How Family Trusts Work

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A family trust, also called a trust fund, is a useful estate-planning tool. A family trust can be just as beneficial to middle-class America as it is to wealthy people and families. In addition to using a family trust to avoid probate, some people use it to provide for the grantor or other family members who are unable to make financial decisions on their own. A family trust can be an alternative to or work in conjunction with a last will and testament.

How a Trust Functions

Although state laws define the framework for creating a family trust, many states follow the guidelines described in the federal Uniform Probate Code, so they generally work in much the same way.

Read More: Joint Trust Vs. Single Trust

The Parties

The person who creates a family trust is the grantor. The person or entity appointed to manage the trust is the trustee. With a family trust, the grantor is often the primary trustee, and a second person -- a secondary trustee -- is named to manage the trust if the grantor becomes incapacitated. The heirs are the trust’s beneficiaries.

A distinguishing feature of a family trust is that it only allows you to name family members as beneficiaries. While this always includes immediate and extended family members, in some states the definition includes charitable organizations and trusts that your beneficiaries either own or have membership in.

Types of Family Trusts

A family trust can be either a revocable living trust or an irrevocable living trust and take on a number of forms.

A revocable living trust is in effect during your lifetime, but you can modify or change it at any time. For example, you can add or remove beneficiaries or transfer assets in and out of the trust as circumstances or your wishes change.

An irrevocable living trust is a also in effect during your lifetime, but you cannot modify or change any clauses or terms after it’s created.

According to Lee Phillips, J.D., a Utah-based estate and business attorney, most people set up a family trust as a revocable living trust. The main reason is that it allows the grantor to retain ownership and control over trust assets during his lifetime. Upon the grantor’s death, the trust automatically becomes irrevocable.

Assets and Property

The trust document lists the property in the trust and names who gets the property when the grantor dies. For household items and untitled property, this requires including a list with the trust document. However, titled property such as real estate and bank and investment accounts must be retitled in the name of the trust.

Trust Objectives

A family trust can accomplish a number of objectives during and after your lifetime. For example, a family trust allows you instead of a court judge to name a conservator to manage and make decisions for you if you no longer can.

You can also set up different versions, such as a credit-shelter trust, a generation-skipping trust or a qualified personal residence trust to accomplish specific objectives:

  • The credit-shelter trust is used to protect trust assets from estate taxes. The grantor bequeaths assets for beneficiaries up to the estate-tax exemption and passes the remainder tax free to the surviving spouse.
  • A generation-skipping trust is used to transfer cash or other assets up to the estate-tax exemption to your grandchildren or great-grandchildren. This form is useful if you want to set up a college fund, because it allows you to specify how your beneficiaries spend income from the trust.
  • A qualified personal residence trust is a way to pass your home to your heirs but still live in and control it for a specified number of years or until you die.


  • A family trust can be complicated to set up and manage. Working with a qualified legal professional can ensure it is set up correctly and fulfills your estate planning objectives.