This article looks at the topic of family trusts, what they are, the benefits they provide and the various types available. We also discuss how to set up a family trust, plus some of the key considerations you will need to keep in mind while drafting your trust agreement.
Setting up a family trust is an excellent way to combine asset protection and estate planning while also providing a welcome degree of tax reduction. They combine flexibility on the one side with a degree of procedural rigidity that ensures your estate is handled exactly the way you want it while also helping your family avoid probate proceedings after you pass.
How you set up your family trust can make all the difference, but then so can the choice of where. An offshore trust can help reduce taxes even further while simultaneously strengthening the protection that a trust can offer.
As a Nomad Capitalist client, we can help you to do just that. Not only will we provide advice on how to execute your estate plan, we will also help you find the best offshore solution for your exact needs with access to our cross-jurisdictional team of partners to ensure your loved ones can fully enjoy the benefit of your wealth for generations to come.
Family Trusts – TL;DR
Family trusts are a common structure used for estate planning purposes.
They help protect assets and can help family members avoid probate since trust documents contain the full details of all assets and how they are to be dispersed to the trust’s beneficiaries from its trustee.
If correctly structured, a family trust negates the need to pay taxes unnecessarily, such as estate taxes.
As the settlor of the trust, you can retain complete control over what happens to your estate and its assets for years after you have passed.
What Is A Trust?
A trust is a legal agreement between multiple parties.
This can include the settlor, the person who creates the trust and the beneficiaries, who are, as the name suggests, the ultimate beneficiaries of the trust’s assets.
The third party in a trust is known as the trustee, this is the individual (or, in some cases a law firm or trust company) who manages the trust on your behalf. In some cases, there can be multiple trustees, i.e. the client and the company or spouses, etc.
So if you were looking to set up a trust to pass assets to your family members, then that would make you the settlor, and your family members would be the beneficiaries.
The trustee acts as an intermediary between both parties, ultimately acting on a fiduciary basis to manage the trust’s assets and ensure that the beneficiaries receive them in accordance with the terms of the trust agreement.
One of the biggest advantages of having a trust is the level of flexibility provided. You can use a trust for a variety of purposes, such as running a charitable trust, setting up a life insurance trust or establishing an offshore trust for asset protection.
For the purposes of this article, however, we will be looking at family trusts, a specific type of trust used in estate planning whereby all the beneficiaries are kin of the trustee.
Benefits of a Family Trust
There are many benefits to setting up a family trust as part of your estate planning.
Using this type of structure allows you to set out, in specific detail, precisely how your estate is to be managed and how, exactly, your assets are to be shared with your family members.
You can also include specific time periods or certain clauses, for example, you may wish that your children inherit a specific amount on reaching a certain age and perhaps a secondary sum on graduation from college.
This specificity is one of the main benefits of a family trust, particularly when compared with wills. By setting up a family trust, you eliminate the possibility of a lengthy probate process after you pass.
Rather than having to face the possibility of probate court, which is not only expensive but also emotionally and psychologically damaging to all concerned, everything can be set out in advance within your family trust document. So having a family trust guarantees peace of mind for you and for all your family members once you’re gone.
Plus, once the trust is established, your assets are ring-fenced within it, whereby only the beneficiaries (i.e. your family) have access to it, as per the exact conditions you have set.
This means that assets therein are potentially shielded against creditors, predatory litigation and other threats, provided, of course, that the trust is set up correctly.
One of the main reasons why we always recommend setting up trusts in offshore jurisdictions is due to the fact that they have more robust asset protection in general, and many specifically do not recognise foreign rulings, so even US rulings have no dominion.
This means, for example, if you have one family member that you are concerned about who could potentially lose assets to a messy divorce, a domestic court may rule in favour of their ex-spouse, which could prove costly. But with an offshore trust in a jurisdiction which does not recognise foreign rulings, this point is moot. The ex-spouse would have to fight another costly legal battle in that jurisdiction with little to no chance of success. This is just one such potential threat which can be neutralised with an offshore family trust.
Finally, using a family trust also helps to minimize taxes. With proper structuring, you are able to avoid estate taxes, in part or in full.
Of course, unlike the US, there are lots of countries with no estate taxes out there. These include offshore countries with a whole range of tax benefits, indeed, many of them have zero tax whatsoever.
However, understanding the tax implications of establishing a trust in these jurisdictions can be a complicated process at best, which is why it’s always best to get advice from the experts.
At Nomad Capitalist, we will help you to enjoy fully compliant legal tax reduction across the board for you, your family and your business while also creating an airtight estate planning and asset protection solution as part of our all-encompassing Action Plan product.
Types Of Family Trusts
The five most commonly used types of family trusts are as follows:
- Living Trust
- Marital Trust
- Irrevocable Family Trust
- Revocable Family Trust
- Spendthrift Family Trust
Living Trust: This is a type of trust which you establish and maintain while you are still alive. By setting up a living trust for your family, you can use the trust structure to bequeath assets to your family members while you are still alive.
