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by Nate WittigFamily Trusts | Pros & Cons
Family trusts can provide several benefits for business purposes, tax optimization, or estate planning. But that’s not to say they are all roses.
They offer the legal and financial protection you need to be confident that your hard-earned wealth gets protected. However, their cost and complexity are just some other things to consider.
In this blog post, we’ll explain what family trusts are, show you the pros and cons, and give you some tips to determine if a family trust is right for you.
What Are Family Trusts?
Basically, a family trust is a unique legal arrangement designed to protect assets.
The concept is relatively simple. One person (grantor) gives something to a second person (trustee) to hold and protect for a third person (beneficiary).
How They Work
For family trusts, this usually entails the head of a family transferring assets to a trustee to be protected and later distributed to other family members.
A trust can hold various assets, including cash, real estate, valuables, stocks, and even entire businesses – all protected from liability, creditors, and family infighting.
Trusts get used in different ways around the world. However, the primary governing principles remain the same.
For example, in the USA, trusts are typically used as a way for the grantor to control what happens to their assets after death. In contrast, family trusts in Australia or New Zealand tend to function as a structure for family businesses.
Advantages of Family Trusts
Depending on your situation, a family trust can have several benefits. These are the primary advantages:
Asset Protection
One of the primary purposes of a family trust is to protect assets from liability. From a legal standpoint, the assets in a trust are no longer owned by the grantor, which covers the assets from creditors, lawsuits, and other liabilities.
Tax Benefits
There are various tax benefits associated with family trusts. However, an in-depth analysis is beyond the scope of this blog. In general, family trusts can help distribute wealth to family members in lower tax brackets and avoid large, one-time tax hits associated with inheritance.
Estate Planning
Family trusts can help ensure your wishes get carried out as intended after you pass away. All the family squabbles in the world can’t affect the iron-clad laws of a family trust, which provides confidence that your wishes play out as you intended.
Continuity
One fear many people have is that once they pass away, their businesses and investments will fall into disarray or get torn apart through family infighting. Family trusts help ensure your interests continue operating as planned – even when you’re no longer there.
Avoid Probate
Family trusts help avoid the costly and time-consuming probate process because the trust owns the assets, not you. This way, beneficiaries can access assets immediately rather than being delayed by legal hassles.
Vulnerable Family Members
A trust can help protect a less-than-responsible spouse or child. It can ensure they get a steady income but never have access to large sums of money or other assets they might use inappropriately.
Flexible
Family trusts are highly flexible and can be tailored to meet your needs and requirements. For example, trusts can be irrevocable once enacted or adjustable while you’re still alive. Consult a legal professional for more details.
Disadvantages of Family Trusts
Despite all their upside, a family trust has a few additional things to consider. Here are some of the main disadvantages:
Cost & Complexity
Family trusts are complex legal arrangements that almost always require professional support to set up and administer. For this reason, the cost can be high due to ongoing trustee, legal, and accounting fees. Make sure these fees get factored into your planning.
Lack of Control
Family trusts are there to remove control from the grantor and give it to a third party. However, this can become a problem when circumstances change significantly, or the grantor changes their mind. Be sure everything is the way you want before you sign.
Public Record
When you establish a family trust, what used to be your private family business is now subject to a certain degree of public scrutiny. Make sure the privacy tradeoffs of a family trust are worth the benefits.
Business Growth
While laws differ in different areas, generally, trusts cannot retain profits generated by businesses and must distribute to beneficiaries. That is fine for a mature company but could be problematic for newer companies that want to reinvest profits.
Is a Family Trust Right for You?
Establishing a family trust is a highly individual decision based on several personalized factors. You’ll need to consider your financial situation, tax implications, asset protection needs, family dynamics, and estate planning goals.
Family trusts provide significant benefits but are also complex, requiring permanent professional assistance to set up and administer. Our general guidance is that family trusts are for people with high net worth, complex assets, and/or large families that may fight over things once you’re gone.
Once you’ve done as much research as possible, it’s best to consult legal and tax experts to understand if this is the right move for you. Laws and rules vary between states and countries, so a professional will also help you navigate the local regulations.
The First Step is Weighing the Advantages and Disadvantages
Yes, this legal tool can help you protect the fruits of your family investing efforts and provide continuity for your estate once you’re gone. That doesn’t mean it’s the right move for everyone. It’s a big decision that you want to make sure you get right!
So understand the advantages and drawbacks before establishing a family trust and always consult a professional before making a final call.
