Meaning of a Family Trust
A family trust is a specific type of legal relationship that allows one family member to share the benefits of property and income with other family members. As a purely legal matter, there is nothing that distinguishes a family trust from other types of trust. However, as a practical matter, a family trust is a trust agreement that involves only family members of the person who creates the trust. Family trusts are commonly used for inheritance purposes, but they can also be useful for other financial planning reasons.
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Identification
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Most family trusts are embodied in a written document called the Family Trust Agreement. This written document identifies the trustor, who is the person who creates the trust and transfers his property to the trust, as well as the trustee, who is the person who manages the trust property and administers the trust agreement. Finally, the trust agreement identifies family members who are the beneficiaries of the trust, which means family members who are entitled to receive distributions of property or cash from the trust.
Function
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The most basic reason for creating a family trust is to minimize probate expenses that otherwise incur after a family member dies. When a person dies, all of his property must be compiled, cataloged and distributed under a will, or if there is no will, under standard state law. This somewhat complicated process is called probate. It is not uncommon for probate to be time-consuming and fairly expensive. To minimize the adverse effects of probate, family members can create family trusts to transfer property by inheritance. Any property owned by the trust does not have to go through a deceased person's probate because the trust owns the property, and the trust continues to exist and operate even after the trustor dies.
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Benefits
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In addition to avoiding probate costs, a family trust can also allow family members to share property and income with other family members in a systematic and organized fashion. A parent can create a family trust to share income-producing property or businesses with children. Similarly, a parent with a special needs child can create a family trust to help support that special needs child, and to help provide supplementary income to any siblings who care for the special needs sibling. As creators of the family trust, the parents can include whatever terms and conditions they want to protect the trust property and provide for the proper care for each child named as a beneficiary in the trust.
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A final reason to consider a family trust would be to appoint a professional property manager as trustee of the trust. If your trust owns real estate, then you can appoint a real estate investor to manage the property. Similarly, if your trust owns stocks, bonds, hedge funds or similar financial accounts, then you can appoint as trustee a financial expert such as a broker for financial planner. These professionals will often provide a better rate of return than you could provide by investing the property on your own. Although the trustee will charge a fee for her services, you may come out ahead if she is competent in investing the type of property owned by your trust.
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References
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