Estate planning is one of the most common uses of trusts around the world. Trusts of all sorts can be used in different ways to provide for your family and protect the assets which they will inherit from you. The common name given to a trust that serves these purposes is a “family trust”.
In this article, we will explore what a family trust is, the various types of family trusts and what they are used for, and why it makes sense to set up your family trust offshore. We will also go over the practical steps for setting up a family trust.
What Is a Family Trust?
A family trust is a legal entity that holds and manages assets for the benefit of family members. The grantor, also known as the settlor, transfers ownership of assets to the trust. A trustee manages these assets according to the trust document's instructions. Beneficiaries are the family members who receive benefits from the trust.
Trust documents outline the rules for asset management and distribution. These can be tailored to meet specific family needs and goals. Family trusts can help avoid probate, potentially reduce estate taxes, and provide asset protection.
Definition and Basic Concepts
A family trust is a trust that is created specifically to benefit the members of your family. Like all trusts, a family trust is an agreement between three parties: the grantor/settlor, a trustee, and the beneficiary/beneficiaries. The grantor is the person who forms the trust and transfers assets to the trust for a specific purpose. The trust and its assets are then managed by a trusted third party known as the “trustee”. In the case of a living revocable family trust, the grantor themselves can also act as the trustee (more information on this later). Finally, the beneficiaries are the ones who receive the ultimate benefit from the assets in the trust.
In the case of a family trust, the beneficiaries are family members of the grantor. This means that if you created a family trust, you would typically name your children, grandchildren, siblings, or spouse, as the beneficiaries of the trust. It is important to understand that when the term “family trust” is used, it does not actually refer to a legally distinct type of trust. A family trust can in fact be any type of trust that is used to benefit the members of your family.
What Are the Different Types and What Are They Used For?
Family trusts are typically living trusts, which means they are created and take effect during your lifetime. They can be either revocable or irrevocable depending on the terms of the trust and its specific purposes.
Revocable vs Irrevocable
A revocable family trust can be modified or terminated by you, the grantor, at any time. You can act as the trustee yourself and name a successor trustee to take over in the case that you become incapacitated or pass away. Some of the main advantages of setting up a revocable family trust include:
- You retain control over all the assets placed in the trust due to being able to change or revoke the terms of the trust at any time.
- The trust avoids costly and time-consuming probate procedures after your death. The distribution of assets to the beneficiaries of the trust can happen immediately without unnecessary costs. It can also serve to reduce estate taxes.
- The probate process associated with a conventional Will & Testimony is public. Therefore, the avoidance of probate procedures also helps ensure a greater level of privacy for the beneficiaries of the trust.
In contrast, an irrevocable trust cannot be changed or revoked. In the case of an irrevocable trust, the trustee must be an independent third party whose primary duties are to protect and manage the assets in the trust. When you create an irrevocable trust, you effectively give up legal ownership of the assets that you place in the trust. This sense of loss of control is daunting to some, but it certainly has its advantages.
Some of the main benefits of an irrevocable trust include:
- Protection of trust assets: an irrevocable trust comes with a certain loss of control and flexibility, because the trust cannot be changed and you do not retain ownership of the trust assets. However, it is exactly for these reasons that irrevocable trusts offer such unmatched asset protection for your family. If someone has a personal claim against you, it is extremely difficult to penetrate the walls of an irrevocable trust to fulfil the obligations. This becomes even more powerful with an offshore irrevocable family trust.
- Privacy: irrevocable family trusts also offer significantly more privacy for your family and legacy, as the assets are in the name of the trust and not your personal name. They can be distributed directly to your beneficiaries without going through any public probate or other cumbersome processes.
- Greater tax efficiency: while revocable trusts can offer some degree of tax reduction, irrevocable trusts tend to offer the best tax efficiency, as they are taxed as completely separate entities and usually receive special tax breaks and reductions.
- Wide range of specialised types: Irrevocable trusts offer great opportunities to tailor the trust to your specific needs, through various special types and options for unique trust terms.
