If you think you’re the only person who doesn’t know what a family trust is, let me put your mind at ease. Most people don’t understand what a trust is – even those people who own one.
A family trust is also known as a revocable living trust. The family or living trust is a simple yet powerful tool to help you do lots of things. One of those important things is that it helps you avoid probate (if set up correctly), but it does much more than just that.
When you set up the trust, you name someone to take over in case you are dead or disabled. This is the trustee. Once one of those things happens, the person you named steps in. Of course she can’t do anything she wants with your money. She has to do what you spell out in the trust. If she doesn’t, she’ll be a target for civil and possibly criminal prosecution. Just the same, if you set up a trust, make sure you name a successor trustee who is responsibly, trustworthy and reasonably smart.
Once you set up your trust, you transfer assets into your trust. This is really easy to do. For financial assets like bank accounts and brokerage accounts, you just fill out a form that your bank and brokerage company gives you. Once you sign on the dotted line, your assets are retitled and thereafter held in the trust. You can also change the trustee and the beneficiary whenever you like. You do not lose any control over the assets. (That’s not the case with an irrevocable life insurance trust.)
What’s important to realize is that the assets aren’t in the trust until you re-title them. Many people make the mistake of thinking that once they set up their trust, the assets are included. That’s a huge and potentially expensive mistake. You have to re-title everything if you want it in the trust.
For real estate, your lawyer will usually take care of retitling the assets. This is also a simple and inexpensive process. Nothing to worry about here.
Why do people set up family trusts?
Because they want to control what happens to their money once they die or become disabled. Once you die or become incapacitated, your trustee takes over using her power of attorney. You don’t have to worry.
But if you have your money in your name alone and you don’t have a trust, you’ll be in a world of hurt if you die or become disabled. That’s because it will be difficult for anyone to access your money in order to care for you. In that case, they’ll have to go through the court system, which is expensive and time-consuming.
If you keep your assets in the name of both yourself and someone else – joint tenants or tenants in common – there are other problems. First, the money is at least partially theirs. That means they have access to it, they can spend it any way they want and/or they can be sued and their creditors can seize the assets.
A family trust basically makes sure your assets are available for your benefit. And if you die, the family trust insures that the money will be divided as you want it to be divided. A family trust does many other things too. It usually sets up health powers of attorney, which appoint someone to make medical decisions for you in case you can’t.
I’m not an attorney and I can’t provide legal advice. Also, laws are different depending on what state you live in. That’s why you should absolutely get professional legal advice before you proceed.
But it’s nice to know what a trust can do. If nothing else, by understanding the power of a family trust you can ask your attorney the powerful questions you need answers for before you make any decisions.
Have you set up a family trust? Why or why not?