When it comes to 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.
All trusts aren't structured the same, and 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 is a legal document that 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.
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, like bank accounts or businesses, for their exclusive benefit. The setup is designed to give you control over the trust's assets, 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.
In both cases, they’re revocable trusts. With a revocable trust, the trustee can modify the trust terms or remove beneficiaries.
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.
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 still considered the owner of the assets within the trust for liability purposes.
Document titled Living Trust and Estate Planning on a desk next to a gavel
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 supervised by a trustee who works on behalf of the beneficiaries. The role of the trustee can be held by either the trustor or another individual.
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 or not 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 to ensure they have financial security while you’re gone. Setting up a family trust offers a smart solution to meet their needs. 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 and guarantee your assets are handled and distributed as desired.
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.
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.
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