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Family Trust Fund Basics for Americans

Writer's picture: Mitch ZweberMitch Zweber

Family Trust Fund Basics for Americans


If you’re looking for information on how a family trust fund works and whether to use one, you’re probably in the midst of your estate planning process.


While a family trust fund can help those with high-value estates by making sure that specific family members or causes benefit from their legacy, it’s critical to work with a professional. Your accountant, financial advisor, and attorney can work to create an estate that seeks to minimize taxes and asset preservation.


We recommend that you work with a qualified team of professionals so that your financial assets are distributed properly.


It can be hard to think about what happens after you’re not around. However, planning what will happen to your wealth can benefit your surviving spouse and children. From the types of family trusts available in the US to how to minimize estate taxes, here are some family trust fund basics for Americans.



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What Is a Trust Fund? 


A trust fund is a legal arrangement allowing individuals to place assets (money, property, bonds, and more) into an account to benefit another individual or entity, called a beneficiary. 



What Is a Family Trust? 


A family trust is a type of trust fund that holds your family’s assets.


With a family trust, your wealth will be safeguarded and transferred across generations, giving you control over how your spouse, children, or extended family receives portions of your wealth. 



How Does a Family Trust Work?


Typically, there are three parties involved in the set-up and maintenance of a family trust, a grantor, a trustee, and the beneficiaries.


The assets involved in a trust belong to the grantor, who is also the one who establishes the trust. The trustee managing the assets on behalf of the beneficiaries, and the beneficiaries, are family members who receive the financial assets. 


However, because a trust is a legally binding arrangement with significant financial and legal implications, establishing one requires close collaboration with both a financial advisor and an estate planning attorney.


1) Financial Advisor


They assist the grantor in choosing the most suitable type of family trust based on financial goals, asset structure, and tax efficiency.


Financial advisors also help outline the trust's investment and income strategies seeking to ensure the assets grow or are maintained to support beneficiaries.


2) Estate Planning Attorney


The attorney drafts the trust document so that it complies with federal and state laws.


They file any required legal paperwork. They help structure the trust to meet the grantor’s wishes while navigating legal considerations like tax implications, and succession planning.


Combining the expertise of both professionals provides a comprehensive approach to setting up and maintaining a family trust, ensuring the trust is both financially optimized and legally sound. 


If you are looking for a financial advisor who will actively assist you with your estate planning, we recommend that you schedule a call with a 360 Financial advisor. 



Types of Family Trusts 


In the US, there are many types of family trusts. Common ones include: 


Living trust


With living trusts (also known as revocable trusts), trust assets are held while you’re still alive, with a plan set in place for those assets after you pass away. 


Charitable trust


These trusts include charities or a specific charity as part of their beneficiaries, alongside family members. 


Marital trust 


These trusts benefit the spouse of the grantor and are irrevocable (cannot be modified), which avoids incurring federal taxes. 


Generation-skipping trust  


Grantors can leave their assets to future generations, including grandchildren, with generation-skipping trusts. These trusts also reduce heavy tax burdens, like estate taxes.



Revocable vs. Irrevocable Trusts 


The two standard types of family trusts are revocable trusts and irrevocable trusts.


Revocable trusts, also known as living trusts, are family trusts that can be modified by the grantor at any time. 


This means the grantor can remove or add beneficiaries, modify the terms of the trust, and change how the assets are distributed. While this type of trust provides ultimate flexibility, assets held in revocable trusts are subject to federal and state estate taxes. 


On the other hand, irrevocable trusts cannot be modified once the agreement is signed, except under very rare circumstances. Even then, any changes will be subject to consent by the beneficiaries and order of the court, with exact rules depending on the laws of the state. 



Potential Tax Implications of Family Trusts 


As mentioned earlier, revocable family trusts come with tax implications.


Because the grantor still technically controls the assets with these types of trusts, these assets are considered a taxable part of the estate. Additional income generated by these assets will be calculated and reported on the final tax return. 


Generally, irrevocable trusts come with the most tax advantages. Because the grantor gives up control of the assets as they’re loaded into an irrevocable trust, after they pass away, this may remove the amount of the estate the government will take. 



Benefits of Family Trusts 


As a grantor, you may receive a lot of benefits if you decide to set up a family trust. These are some of the benefits of a family trust:


1. Avoids the probate process


The probate process is a legal process that occurs when the person who passes away doesn’t have a will for their estate.


