There are few estate planning vehicles as important as a family trust, also known as a living trust or inter vivos trust. In the following article we will discuss the importance of a family trust as part of your San Diego estate planning portfolio and also touch upon some other important documents that will help you plan for the inevitable.
What is a Family Trust?
A Family Trust is a legal document you and your spouse create that acts as an instruction manual on how you want your estate to be distributed upon your death. However, it is so much more than that.
How a Family Trust Works
It is easy to set up a trust. The key is finding an experienced estate family attorney who can help guide you through the process and alert you to possible pit falls. Pit falls such as choosing the wrong trustee or naming a beneficiary that has a dependency problem.
Family Trust: Protecting Your Legacy
Family Trust Creation
A Family Trust is created by you and your spouse, known as the Settlor, or Grantor, or Trustor. All those are fancy words which basically mean the person who created the trust. You and your spouse create a Family Trust by deciding on a few very important things: the Trustee and the Beneficiary or Beneficiaries.
One of the first things when creating a Family Trust is deciding on who will be the Trustee. The Trustee has various duties associated with administering the trust, all according to the terms of the trust which you and your spouse determine in advance.
Typically upon creation of the Family Trust, the Trustee of the Trust will be you and your spouse as Co-Trustees. That means you and your spouse are responsible for following (or not) the terms of the Trust. You set it up so you can essentially do what you want. However, that is not the case for the successor trustee.
In your Family Trust you will also designate a Successor Trustee. The successor trustee takes over the duties of the Trustee upon various occurrences, such as the death of both Co-Trustees, the incapacity of the Co-Trustees, or if a Trustee simply no longer wishes to act. It is a good rule of thumb to have two successor trustees in case your original choice decides not to act, fails to act, or simply cannot act.
The importance of a good Trustee
A Trustee has various fiduciary duties that he or she must adhere to. One such duty is to follow the terms of the family trust. Some additional duties are a duty of care, duty of loyalty and impartiality to the beneficiaries, duty to avoid conflicts of interest, duty to preserve the trust assets, duty to make the trust assets productive, and duty to avoid commingling the trust funds with your own money.
With all these duties, it is important that your successor trustee be a responsible person, who can avoid the pitfalls of being a trustee. This is heightened when you name a trustee that might already be at odds with a beneficiary, such as a brother and sister who have a high level of sibling rivalry. One of the most common reasons for Trust Litigation is when a trustee is negligent. And the next is like it, when a beneficiary is unhappy with a trustee. Therefore, make sure you choose the right successor trustee for your Family Trust.
Another thing you need to consider is planning for incapacity. The trustee takes over if the Settlor’s of the Trust (you and your spouse) become incapacitated. For a Family Trust, the trustee would still be your spouse. However, if one spouse dies and the surviving spouse becomes incapacitated, the successor trustee will step into the role of Trustee and oversee your estate. You will want to make sure you have someone in that role you can trust in case you become incapacitated.
The initial beneficiaries of the Family Trust will be the Settlor of the Trust, i.e. you and your spouse. It is important to understand that you do not lose control of your assets when you set up a revocable trust. After you die, the Family Trust beneficiaries are those who will receive your assets under the terms of your trust. For families with young children, you can structure your Family Trust so that the children receive their inheritance in stages. For example, you can have your Trust distribute a portion at a specific age. To Johnny at age twenty-five, up to one third of the Trust assets, and then another one third at thirty, and finally the remainder at age thirty-five. This avoids giving your child everything all at once and risking him or her blowing the inheritance.
A Family Trust has other provisions, such as a spendthrift provision, which offers some level of protection for the beneficiary from creditors. You can also add provisions that allow the trustee to hold funds if the trustee believes your beneficiary has a dependency and will use the inheritance to fund an addiction, such as to alcohol or drugs.
Family Trust Benefits
There are many benefits of a San Diego living trust. Three primary benefits of a family trust are:
A Family Trust is a legal document that allows everything in the trust to be distributed by the trustee without the supervision of the court. Court supervision is required when probating a will. In fact, a will is simply instructions for the court on how to administer your estate. But a Family Trust provides instructions for a trustee and avoids probate altogether. One word of caution: make sure your Family Trust is properly funded! Any assets not titled in the trust may need to be probated. This can be very costly in certain states, such as California, where assets such as real estate are valued at the fair market value and not based on your actual equity.
