What Is A Family Trust?

A family trust is usually intended to either honor and/or provide for family. Nearly every kind of trust that does not have a charity and non-family members as beneficiaries is considered a "family trust" of some kind.

A family trust anticipates a connection with others that is usually blood-based. But when one drills down more deeply, usually a family trust is intended to also go to some sense of values and walk-together in life, and often tends to support that beyond one’s days on this earth.

A prime example would be the Rothschild family* trust, or the Fugger family trust, which continue after hundreds of years and still provide for beneficiaries, but which mostly focus on the family’s human strength and communication within the family — regardless of the degrees of separation among cousins, and among great-great-great-great-grandchildren.

For example, those who are related are provided the opportunity to participate and plug back into the original values, intent, and strength of diversity of those families.

Irrevocable Family Trust

A trust that is set up such that the terms cannot be changed is an irrevocable family trust. In most cases, an irrevocable family trust holds assets being transferred from a family member or estate to other family members.

The family trust usually affords creditor protection, divorce protection, consolidation of assets for management, cost reduction via probate avoidance, or some other benefit. Trust makers often hope the trust gives beneficiary family members sufficient time to attain a level of expertise and sophistication needed to successfully manage assets.

Even the most capable family members benefit from risk reduction that a family trust can provide, however. In some family trust designs, the trust property is available for distribution upon beneficiary request, except when a creditor or divorce challenge occurs. Then trust distribution terms become more restrictive to protect the trust property from beneficiary creditors and judgments.

As a general rule, when beneficiaries are unable to access the assets, their creditors cannot collect against them either. After the creditor event lapses, the assets can be more freely available to the family trust beneficiary.

Donors typically transfer assets that are likely to appreciate into an irrevocable trust. The gift has its current value, and the appreciation then occurs outside of the donor’s estate.

Often, strategies are used to lower the current value of a property transfer from its fair market value to an irrevocable trust. This is called “discounting.” Discounting is often used with big transfers to a family trust. The goal of transfers and discounting is to limit the amount of gift applied to an individual’s lifetime gift exemption.

Life Insurance: a Valuable Element of a Family Trust

A sudden and large death benefit from a life insurance policy is a good example of an asset that appreciates in value. If you buy a large life insurance policy, even one that might provide liquidity in the event of death, it can provide liquidity to purchase illiquid assets such as real estate or company stock from an illiquid estate.

Life insurance can also fund taxes and the needs of living family members as illiquid property is transferred. It is oftentimes used to provide liquidity to an estate, and sometime to heirs and/or a spouse.

* Image Credit: Great Coat of Arms of Rothschild Family Illustration by Mathieu Chaine courtesy of Wikipedia under the Creative Commons Attribution-Share Alike 3.0 Unported license.