Marital Trust: This is a specific type of trust specifically created for the passing of assets on to a spouse. Later, once you and your spouse are dead, the trust can then pay out to beneficiaries, so this can also be used as a form of family trust.
Irrevocable Family Trust: This is one of the most common forms of trust structures for both estate planning and asset protection because, once the trust has been established, it cannot readily be altered or amended. In other words, if you, as the settlor, create an irrevocable trust, the terms of the trust agreement are essentially set in stone.
Revocable Family Trust: As you may have already surmised, a revocable trust is the opposite of an irrevocable trust, as outlined above. A revocable trust can be easily amended after creation or even dissolved if you so choose.
Spendthrift Family Trust: If you have concerns about how specific family members might spend their money, then a spendthrift trust is the solution. This type of trust puts careful constraints on how family members spend their money while also ensuring specific assets remain in trust for future generations.
After all, careful preparation and ironclad asset protection mean nothing if you also have concerns about one or more family profligate members.
This may be the case, particularly with younger family members you fear may squander their inheritance without proper controls in place. It’s also worth considering if you own assets which have been in the family for generations and you want to make certain they continue to do so for generations to come.
All of these factors can be taken into consideration when creating a trust document and you should be thinking about them all well before speaking with your financial advisor or an estate planning attorney.
However, we also can’t stress enough how important it is to look at all the options first, particularly when you realise how many advantages you can gain by establishing a family trust offshore.
We can advise on a range of top trust jurisdictions where you can take full advantage of lower taxes, tougher asset protection and far more creditor protection overall, to ensure your trust assets remain unassailable to everyone except those who you love most.
With our trusted partners on the ground, we can establish an offshore trust quickly and efficiently, with qualified trustees on hand to help manage assets on your behalf. For more information, contact us today.
Setting Up A Family Trust
The steps required to set up a family trust are not all that complicated in and of itself.
Yes, you also have to factor in hiring lawyers plus filing costs, but the actual documentation side of it is not as complicated as you might think. It just needs some planning on your side and some time to think out exactly what you wish to achieve in advance.
First of all, who are the beneficiaries? What assets do you wish to include in the trust? And so on.
Next, you need to draw out the trust document, this is the legal document that will be used to specify the precise legal arrangement that you wish to have between you as settlor and your beneficiaries.
You also need to appoint an independent trustee who will manage the trust and perform a fiduciary duty to the beneficiaries.
The next step, therefore, is to transfer assets into the actual trust, to be managed by the trustee. Before transferring assets, make sure to get proper advice beforehand from a financial advisor who specialises in this area.
If you are doing so in an offshore jurisdiction, you will invariably need to think about offshore bank accounts. But once again, you need to think carefully about the tax considerations involved, especially if you are a US citizen, so if you’re not sure, get in touch, and we can advise you.
Peace Of Mind For Generations To Come
Setting up your own family trust allows you to ensure that successive generations can continue to benefit from your wealth long after you’re gone.
For enhanced peace of mind, you can use an offshore trust in a jurisdiction which provides additional layers of security. This way, you can make sure that your family members – and only your family members – can enjoy the benefit of your wealth, safe from predatory litigation or other similar legal challenges.
Offshore trusts also negate concerns about unnecessary estate and gift taxes, provided the trust is structured correctly, and steps are taken to ensure it is properly compliant.
The benefits and savings involved are more than evident, but there are plenty of pitfalls if done incorrectly. This is exactly why it’s important to get the right advice right time around – after all, your family deserves nothing less than the very best.
So if you are looking to set up a family trust that ensures the maximum level of flexibility, protection and peace of mind while also affording you the maximum level of legal tax savings, become a Nomad Capitalist client.
Family Trust FAQ
Irrevocable trusts are a type of trust which, once established, cannot be altered in any way. They are the opposite of a revocable trust, which can be easily amended or disbanded.
Irrevocable family trusts are a popular structure for estate planning since they ensure that once the settlor has created the trust, no further changes can be made to it afterwards.
A spendthrift trust is a type of trust which puts specific restrictions on money or other assets in the trust that can be spent or otherwise dispersed.
A testamentary trust is a trust which is founded on behalf of the settlor after death, as per their will.
A generation-skipping trust is, as its name suggests, a type of trust which skips one generation while dispersing assets – i.e. from grandparent to grandchild.
Since establishing your own trust can be a complex legal process, it’s often good practice to hire an estate planning attorney, a legal professional who specializes in estate planning and inheritance law.
When most people think of a trust, they either think of a charitable trust or a trust fund that’s set up by wealthy people for their children. However, trusts have a wide range of applications.
In addition to non-profit organizations and estate planning, trusts can also be used for creditor protection and to help protect assets against predatory litigation.