A Family Trust is a great tool for planning for incapacity. If you are diagnosed with Alzheimer’s or dementia, or some other cognitive disease, be sure to set up a Family Trust. The Trust will allow your Trustee to manage all your assets titled in the Trust. Therefore, when you are no longer able to make decisions for yourself due to incapacity, your Trustee can handle all your financial obligations for all assets titled in your Family Trust. And anything not titled in the name of your trust can be managed with a durable power of attorney (see below).
Fund a Special Needs Trust
Another benefit of a Family Trust is you can make provisions in the document to fund a special needs trust. If you have a special needs child a great way to provide for that child if you and your spouse should die prematurely is with second to die life insurance. This is a great tool that provides the death benefit payout on the death of the surviving spouse.
Beyond a Family Trust: Additional Estate Planning Documents
The other documents necessary for a proper estate plan with a Family Trust will include pour over wills, powers of attorney, advance health care directives, and life insurance.
Pour Over Wills
A Pour Over Will (POW) is simply a last will and testament that names the trustee of your Family Trust as the beneficiary of any assets that are not titled in your trust. The POW grabs any assets not in your Family Trust and “pours” those assets into your trust. Once the asset “pours” into your trust, the terms of the trust will determine how that asset is distributed.
Pour Over Wills are also a good place to list your choice of guardian for your children. You can name multiple guardians. However, it is best to choose a stable home for your kids if you were to die.
A Durable Power of Attorney (DPA) is a document that gives certain powers to an agent of your choice. Through the DPA, your agent can make financial decisions for you on all assets not titled in your trust. The word durable means that this power continues on when you incapacitated, which is the main reason this document is recommended. Note: t is highly important to name the same person you name as trustee of your Family Trust as your agent for your durable power of attorney. If you name a different person, he or she might butt heads with your trustee on what it is in your financial best interest.
Advance Health Care Directive
An Advance Heath Care Directive (AHCD), also known as a living will or Power of Attorney for Health Care, allows your designated agent to make end of life decisions on your behalf. This includes what you prefer in terms of life support, chemotherapy if diagnosed brain dead or if you have some sort of cognitive disease, pain medication, etc…The advantage of an advance health care directive is that you make the decisions for your family, so that they do not have to make them for you, saving them a lot of pain and grief.
Life insurance is a great way to leave a legacy. And even more important is that life insurance provides for your family beyond the grave. If you are the primary bread winner of the household your family is dependent on you for financial support. Although life insurance cannot replace a father or mother, it can provide some solace if you were to be taken from your family prematurely.
Do I Name My Family Trust As The Beneficiary of My Life Insurance?
Typically, the best method is to name your spouse as the primary life insurance beneficiary. However, naming the *trustee of your Family Trust as the contingent beneficiary of the life insurance gives you the most control over the death benefit proceeds if your spouse should pre-decease you. This method will also protect minors from receiving everything at age 18. Instead, your children will receive under the terms of the Family Trust.
*The beneficiary language would look something like: “The trustee(s) then in office under the terms of THE XXXX FAMILY TRUST under written agreement dated FEBRUARY 22, 2015.”
If your estate will be subject to estate taxes (current 2016 estate tax exemption $5.45 million or $10.9 million combined), it would be better to set up an irrevocable life insurance trust to avoid having the life insurance proceeds be counted as part of your estate.
Business Owners Benefit from a Family Trust
For all you business owners, you should definitely consider a Family Trust and life insurance for business succession planning. The life insurance can be used as a type of key man insurance or to fund a buy-sell agreement with a co-owner.
Another great strategy for a parent looking to keep the business in the family and still give an equal inheritance is to buy life insurance that will pass to the children not interested in the business. The business is then transferred to the child upon death or retirement of the parent. The Family Trust can provide language to this effect so that all beneficiaries are happy with the equal distribution and no one feels shafted.
A Family Trust is a great tool for protecting your family. There are too many scenarios to detail all the advantages of setting up a Family Trust. However, without properly funding your trust it serves no purpose. Make sure your assets are correctly titled in your trust. In addition, consider the other helpful documents, such as pour over wills, powers of attorney, advance health care directives and life insurance. Each has a specific purpose that will provide the protection your family needs if the unthinkable should happen and you, or both you and your spouse, should die.
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