Special Types of Trusts
Both revocable and irrevocable trusts have their own relative strengths and weaknesses, and deciding which to use depends on your preferences and purposes for the trust. Within these two broad categories of trusts, there are many specific types that can be used as family trusts (i.e., used to benefit your family). Some of the most popular types of family trusts and what they are used for include:
Spendthrift
A spendthrift trust is a useful type of trust which limits your heirs’ direct access to the assets in the trust according to the terms laid out. This is to avoid misuse of the assets in the trust if you are concerned that the beneficiaries are not responsible enough to handle them. The beneficiaries might receive income or interest from the assets in the trust without being able to access any of the principal, or it may set out special terms or timelines for the principal to be distributed.
Bypass
An irrevocable trust whereby the surviving spouse gets limited control and income from the assets in the estate but does not get legal ownership of them. Once the spouse passes away, the assets are passed on to your heirs. A bypass trust serves two main purposes: Firstly, it allows you to take care of your spouse while ensuring that the assets ultimately go to your heirs, and secondly, it reduces overall taxes because the assets only get transferred once (directly to your heirs).
Marital
In contrast to a bypass trust, a marital trust is an irrevocable trust whereby the surviving spouse fully inherits the assets in the trust along with the income. This reduces taxes for the surviving spouse but does mean that the heirs will pay taxes on the assets that they inherit.
Life insurance
This is simply using an irrevocable trust to hold a life insurance policy for a specific beneficiary. The benefit is that both the value of the policy and the payable death benefits avoid estate taxes.
Charitable remainder
A special type of trust that combines a charitable trust and a family trust. It guarantees a certain benefit value to your heirs, and the remainder is then given for charitable purposes.
Special needs
This trust is established to pay for medical costs and day-to-day expenses of a special needs dependant. The advantage of structuring it in this way is that they remain eligible to receive government benefits.
Totten
A conventional living revocable trust where the value of the trust is payable to the beneficiaries upon your death. It effectively functions like a bank account during your lifetime, as money can be freely deposited and withdrawn, but allows for easy transfer to your heirs while avoiding unnecessary estate taxes and probate.
Benefits
Family trusts provide significant advantages in estate planning. They allow for smoother asset transfers, bypassing probate and ensuring privacy. Assets held in trust avoid becoming public record, protecting family wealth from prying eyes.
Trusts offer flexibility in asset distribution. Grantors can set specific conditions for beneficiaries, such as reaching a certain age or achieving educational milestones. This control helps preserve family wealth across generations.
Trusts also facilitate tax planning. Charitable trusts can reduce estate taxes while supporting favored causes. Marital trusts can maximize estate tax exemptions for married couples.
Asset Protection and Management
Asset protection is another key benefit. Certain types of trusts, like irrevocable trusts, can shield assets from creditors and lawsuits. This protection extends to beneficiaries through spendthrift provisions.
Family trusts can shield assets from creditors and legal judgments. This protection extends to both the grantor and beneficiaries, depending on the trust's structure.
Professional management of trust assets can lead to better financial outcomes. Trustees have a fiduciary duty to manage assets prudently and in the best interests of beneficiaries.
Trusts can help avoid probate, potentially reducing costs and maintaining privacy. Assets held in trust typically pass directly to beneficiaries without court involvement.
Medicaid planning can be facilitated through certain types of trusts. This may help protect assets while qualifying for long-term care benefits.
Methods for Funding a Trust
Trusts can be funded through various methods. One common approach is transferring assets directly into the trust's name. This can include real estate, vehicles, bank accounts, and investment portfolios.
Another method is designating the trust as a beneficiary of life insurance policies or retirement accounts. Some individuals opt to use a pour-over will, which transfers any remaining assets into the trust upon death.
Gifting assets to the trust during the grantor's lifetime is also possible. This strategy can have tax implications and may require professional guidance.