Probate can be long, drawn-out, frustrating, and come with extensive emotional and financial implications for the rest of your family. Setting up a family trust before the event of your passing prevents this from happening. 


2. Preserves your assets


Moving your assets into a trust means they’re no longer under your direct control, which can help safeguard them from creditors.


3. Better control 


If you have substantial financial assets or you have particular requirements about how they’re allocated after you’re gone, a family trust will legally ensure they’re distributed the way you want, giving you unparalleled control. 



Disadvantages of Family Trusts 


Like all types of trusts, family trusts also come with some disadvantages that are worth considering. 


1. Tax implications 


Depending on the type of family trust you choose, the tax implications can be high.


In 2024, the highest income tax rate for trusts reached 37%. Working with a financial advisor helps you work towards reducing your tax rate and other potential financial implications. 


2. Less freedom around your assets 


Once your assets are placed in a trust, you have limited freedom around what you can do with them.


For example, if you want to sell an asset, you may need to comply with certain duties or consider the beneficiaries. 


3. More paperwork 


Setting up and maintaining a trust generally involves a lot of paperwork.


Every time a change is made, all trustees must sign off on the decision. This can be time-consuming and inconvenient, especially if the trustees are in different locations or have scheduling conflicts. 



family trust


Is Your Financial Advisor Helping with Your Estate Planning? 


If you want to minimize taxes, set up a trust, or get support with estate planning, you should work with a financial advisor alongside your estate planning attorney. 


Setting up and maintaining a family trust can be complex, especially if you have unique financial goals. Financial advisors seek to provide personalized services and transparent advice when helping their clients set up family trusts. 


Working with a wealth management firm may be your best option if you have substantial assets and a complex estate. 



Common Questions about Trusts 


What is the biggest mistake parents make when setting up a trust fund?


One major mistake is not clearly defining the terms and structure of the trust fund, which can create misunderstandings or even legal complications for beneficiaries.


A vague trust document might lead to disputes or unintended tax burdens. Working with a financial advisor and legal professional can help avoid these common pitfalls.


How does transferring property into a family trust affect taxes?


When property is transferred into a revocable trust, it remains part of the grantor’s estate, meaning it's subject to estate taxes.


However, property in an irrevocable trust is generally removed from the estate, which can reduce estate tax liability. Each trust type has unique tax implications, so it’s essential to evaluate your tax strategy carefully with an advisor.


Should I set up a trust fund for my grandchildren?


Setting up a generation-skipping trust can be beneficial if you want to leave assets to your grandchildren.


This type of trust can avoid estate taxes in certain cases, potentially preserving more wealth for future generations. It’s wise to consult an advisor to weigh the tax implications and create a structure that supports your legacy goals.


How does setting up a family trust impact government benefits for beneficiaries?


Certain types of trusts can be structured to ensure that assets within the trust don’t disqualify beneficiaries from government benefits such as Medicaid or Supplemental Security Income (SSI). For example, a Special Needs Trust is often used to preserve eligibility for these benefits.


How is a surviving spouse typically supported through a family trust?


A marital trust is commonly used to provide financial security for a surviving spouse.


In this structure, the spouse can receive income or access specific assets while preserving the estate for future beneficiaries. Marital trusts are often irrevocable, which helps reduce estate taxes on assets passed to the spouse.


What should be included in a trust document for a family trust?


A trust document must clearly outline the grantor’s wishes, beneficiaries, and distribution terms.


It should specify the trustee’s responsibilities, instructions for asset management, and any special provisions for beneficiaries. Ensuring the trust document is precise and legally sound is crucial, as it becomes the guiding instrument for trustees and legal representatives.




Speak with a fiduciary advisor


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About 360 Financial


360 Financial is an independent wealth management firm with a team of specialized financial advisors and financial planners. As fiduciaries, 360 Financial’s advisors provide services to business owners, entrepreneurs, and professionals. We help investors with sudden wealth, retirement planning, tax planning, estate planning, and business financial planning. 


Headquartered in Minnesota, we serve investors across the US with online and in-person wealth management and financial planning services.





About the Author


Mitch Zweber is a financial professional focusing on portfolio management, retirement planning, estate planning, and goal funding.


His approach to financial planning is holistic, addressing each client's needs, goals, and aspirations to build an individualized plan to pursue financial success. He believes in educating clients to empower them to make confident financial decisions.


What excites Mitch most about his job is meeting new clients and contributing to their pursuit of financial success. He finds it very rewarding to see clients accomplish their short‐term and long‐term financial goals.




 





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