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Why Setting Up a Family Trust Matters

Why Setting Up a Family Trust Matters EPPL Blog

One way to ensure that your loved ones receive the benefits that you have earmarked for them after your death, is to establish a Family Trust when you are alive. A Family Trust is an estate planning tool that can be set up to financially protect and benefit your family. As with other trusts, a Family Trust will typically help your family to avoid probate and protect your assets.

By definition, a Family Trust is made up of a tripartite relationship between the Testator (you, the person creating the Trust), the Trustee (the person or people you name to manage and administer the Trust) and the beneficiaries (the person or people who will financially benefit from your estate when you die).

The Trust Agreement for a Family Trust simply lists all the assets and names all beneficiaries associated with the Trust. Specifically, the beneficiaries of a Family Trust will all be family members of the Testator. This contrasts with other types of Trusts in which a person can list friends, family members or organizations as beneficiaries.

The Trust Agreement will also name a Trustee or Trustees and include instructions that detail how assets the Trust holds should be managed. The Testator can be as specific or general as he or she likes. As examples, stipulations can be made as to when and how beneficiaries should get money in the future — after graduating from university, upon marriage, or upon the birth of your beneficiary’s first baby.

Transferring your assets into your new Family Trust simply means that you have to formally retitle assets to make them owned by the Trust. This is usually a fairly simple process and only requires you and your estate planner to reach out to each financial institution where you have accounts, policies and assets including property assets.  Note that Family Trusts are not publicly registered and the assets in them can thus be kept confidential.

Pros and cons of setting up a Family Trust

Among the advantages of setting up a Family Trust is that it allows a person to buy a house for a child to live in without ownership potentially being forfeited after his death. This is because ownership remains with the Family Trust.

A Family Trust also gives protection against relationship property claims. For example, if assets are transferred into a Family Trust prior to entering into a relationship, the assets in the Trust are less likely to be subject to a relationship property claim at the end of the relationship.

Furthermore, assets held in a Family Trust are usually protected from creditors of the beneficiaries.  A common situation is that your beneficiaries may have some personal liabilities and you wish to protect the family home from such liabilities in the event of your death should your beneficiaries be unable to meet the financial obligations. A Family Trust typically protects those assets from personal liabilities.

On the “cons” side of the spectrum, there are a couple of points that should be considered. While this may worry some people more than others, transferring assets to a Family Trust means that you have lost ownership of your assets – the Trustees control the assets. Although you can retain some control by holding the power to appoint or remove Trustees, or even by being a Trustee yourself, it is important to remember that assets you transfer to the Trust are no longer your own.

Establishing a Family Trust is also costly. The more complex a Trust is, the more likely it is going to cost. You will also have to allocate time and money to meeting your Family Trust’s regular accounting and administrative requirements. Finally, there is a risk of possible changes to legislation of trust law that may remove or affect some of your original objectives for setting up the Family Trust.

In the next blog post, we show why a staggered payout is better than a lump sum inheritance.

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