Asset Transfer and Titling
Proper titling of assets is crucial when funding a trust. Real estate deeds must be updated to reflect the trust's ownership. Vehicle titles should be reissued in the trust's name.
For financial accounts, new accounts may need to be opened in the trust's name. Alternatively, existing accounts can be retitled. This process often involves providing the financial institution with a copy of the trust document.
Stocks and bonds typically require a change of ownership form. For closely held businesses, operating agreements may need modification to transfer ownership to the trust.
Why Should I use an Offshore Family Trust?
An offshore family trust is simply any of the various types of family trusts we have looked at that is established in a foreign jurisdiction outside of where the grantor and beneficiaries reside. There are many reasons to opt for an offshore family trust over a domestic one. The main comparative advantages it offers are:
Superior asset protection: an offshore family trust provides much greater protection to the assets compared to a domestic trust, irrespective of the type of trust used. This is because the assets are protected by being in a different legal jurisdiction. It makes it very difficult for local courts to enforce any kind of claim to the assets, and plaintiffs would be forced to initiate a case in the foreign jurisdiction. What’s more, the best offshore trust jurisdictions have highly protective trust legislature which makes it almost an impossibility to win a claim against the assets in a trust through their legal system.
Reduction/elimination of taxes: While a domestic trust may offer some tax advantages, an offshore family trust in a tax haven can provide enhanced tax reduction and even eliminate taxes in some cases.
Privacy: Placing your family trust in a foreign country ensures that the trust agreement and the assets in the trust remain private. This is certainly a desirable quality when dealing with sensitive financial matters such as the passing on of your estate to various heirs. You may even want to keep the details of the trust confidential to other family members, which is easily done through an offshore family trust in the right jurisdiction.
Flexibility: going offshore gives you a far greater range of options when it comes to setting up your trust. You get to choose between different countries, each with their own trust regulations, as well as the different types of trust which are available in each place. This gives you greater flexibility to adapt the trust to your specific needs.
Access to opportunities offshore: forming a trust in a foreign country also provides you with access to new opportunities to invest and open a bank account offshore.
How to Set Up a Family Trust?
Trusts are complex financial instruments, and so it is always recommended to begin the process by talking to a professional estate planning attorney who is knowledgeable about the offshore trust landscape. They will be able to help you determine whether a family trust is the right vehicle for you. They will also be able to suggest and help you compare the different types of family trusts available, to help you choose the best one for your needs.
Once you have done your research and spoken to a trust expert, you will have to go through the process of setting up the trust. The exact steps could differ depending on the type of trust and where it is formed, but would basically include:
- Electing a trustee and beneficiaries: in the case of a revocable trust, you could elect yourself as trustee, otherwise you will have to choose a trusted third party. You must also designate the beneficiaries who will benefit from the proceeds of the trust. A beneficiary may also act as the trustee in the case of revocable trusts.
- Drafting the trust document: After you have chosen the trustee and beneficiaries, you can proceed to drafting the trust agreement. While it is possible to do this alone or with the help of software, it is best to work with an estate attorney to ensure that everything is done properly. The trust agreement should be in accordance with the specific type of trust you have chosen to create.
- Transferring assets into the trust: finally, once the trust agreement is in place, the next step is to fund the trust by transferring assets into it. Practically, this involves transferring the ownership of said assets to the trustee, who is legally bound to manage them on behalf of the trust. Depending on the type of the trust, you could place any of the following assets in the trust: real estate, vehicles, bank accounts, companies, shares, family heirlooms and collectibles, fine art, antiques, and many other investments.
Takeaway
To conclude, a family trust is just the name given to any trust which used specifically to benefit your family members. The exact features of the trust will therefore depend entirely on the type of trust you set up, where it is located, and how the agreement is drafted.
Therefore, it is highly recommended to work closely with an estate attorney who can ensure that all the technical aspects are done properly, help you gather the required documents, and make sure the agreement is signed off correctly. When dealing with a large estate, it is essential to avoid any unnecessary mistakes that could jeopardise the trust and its assets.
