What is a Family Trust?
A “family trust” is a trust that receives assets from a wealthier decedent’s revocable living trust that are typically exempt from the federal estate tax of 40%. The family trust may pass on the assets to family members, most commonly children, but only after the surviving spouse also passes. But unlike a survivor’s trust that is controlled by the surviving spouse, the family trust is controlled by someone other than the surviving spouse.
This allows assets in the trust to use the deceased spouse’s lifetime exclusion amount from estate tax while also protecting the appreciation of assets from estate tax when the surviving spouse passes. While the surviving spouse is alive, trust assets are available to provide for his or her needs but are managed by another party acting as trustee. A family trust may include provisions to provide for children while the surviving spouse is alive, but this is not a requirement.
As opposed to an outright distribution to individuals of a deceased spouse’s assets, a distribution to a family trust can also protect one’s assets from “creditors” and “predators” who may target the surviving spouse or next generation of the family. A “creditor” could be a person who sues another or is owed a debt. A “predator” may be a man or woman looking to marry someone with assets and intending to divorce them later for profit.
How does a family trust protect my assets from creditors and predators?
A person creating a family trust may put in place directives detailing who may benefit from the assets in the family trust and for what purposes. These directives may include limits on amounts expended. The restrictions in the trust instrument effectively allow the deceased person to direct the use of trust assets from the grave. These directives effectively instruct the Trustee, “My money is held in trust for my surviving spouse and children’s benefit and not for the benefit of other third parties like ex-spouses, bankruptcy creditors, lawsuit plaintiffs, etc." Generally, courts will also honor this instruction and prevent third-party creditors from attaching your family trust assets to repay your beneficiaries' personal debts. Finally, because your family trust will be managed by a party other than your surviving spouse but for your surviving spouse and children's benefit, any attempt by a predator to gain access to the family trust's assets must contend with the Trustee and not the surviving spouse.