A trust is a legal mechanism that is established to contain and own property. A family trust is established to contain a family's assets and is usually used to achieve an estate plan goal or to manage the assets of a family-run business. Generally, family trusts offer tax advantages because any dividends paid by the trust do not incur an income tax to the trust itself. A family trust is frequently a revocable trust, so the trust can be dissolved without any legal impediments.
Initial Considerations in Setting Up a Family Trust
There are various considerations when setting up a family trust. First, it is necessary to determine who the beneficiaries will be. Beneficiaries are persons who receive property from the trust. For example, the family trust could be limited to an immediate family or could be general and applicable to children and grandchildren of the person setting up the trust. Moreover, when setting up a family trust, it is necessary to select a trustee. The trustee is a person who manages the trust. The trustee has broad authority to manage the assets of the trust and to distribute property of the trust. Consequently, it is crucial to appoint a trustworthy person as trustee. In addition, one should decide whether the trust should be revocable or irrevocable.
Funding the Trust
When establishing a trust, one must determine how to fund the trust. The trust can be funded with cash, investments, artwork, stocks, bonds or other property. It is best to place appreciating assets into the trust. Furthermore, one should obtain a valuation of the assets to be placed into the trust at the pre-formation stage. Also, one must determine whether he or she wants the trust to distribute dividends, which is the interest on the assets placed in the trust. In such a case, the property in the trust will remain intact but any interest gained by the trust will be distributed to the beneficiaries. If this distribution occurs, a trust manager must be utilised. Trust managers are usually paid an annual fee or assigned a percentage of the dividends earned by the trust.
Executing the Trust
Once the foregoing considerations have been completed, it is necessary to actually establish the trust and execute all of the corresponding trust documents, including the trust instrument and any documents that require retitling, such as the deed to property. This matter should be performed by an attorney in conjunction with an accountant and financial professional. Once the trust documents are finished, they must be signed by the parties creating the trust as well as the trustee. In addition, a trust bank account should be established in the name of the trust to fund the trust. Finally, one should advise the beneficiaries that the trust exists.