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TL;DR: Living trusts and family trusts share similarities but serve different goals. Choosing the right one depends on flexibility, beneficiaries, and control.
Main points:
- Living trusts: avoid probate, allow any beneficiary, and offer flexibility
- Family trusts: preserve family wealth, restrict beneficiaries to relatives
- Revocable trusts = flexible; irrevocable = harder to change
- Family trusts often use independent trustees for fairness
- Tax treatment differs during lifetime vs after death
For financial and estate planning, you should understand the differences between a living trust vs a family trust. Someone may advise you to use a trust to protect your assets. But what is a family trust and how does it differ from a living trust?
Each type of trust serves a distinct purpose. This guide will explore family trust vs living trust, show how they differ, and help you choose what fits your goals.
Definitions: Living Trusts vs Family Trusts
A living trust lets you transfer assets to your beneficiaries while you’re still alive. It ensures a smooth transition of your wealth to your beneficiaries. A major advantage: 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, secure assets for family members. They manage and distribute assets exclusively to family. Also, they give you control, safeguard assets, and can help reduce taxes for beneficiaries.
It includes 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?
Yes and no. 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. But a living trust vs revocable trust show that both can be revocable trusts or irrevocable trusts:
- With a revocable trust, you can change terms or remove beneficiaries.
- With an irrevocable trust, you typically cannot alter it without consent or court approval.
This depends on how your lawyer decides which is best for you. Trusts vary in structure depending on your needs, state law, and legal advice. 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 avoid probate, expenses and legal fees of the process.
- They will both simplify the distribution of assets.
- 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.
- A family trust focuses on distributing assets to your family and preserving generational wealth.
- A living trust gives you flexibility in who receives your assets; a family trust concentrates on family beneficiaries.
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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. With a living trust, you can name anyone — family, friend, charity — as a beneficiary. You retain full authority over that decision.
With a family trust, you restrict beneficiaries to family members only. You design how wealth flows through your family over time.
What Is the Difference in Structure Between a Living Trust vs a Family Trust?
In a revocable living trust, you often name yourself as trustee, so you can manage, add, remove, or sell assets freely. You remain the owner for legal purposes and can revoke the trust anytime.
In a family trust, an independent trustee often manages assets for the beneficiaries’ benefit. This can help avoid conflicts or bias in asset management. Note that revocable living trusts do not shield you from creditors or lawsuits. That’s because you retain control and ownership rights.
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 flexibility in who benefits? Go with a living trust.
- Do you want assets to stay within your family? A family trust gives you that guarantee.
Choosing between a family trust vs living trust is only one piece of estate planning. Inflation, taxes, and retirement risks also play a major role in how effective your trust will be. This episode of The Asset Preservation Hour handles:
- What a living trust is and whether you really need one
- How to avoid predatory “trust mills” and costly estate planning mistakes
- The impact of inflation, taxes, and market risk on retirement
- Smart strategies like Roth conversions and Social Security tax planning
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.
