There are a few different types of family trusts you can establish. Two common types include living and testamentary trusts. A family trust benefits family members, including your spouse, children, parents, or even your pets! However, sometimes there is confusion about how a family trust works. Family trust vs living trust: same thing or different? Learn about living and testamentary family trusts and how each one works.
Family vs Living Trust: Same Animal?
A family trust is a legal arrangement in which you, the “Grantor,” transfer ownership of your assets to your legal trust framework. You then name a trustee to hold and manage your assets for the benefit of your family members, called “Beneficiaries.” The primary purpose of setting up a family trust is to provide financial security for your loved ones after you die. A family trust can exist as a living trust or a testamentary trust. Keep reading to find out the difference!
Benefits of Setting Up a Family Trust
A family trust brings many crucial benefits to you, your family members, and your estate.
- Avoids probate: Probate is the legal process of distributing a person’s assets after they die. If you die without a will or living trust in place, your assets will go through probate. By setting up a living family trust, you can avoid the lengthy and expensive probate process and ensure that your assets distribute to your heirs according to your wishes.
- Provides financial security: A family trust can provide financial protection for your loved ones by specifying how and when they will receive assets from the trust. For example, you can specify that your spouse will receive income from the trust until they remarry, at which point your children will begin receiving income. A family trust can ensure that your loved ones are provided for financially even after you’re gone.
Living vs. Testamentary Family Trusts
The main difference between a living and testamentary family trust is when they become active. (1)
A living family trust becomes active immediately, while the Grantor lives and breathes. You establish living trusts while living and often act as your own trustee. A testamentary family trust only becomes active after the Grantor dies.
Another difference between the two types of family trusts is that a living family trust can be revocable, meaning you, the Grantor, can change your mind about the trust and cancel it at any time. On the other hand, a testamentary family trust is irrevocable and cannot be changed once you’ve created it.
Finally, assets held in a living family trust are not subject to probate, whereas assets held in a testamentary family trust are subject to probate. You can elect to have a pour-over with a living family trust that will add any assets left out of the trust when you die. Avoiding probate also can prevent public knowledge of your assets and legal challenges due to disgruntled family members.
How Does a Living Family Trust Work?
When you, the Grantor, transfer ownership of your assets to the trust, this act of funding establishes your trust. You can act as the Trustee yourself or appoint someone else to act as Trustee. The trust’s beneficiaries are typically family members, such as the Grantor’s spouse or children.
Once you create a living family trust, it becomes active immediately. The assets held in the trust are not subject to probate if you die. You can revoke or change the terms of the trust at any time, as long as they are still alive and mentally competent.
How Does a Testamentary Family Trust Work?
You, the Grantor, create a testamentary family trust when you include instructions in your will for your assets to transfer to the trust after you die. This person you name as your trustee, your “successor,” begins managing your assets until your named executor begins to settle your estate in probate court. The trust’s beneficiaries are typically family members, such as your spouse or children.
The testamentary family trust only becomes active after you die. A testamentary trust is then subject to probate, the legal process of distributing a person’s assets after they die.
During probate, the court will appoint an executor to oversee the distribution of the Grantor’s assets. The executor will pay the Grantor’s debts and distribute the Beneficiaries’ inheritance according to the terms of the trust.
Common Misconceptions About Family Trusts
One common misconception about family trusts is that they are only for wealthy families. This is not true! Family trusts can be beneficial for families of all income levels.
Another common misconception about family trusts is that they are complex and challenging to set up. While it is true that family trusts are more complex than a will, they are not necessarily difficult to set up. You can work with an attorney to help you create a family trust that meets your specific needs.
Finally, some people mistakenly believe that family trusts are only for married people. This is also not true! Unmarried couples, same-sex couples, and even single individuals can create family trusts.
No matter your family situation, a family trust may be an excellent option to consider when planning for your family’s future. Talk to an experienced asset protection and legacy planning attorney today to learn more about whether a family trust is right for you.
We Can Help
At Vail Gardner Law, our asset protection and legacy planning attorneys can help you create a family trust that meets your specific needs. Contact us today to schedule a consultation. We look forward to helping you protect your family’s future!