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How does a family trust work?

A family trust is a legal vehicle allowed in many different countries that allows you to transfer control over some of your assets to an independent party known as a trustee. The trustee then distributes your assets in compliance with the instructions you gave when you originally set up the trust. A family trust can keep your estate assets out of probate when you die, and your estate can avoid inheritance tax.


A family trust can be created in two different ways: by drafting and signing a trust deed or by including instructions for creating the trust in your will. Either way, you must name the trustee and the beneficiaries and include instructions for the trustee as to how to distribute the trust assets. If the trust is created while you are still alive, you can continue adding assets to it until you die.


A family trust is considered revocable in most jurisdictions unless the trust deed states otherwise. A family trust created by a will is irrevocable, since you cannot revoke it if you are dead. If the trust is revocable, you can revoke it at any time by written notification to the trustee and the beneficiaries. If you want to create an irrevocable family trust using a trust deed, state that the trust is irrevocable in the deed, and transfer all assets to the trust -- establish a "John Doe Trust Fund" bank account, for example, and transfer title to real estate and automobiles to the name of the trust.


You have great flexibility in distributing trust assets. If it is to be a family trust, your beneficiaries must all be immediate relatives. You can distribute the trust property in lump sum when you die or distribute assets gradually over a period of years. You can keep property permanently in the trust, and assign the income it generates to your beneficiaries -- for example, you might donate money to the trust and assign the interest to your children. You might also grant your trustee the authority to invest trust assets and assign profits to your beneficiaries.

Funding the Trust

You must put property into the trust as soon as it is created, although most jurisdictions do not require a minimum amount. If your trust is established by the terms of your will, it is not created until you die and need not be funded until then. If you prefer, you may donate assets such as your personal residence to the trust, and lease them back by paying the trust a monthly fee (this will allow you to deed away your home but retain the right to live there until you die).