Free Guide to Starting a Family Trust

What Is a Family Trust and Why People Create Them

A family trust is a legal document that places assets—such as money, property, or investments—under the control of a trusted person or institution for the benefit of family members. The person who creates the trust is called the grantor or settlor. The person who manages the trust is called the trustee. The family members who receive benefits from the trust are called beneficiaries.

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People create family trusts for several important reasons. One primary reason is to avoid probate, which is the court process that happens after someone dies. Probate can be expensive, time-consuming, and public. When assets are in a trust, they bypass probate and transfer directly to beneficiaries according to the trust document. This can save thousands of dollars and months of waiting.

Another reason families establish trusts is to manage assets for minor children. If parents die without a trust in place, the court may appoint a guardian to manage money for children until they reach adulthood. A trust allows parents to specify exactly how and when their children receive inheritance—for example, giving them money at age 25, 30, and 35 instead of all at once.

Trusts also offer privacy. When property goes through probate, the details become public record. A trust keeps financial information private between the grantor, trustee, and beneficiaries. Some families use trusts to manage property across multiple states, which can simplify taxes and legal procedures.

Additionally, trusts can provide asset protection in certain situations. Some types of trusts may help shield assets from creditors or provide structure for families with members who have special needs or struggle with money management.

Takeaway: Understanding that trusts serve multiple purposes—avoiding probate, protecting minor children, maintaining privacy, and organizing assets—helps you determine whether a trust might match your family's situation.

Types of Family Trusts and How They Differ

There are several common types of family trusts, and each works differently. Understanding the distinctions helps clarify which structure might fit your circumstances. The two broadest categories are revocable and irrevocable trusts.

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A revocable living trust can be changed or cancelled by the grantor at any time during their lifetime. The grantor can add or remove assets, change beneficiaries, or revoke the trust entirely. Because the grantor retains control, they remain responsible for taxes on trust income during their lifetime. A revocable trust does not reduce estate taxes, but it does avoid probate and keeps finances private. Most family trusts created during a person's lifetime are revocable living trusts.

An irrevocable trust cannot be changed or cancelled once it is established. The grantor gives up ownership and control of the assets placed in the trust. Because the grantor no longer owns the assets legally, an irrevocable trust may reduce estate taxes and protect assets from creditors. However, the permanence of this choice makes it less flexible. Irrevocable trusts are often used for specific goals like charitable giving or protecting assets for beneficiaries with special needs.

A testamentary trust is created through a will and only comes into existence after the grantor dies. It does not avoid probate because the will itself must go through probate. However, testamentary trusts can be useful for managing assets for minor children or directing how money is used after death.

A bypass trust (also called a credit shelter trust or A-B trust) is designed for married couples who want to reduce estate taxes. When the first spouse dies, assets transfer to the bypass trust instead of directly to the surviving spouse. This structure can preserve tax benefits for the surviving spouse and their heirs.

A qualified personal residence trust (QPRT) allows a grantor to transfer a home into a trust while continuing to live in it for a specified period. After that period ends, the home passes to beneficiaries. This structure may reduce estate taxes on the home's value.

Takeaway: Different trust types serve different purposes; revocable trusts offer flexibility and privacy, while irrevocable trusts may provide tax and creditor protection at the cost of permanence. Your goals determine which type makes sense for your situation.

Step-by-Step Process for Creating a Family Trust

Creating a family trust involves several key steps. While the process is not overly complicated, it does require careful thought and attention to detail. Here is what the process generally looks like.

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First, you decide what type of trust fits your needs. Think about your primary goals: Do you want to avoid probate? Reduce estate taxes? Manage assets for minor children? Plan for incapacity? Different goals point toward different trust structures. You may benefit from discussing your situation with an attorney or financial advisor, though this guide describes the general mechanics of how trusts work.

Second, you identify what assets you want to place in the trust. These might include real estate, bank accounts, investment accounts, vehicles, or personal property of significant value. Make a complete list. Not all assets need to be in a trust; some people keep certain accounts outside the trust for various reasons.

Third, you name key people. You choose a trustee—someone you trust to manage the trust according to your wishes. Many people name themselves as trustee of their own revocable trust during their lifetime. You also designate successor trustees who take over if you become unable or unwilling to serve. You name beneficiaries who will receive trust income or assets. You may name different beneficiaries for different assets or create a structure where some beneficiaries receive income and others receive principal.

Fourth, you draft the trust document. This is where the specific rules and instructions live. The document explains how the trustee should manage assets, when and how beneficiaries receive distributions, what happens if a beneficiary dies, and many other details. Most people work with an attorney to draft a trust document, though some use online templates for simpler situations.

Fifth, you retitle assets into the trust's name. This step is crucial. If you create a trust but do not transfer assets into it, the trust will not own those assets and cannot control what happens to them. For real estate, you file a new deed showing the trust as owner. For bank and investment accounts, you contact the financial institution and request a title change. For vehicles, you update the registration. This step makes the trust real and functional.

Sixth, you execute the document according to state law. Most states require trusts to be signed and notarized. Requirements vary by state, so checking your state's specific rules matters.

Takeaway: Creating a trust requires identifying your goals, listing assets, naming trustworthy people, drafting clear instructions, retitling assets, and executing the document properly. The critical step that many people overlook is actually transferring assets into the trust.

How Trusts Handle Taxes and Estate Planning

Tax implications are an important part of understanding trusts. Many people create trusts hoping to reduce taxes, but the actual tax effect depends on which type of trust you establish and how you structure it.

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A revocable living trust does not reduce federal estate taxes. From the tax perspective, the Internal Revenue Service treats a revocable trust as if it does not exist. If you are the grantor and trustee of your own revocable trust, you report all trust income on your personal tax return using your Social Security number. You pay taxes on that income just as you would if you owned the assets personally. However, a revocable trust still provides the non-tax benefits mentioned earlier: avoiding probate, maintaining privacy, and managing assets if you become incapacitated.

An irrevocable trust may reduce estate taxes because assets in an irrevocable trust are no longer part of your taxable estate. If your estate is large enough to be subject to federal estate tax—which currently applies to estates over approximately $13 million for individuals in 2023 and 2024—an irrevocable trust can make a meaningful difference. However, irrevocable trusts have tax complications. The trust itself must file a tax return and pay taxes on income if the income is retained within the trust rather than distributed to beneficiaries.

Federal estate tax is not the only tax consideration. States have different rules about estate tax, inheritance tax, and income tax on trusts. Some states impose estate taxes at lower thresholds than the federal government. Others have no estate tax at all. Your state's tax laws affect which trust structure makes sense for your situation.

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