is the added benefit of having a successor trustee. If you can't take care of your trust, the successor trustee can manage your trust assets. This is a good measure to have in place in emergencies or cases of severe and ongoing illness.
Family trusts are designed specifically with family members in mind. This is to control the distribution of wealth among family members. The trust's grantor will appoint a family member in charge of the trust and all assets inside the trust.
If you compare a family trust vs a living trust, a family trust is a way to keep assets within your family. A living trust will help you to assign control over your assets while you are alive, but unable to do so yourself.
Who Benefits from a Living Trust vs a Family Trust?
Another thing to consider between a living trust vs a family trust is who exactly benefits from each one.
With living trusts, the trustor can designate beneficiaries without any limitations on their relationship. As the trustor, you have full authority to choose who will benefit from your assets. This could include family members, friends, or organizations.
A family trust is an effective tool for wealth distribution among family members only. The trustor, who establishes the trust, strategically allocates wealth and assets to ensure a fair distribution among them. It allows you to provide financial security for your loved ones.
What Is the Difference in Structure Between a Living Trust vs a Family Trust?
Despite being a legal entity, you’re considered the owner of assets in the living trust for liability purposes.
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In a typical revocable living trust, you have the power to name yourself as the trustee. This grants you full control over the assets you transfer to the trust. You can freely add or remove property, sell it, or even give it away without any limitations. The assets are still yours.
The law recognizes you as the owner of trust property due to its revocable nature. You have the power to revoke or undo the trust whenever you want. By doing so, the assets will once again be under your name.
Unlike a standard living trust, a family trust is an independent trustee works on behalf of the beneficiaries. The role of the trustee can be held by either the trustor or another individual. This helps to maintain objectivity over the trust’s assets and avoid conflicts.
Although revocable living trusts have their advantages, they don't offer any protection against creditors or individuals with legal claims.
What Are the Tax Implications for a Living Trust vs a Family Trust?
Tax planning is an integral part of estate planning. That’s why you should be aware of the tax implications of a living trust vs a family trust. Luckily, there are no inheritance or estate taxes in Arizona or Nevada.
However, during the grantor's lifetime, a revocable trust is classified as a grantor trust for income tax purposes. All the trust's income, deductions, and credits should be reported on the grantor's personal income tax return. After the trustor passes away, the trust can be treated as a separate taxable entity.
This is critical information to know before you set up a trust. It is always good to seek advice from estate planning attorneys and financial advisors who understand your goal.
Should I Create a Living Trust vs a Family Trust?
When deciding whether you want a living trust vs a family trust, think about your goals.
Do you want your beneficiaries to have immediate access to your assets after death. If so, then a living trust could be an appropriate choice.
Alternatively, if you have children or grandchildren, you might want them to have financial security when you pass. Setting up a family trust vs a living trust offers a smart solution to meet their needs. It still helps while maintaining control over asset distribution until they reach a specific age.
Get Expert Advice for Your Estate Planning
Living trusts and family trusts have their own unique roles in estate planning. By understanding these distinctions, you can effectively plan your estate. When comparing family trusts vs living trusts, you want one that manages and distributes your assets as you want.
If you're considering setting up a trust, you can rely on the expertise of Asset Preservation Wealth and Tax. Let us guide you through our holistic process based on your unique circumstances and goals. Don't hesitate to contact their team of experts for more information or assistance.
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Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.
The commentary on this blog reflects the personal opinions, viewpoints and analyses of the author, Stewart Willis, providing such comments, and should not be regarded as a description of advisory services provided by Foundations Investment Advisors, LLC (“Foundations”), an SEC registered investment adviser or performance returns of any Foundations client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment, legal or tax advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Personal investment advice can only be rendered after the engagement of Foundations for services, execution of required documentation, including receipt of required disclosures. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Foundations manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Any statistical data or information obtained from or prepared by third party sources that Foundations deems reliable but in no way does Foundations guarantee the accuracy or completeness. Investments in securities involve the risk of loss. Any past performance is no guarantee of future results. Advisory services are only offered to clients or prospective clients where Foundations and its advisors are properly licensed or exempted. For more information, please go to https://adviserinfo.sec.gov and search by our firm name or by our CRD # 175083.
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