3007: What is a Family Trust and Should You Set One Up by Jeff Rose of Good Financial Cents on Estate Planning

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[00:01:16] So press play on good sleep tonight, because a good tomorrow starts with a good night's sleep. Just search for Good Sleep in your podcast app, and be sure to pick the one from Optimal Living Daily. This is Optimal Finance Daily. What is a family trust, and should you set one up? By Jeff Rose of goodfinancialcents.com.

[00:01:40] The concept of a family trust, also known as a revocable living trust, isn't very well understood by many people. The differences between a trust and a simple will, for instance, are frequently confused. While it's somewhat more time-consuming, and therefore more expensive, to have a family trust prepared than a will, there are significant benefits for the trust for many individuals. I have many clients that feel that they have to set up a trust. I think many want to avoid probate at all costs.

[00:02:10] Please keep in mind that probate is not a four-letter word. I don't want to discourage you from setting up a family trust, but it's not a requirement in every situation. How a family trust functions. A family trust is a legally binding document that covers an individual's assets during one's lifetime, and specifies the terms of dispersing those assets after one's death or incapacity. The person establishing the trust, generally referred to as the grantor,

[00:02:39] transfers all of his or her assets so that the trust itself is the owner, not the individual. In practical terms, the distinction is a technical one. The grantor will still have full control over and use of all of his or her assets. A trustee, which is the person who will carry out the terms, is appointed at the time that the trust is formed, but has no role until the grantor is deceased or incapacitated.

[00:03:05] The trustee can be a family member, close family friend, or even a financial institution. Think a bank or a brokerage firm. I've had clients select all the above to be their primary trustee or successor trustee. Keep in mind that choosing a financial institution as a trustee will be the most costly. The cost can be justified as these institutions specialize in these matters, where a family friend may be burdened with all the responsibilities that a trust brings on.

[00:03:34] The terms of the trust and the exact assets included can be changed at any time. For example, if a new car is purchased, it can be added to the trust. This is true with all significant purchases and sales of tangible property, like homes or vehicles, and intangible assets, like securities and other financial investments. Similarly, the identities of the trustees and beneficiaries can be changed by the grantor at any time. What also can be changed is how the assets are dispersed.

[00:04:04] For example, you can set up the family trust to disperse the assets at various ages of your surviving child. They could get a third of the income at age 45, the other third at 55, and the final disbursement at age 65. This is just one example of the thousands of possibilities of how a family trust can be set up. Just to make sure I covered my bases, I reached out to a friend and colleague, Adam Lawler, of Adam B. Law Firm, LLC. Here's what he had to add.

[00:04:34] Quote, in my world, a family trust normally refers to a joint tenancy revocable trust, so think a husband and wife, as grantors or settlers with trustees and beneficiaries. When just one individual is involved, it's normally called a living trust, revocable trust, or a grantor trust. End quote. FYI, the initial trustee is almost always 99.9% the grantor or settler of that trust.

[00:05:02] The professional fiduciaries normally only enter the picture after death and if no competent child, uncle, etc. are around. Benefits of a family trust. Among the numerous advantages of family trust are, number one, avoidance of the probate process. If the grantor dies, the estate can avoid probate court, a substantial benefit over a simple will, where probate is commonplace for any assets not specifically enumerated.

[00:05:32] Number two, avoidance of legal challenges of asset dispersal. A family trust is essentially airtight legally, another potential advantage over a simple will. Number three, limitation of exposure to estate taxes as part of a proper estate planning process. Number four, simplicity and flexibility. A family trust is a relatively easy document to prepare and account for, particularly with the help of an estate planning attorney.

[00:06:01] Transferring asset ownership to the trust is an easy task. The ability to amend and adjust the terms at any time makes it a very versatile vehicle. Number five, control. The terms of the trust dictate exactly what will be done with your assets in the event you're incapacitated or deceased. The trustee must carry out your instructions to the letter or face civil suits and possibly criminal prosecution. The bottom line, what a family trust does.

[00:06:29] A family trust is a relatively simple and inexpensive but potentially powerful legal vehicle with many benefits for a wide swath of individuals. The family trust essentially makes certain that your assets will be allocated as you wish, should something happen to you and make certain that the beneficiaries that you designate will have access to their inheritance, in the manner you intend, quickly and fully. The peace of mind and that fact alone may be enough to recommend the process.

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[00:08:21] Rocketmoney.com slash OFD. One of the things that I love about hosting this podcast is all the new things I get to learn. This article made me want to do a bit more digging, and I found some good info from Investopedia. I thought it was interesting that a will becomes active only after one's death, but a trust is active the day you create it, and a grantor may list the distribution of assets before their death in it, unlike a will.

[00:08:49] There are irrevocable trusts, often created for tax purposes, which cannot be altered after their creation, and living trusts, which can be changed by the grantor. I also didn't realize that all wills must go through a legal process called probate, where an authorized court administrator examines them. And this process can be lengthy and potentially contentious if family members contest the will. Trusts are not required to go through probate when the grantor dies,

[00:09:19] and they cannot be contested. You could easily lose an additional 2% to 4% of your estate due to attorney fees and court costs with the probate process, so this is worth consideration. The main benefit I see for a trust is that it will streamline the process of transferring an estate after you die while avoiding a lengthy and potentially costly period of probate. However, if you have minor children, creating a will that names any guardian

[00:09:46] is critical to protecting both the minors and any inheritance. Deciding between a will or a trust is a personal choice, and some experts recommend having both. A will is typically less expensive and easier to set up than a trust, which is a more expensive and often complex legal document. That'll do it for today and another installment of Optimal Finance Daily. Have a happy Thursday. Thank you for being here every day and listening, and I'll see you on the Friday show tomorrow, where your optimal life awaits.