Family Trust vs. Living Trust: What’s the Difference?
Both family trusts and living trusts can assist you in fulfilling your estate planning objectives, but which trust is best for you is subject to your needs— and in a lot of cases, the terms may be interchangeable.
First, it is important to comprehend the general notion of a trust. A trust is a legal device used to hold assets for another’s benefit.
The individual that creates the trust is referred to as the “grantor” or “settlor” and the individuals that oversee the trust are referred to as “trustees.” The “beneficiaries” are those individuals that may benefit through the trust.
Family Trust vs. Living Trust
To put is simple, a “family trust” may be in reference to any trust devised with relatives as its beneficiaries. Family trusts can be established in two ways:
- Testamentary Trust: Established through a last will and testament, meaning it will only come into play upon the passing away of the grantor and the probating of the will. This type of trust, consequently, doesn’t avoid probate.
- Living Trust: Established and implemented throughout the grantor’s lifetime. The grantor usually also acts as a trustee in overseeing the property in the trust. With this type of trust, the grantor appoints a successor trustee to carry through the requirements of the trust upon their passing away, in which occurs outside of the probate process.
Which trust is preferred is subject to your circumstances, but usually the objective of devising a family trust as a living trust is for transferring wealth to relatives and withdraw assets from the grantor’s legal ownership, still enabling their management over the trust property and the right to get benefits from the assets.
Therefore, one significant factor to contemplate is whether you would prefer to retain assets under your personal management or have them be kept by a trust within your lifetime.
Testamentary Trust Cost vs. Living Trust Cost
Creation costs could be another significant factor when choosing between a testamentary trust and a living trust. Setting up a living trust requires added planning and paperwork outside a last will and testament, so it is going to cost more upfront additionally.
Subject to if you receive any tax savings, however, the cost examination may end up leaning in favor of a living trust.
Revocable Trust as Compared to Irrevocable Trust
Both testamentary trusts and living trusts are revocable, meaning that the trusts’ conditions can be altered at any time, or the trust may be rescinded entirely, by the trust’s grantor. A revocable trust is the most adaptable kind of trust because of the potential of altering it.
The opposite is an irrevocable trust, which prohibits changing any of the conditions in the trust or rescinding it.
Through irrevocable trusts, the grantor surrenders all rights and management over the trust in addition to the property included in it, which means they can’t act as a trustee or take assets out of the trust. There could be tax benefits and other personal reasoning to choose this type of trust.
Credit Shelter Trusts
Oftentimes the terminology “family trust” is in reference particularly to a “credit shelter trust,”, ” or “B trust,” when it is used to decrease or remove state or federal estate taxes following the passing away of a surviving spouse.
Credit shelter trusts are devised so when one of the spouses passes away, the trust property can be utilized by the surviving spouse, and they can receive income from the assets in the trust but the property transfers to other familial beneficiaries—typically children—federal estate tax-free up to the exemption number of the deceased ($5.49 million in 2017).
Since the assets are in trust, when the surviving spouse passes, they are not contained in the estate of the surviving spouse, and their exemption is still additionally available. This allows married spouses the chance to use up the total, total federal estate tax exemption number ($10.98 million in 2017).
If you need to prevent federal estate tax, professional advice is vital;. Even in seemingly simpler cases, however, a living trust attorney can assist you in making the best decisions on all types of estate planning maters, including which kind of trust is right for you.
Source:
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Michelle Kaminsky, E. (2022, May 2). Family Trust vs. Living Trust: What’s the difference? LegalZoom. Retrieved January 10, 2023, from https://www.legalzoom.com/articles/family-trust-vs-living-trust-whats-the-difference
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