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Family Trusts vs. Living Trusts: Let’s Compare the Two

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Planning for the future is crucial, especially considering the uncertainty it holds. Estate planning ensures your assets are distributed as per your wishes after you’re gone. Family and living trusts are among the popular tools for this purpose.

March 5, 2024
Author: NCH

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Family Trusts

Also known as a revocable living trust, a family trust is created to hold and manage assets for the benefit of family members. It allows the grantor, the individual establishing the trust, to maintain control over their assets during their lifetime.

Family trusts often involve spouses and children as beneficiaries, ensuring a seamless transition of assets upon the grantor’s death.

Key Features

  • Revocability: The grantor retains the power to amend or revoke the trust anytime during their lifetime. This provides plenty of flexibility in managing assets.
  • Avoidance of Probate: Probate can be a time-consuming and costly legal process. A family trust allows assets to pass directly to beneficiaries without going through it.
  • Privacy: Unlike wills, which become public documents during probate, family trusts offer more privacy; the trust’s terms and the distribution of assets remain confidential. 

Living Trusts

A living trust or inter-vivos trust allows the grantor to transfer assets into a trust during their lifetime. Unlike a family trust, a living trust can be either revocable or irrevocable but maintains its ability to manage and distribute assets in the event of the grantor’s demise.

Key Features

  • Flexibility in Revocability: Similar to a family trust, a living trust can be revocable or irrevocable. The choice depends on the grantor’s goals and preferences.
  • Immediate Asset Management: A living trust allows for the immediate transfer of assets into the trust. This can benefit individuals who want to retain control but plan for efficient asset distribution.
  • Incapacity Planning: If the grantor cannot manage their affairs, the successor trustee appointed in the trust document can step in without court intervention.

Choosing Between a Family Trust and a Living Trust

Complexity and Cost

Family trusts are usually easier and less expensive to establish and maintain. In contrast, living trusts’ customization options and potential tax benefits may come with additional complexity and higher initial costs.

Nature of Control

While both trusts can be revocable, the family trust is specifically designed to be revocable, emphasizing the grantor’s ongoing control. In contrast, a living trust may or may not be revocable, providing more options for individuals seeking different levels of permanence.

The family trust allows the grantor to continue managing assets even after their incapacity. On the other hand, a living trust allows for immediate asset management, which offers a smoother transition of control during the grantor’s lifetime.

Scope of Application

Family trusts excel in providing a framework for asset management during the grantor’s incapacity to ensure a smooth and seamless transition. A living trust also addresses this but may have a broader focus on ongoing asset management.

Moreover, the two trusts can facilitate the transfer of assets to beneficiaries while avoiding probate. However, the living trust may be more comprehensive in its approach, especially if it is irrevocable, as it often involves specific instructions for asset distribution.

Grantor’s Preferences

If a grantor values ongoing control and flexibility, a family trust, with its inherent revocability, might be the more sensible choice. The ability to make changes ensures that the trust aligns with the family’s evolving needs and circumstances.

On the other hand, individuals seeking immediate asset management during their lifetime may find the living trust more suitable due to its ability to transfer assets into the trust at once.

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Tax Implications

Both trusts can be effective for tax planning, but the specific goals of the grantor may dictate which trust is more suitable. Seeking professional advice on tax implications is recommended.

Irrevocable living trusts, in particular, offer certain tax advantages that might make them more suitable for individuals with specific tax objectives. These include not being subject to estate tax and the ability to shift income to beneficiaries in lower tax brackets. 

Complexity of Estate Planning Goals

For individuals with complex estate planning goals that involve ongoing management, an irrevocable living trust could offer more options than a family trust.

Alternatively, those with simpler estate planning needs may find the family trusts more straightforward and flexible, allowing for easier modifications and adjustments. 

The Role of Professional Expertise

Deciding between family and living trust can be easier by turning to an estate planning professional. These legal and financial experts can provide personalized advice based on your circumstances, ensuring that the chosen trust aligns with your goals and objectives.

Remember that estate planning is not a one-time task, as it requires periodic reviews and updates. Life events such as marriages, births, divorces, and other significant financial changes may necessitate adjustments to the trust document. 

Final Thoughts

The choice between the two trusts depends on individual preferences, family dynamics, and specific financial goals. Whether prioritizing flexibility, privacy, or asset protection, consulting with estate planning professionals is the key to crafting a comprehensive and effective plan.

DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.

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