What Is a Family Trust, and How Do You Set One Up?

Trusts are used to manage estate taxes, shelter assets from creditors, and pass on wealth to future generations. A family trust is a specific type of trust that families can use to create a financial legacy for years to come. Before you set one up, you’ll need to understand the different types of trusts available as well as review your assets to see whether you need one at all. It’s a lot to consider, but doing so can give you a clear picture of which estate planning strategies are best for you and your beneficiaries.

If you have questions about your family’s financial outlook, consider speaking with a financial advisor. Some advisors may even specialize in estate planning.

What Is a Family Trust?

At the core of a family trust, there are three parties: a grantor, a trustee and the beneficiaries. The grantor is the person who makes the trust and transfers their assets into it. The trustee is the person who manages the assets in the trust on behalf of the beneficiaries. The beneficiaries are the individuals who receive some type of financial benefit from the trust, similar to a beneficiary for a life insurance policy.

As you might expect, a family trust lists your family members as the beneficiaries. That means your children, grandchildren, siblings, aunts and uncles, cousins or any other family members can be a beneficiary. Family trusts can also include spouses.

Family trusts are a type of living trust, and they can be revocable or irrevocable depending on your wishes. For starters, a living trust is one that takes effect during your lifetime. A revocable trust can be altered or terminated at any time, while an irrevocable trust is permanent. With a revocable family trust, you can act as your own trustee, naming successor trustees to take over the reins if you become incapacitated or pass away. With an irrevocable trust, you must name someone else to act as the trustee.

For reference, the table below briefly compares the advantages of common types of trusts:

Overview of Different Types of Trusts

Trust Type	Main Benefits
Marital Trusts (“A” Trust)	An irrevocable trust established by one spouse for the benefit of the other. The surviving spouse gets assets in the trust along with any income. This allows surviving spouses to avoid paying taxes on assets during their lifetimes. But heirs must pay taxes on the remaining assets that they inherit.
Bypass Trust (“B” or Credit Shelter Trust)	Reduces or eliminates estate tax by preserving the deceased spouse’s estate tax exemption.
Charitable Trust	Established to divide assets between specific charities and beneficiaries or pass on remaining assets to a designated charity.
Generation-Skipping Trust	Established to pass assets to grandchildren while allowing children to potentially access income generated from those assets tax-free.
Life Insurance Trust	This is an irrevocable trust that holds a life insurance policy for a designated beneficiary. Both the value of the policy and the death benefit avoid estate taxes.
Special Needs Trust	Established to pay for medical care or day-to-day expenses of special needs dependents, which allows them to remain eligible for government benefits.
Spendthrift Trust	This trust structures and limits beneficiary access to assets to avoid misuse. Beneficiaries could access income or interest earned from assets but may be excluded from getting the principal amount.
Testamentary Trust	This trust becomes irrevocable upon the owner’s death, and is established through a last will and testament. Beneficiaries can access assets only at a predetermined time.
Totten Trust	This is a type of bank account that is payable on death to the beneficiary named in the account.

What Are Family Trusts Used For?

A couple with children feeling secure, having set up a family trust.

A family trust ensures that your assets are managed according to your wishes on behalf of your beneficiaries. So let’s say you have $5 million in assets and you want to divide it between your children. You can use a family trust to specify when they can access their share of your assets and under what terms. For instance, you may include a stipulation in the trust agreement that they can’t touch the money until they complete college or reach a predetermined age, such as 25 or 30.

You might also set up a family trust if you have a child or family member who requires special medical care. Placing assets in a special needs trust allows them to still be eligible for government-provided disability benefits, like Medicaid.

Family trusts can also be useful in estate planning if you want to avoid probate for your family. Probate is the legal process of distributing the assets in an estate, due to the decedent dying intestate (without a will) or having an estate larger than their respective state government’s limit. Anything that happens in probate is part of the public record and it can be a time-consuming and expensive process. So transferring assets to a family trust can make life much easier for your family in this way.

You can also use an irrevocable family trust to insulate assets from creditors. Most importantly, a family trust can help to minimize estate taxes once the trust grantor passes away. Otherwise, estate and gift taxes could take a significant bite out of your wealth.

How to Set Up a Family Trust

The first step in creating a family trust is typically talking with an estate planning attorney or financial advisor to make sure this type of trust is right for you. There are a variety of trust options you can use in estate planning. A professional can help you compare different trust options to find the best one.

If you choose to move forward with a family trust, then you’ll first want to decide on a trustee. Again, that could be yourself or you could name someone else. Next, you’d decide what family members will receive from the trust, and if they get anything at all.

From there, you’d create the trust agreement. While there are plenty of little to no cost options online, these may not be the best choice if you have substantial assets. So keep that in mind when weighing whether to create a trust yourself or work with an estate planning attorney.

Once the trust document is complete, the next step is funding it. This means transferring ownership of assets to the trust, with the trustee responsible for managing them. For example, placing a home in a family trust involves transferring the deed so the trust becomes the legal owner, with the trustee overseeing it. Assets commonly placed in a family trust include real estate, vehicles, collectibles, bank accounts and investment holdings.

Whether your trust documents need a notary and/or filed with your local register of deeds depends on the laws in your state. It’s helpful to check the legal requirements for a family trust where you live to make sure you’ve done it correctly. Otherwise, your heirs might run into issues later when it’s time to access trust assets.

Estate Planning Alternatives to Family Trusts

Setting up a family trust is only one way to transfer wealth and protect assets. In some cases, families may find that other estate planning tools are more practical or affordable.

One alternative is a payable-on-death or transfer-on-death arrangement. With these designations, you can attach a beneficiary directly to a bank account, brokerage account, or in some states even real estate. When the account holder dies, ownership moves to the named beneficiary without going through probate.

Joint ownership is another possibility. Property held jointly with rights of survivorship passes automatically to the surviving owner. This can work well for couples who share property, but it may not fit more complicated situations where you want to divide assets among several heirs.

Beneficiary designations can also serve as a simple planning tool. Retirement plans, life insurance contracts, and annuities let you name who will receive the funds after your death. Because these assets are distributed by contract, they are not tied to your will and do not go through probate.

For many people, a will is still the basic way to outline how assets should be distributed. While it usually requires probate, a will can provide clarity and direction, and it is often easier and less costly to prepare than a trust.

Some states also allow small estates to bypass full probate if the total value of assets falls below a set threshold. In these cases, heirs may only need to submit a short affidavit or other simplified paperwork to transfer property.

These tools may not provide the same level of tax planning, asset protection, or privacy as a family trust. Still, they can be effective for families with smaller estates or more straightforward financial needs. Comparing these approaches with the use of a family trust can help determine which path is most suitable.

Bottom Line

A family working with a financial advisor to set up a family trust.

A family trust is something you might consider using if you want to keep your wealth in the family. Remember, by creating a family trust for assets you want to pass on, you’re making your family’s experience following your death much simpler. A family trust, as well as a will, advanced directives for health care, and power of attorney, should all be part of your comprehensive estate plan.

Estate Planning Tips

Consider working with a financial advisor on your family’s financial and estate plans. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
If you’re considering a trust, remember to factor in the cost of creating one. Firstly, there are fees if you’re working with an estate planning attorney. You’ll also pay a fee to the trustee if you’re assigning someone other than yourself that task. And if you’re naming yourself as trustee, choose at least one person who could take over.