Living trust vs. family trust: The best choice for your child’s future

Every parent wants the best for their kids, and for most, that includes planning for their financial future. One of the best ways to protect your assets and ensure they go to your kids is through a trust. But there are several types of trusts, so it's critical to understand the difference to determine which option is right for you.

Next, we compare the key benefits, drawbacks, and practical applications of living trusts and family trusts. We also explain how trusts can be helpful for an estate planning checklist, financial protection and tax considerations, and how tools like Greenlight can help parents manage their family's financial future.

What is a living trust?

A living trust is a legal tool for managing the distribution of assets to beneficiaries and executing your estate plan. After setting it up with the help of a lawyer and financial advisor, the person who moves their assets into the trust, called the grantor, is no longer the legal owner of those assets. Instead, they provide guidance for how a trust should be managed by an appointed trustee.

Living trusts can either be revocable, meaning you can change their rules and governance during your life, or irrevocable, meaning they cannot be changed after they're established. In either case, the trust is the legal owner of assets, which can reduce your taxable income, protect assets from creditors or tax assessments, and make it easier to distribute assets to your chosen beneficiaries after you pass away without having to go through the expensive, potentially contentious process of probate court.

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With a living trust, the grantor often manages and distributes assets to beneficiaries during their lifetime. The trust's beneficiaries stand to inherit the remaining trust assets upon your passing.

A living trust allows you to leave your estate to anyone, including family, friends, charities, foundations, or pets.

Benefits of a living trust for your child's financial future

A living trust has a few key benefits for beneficiaries:

• Creates clear legal instructions on how to distribute and manage your assets and can help execute a living will, reducing the likelihood of probate or family squabbles

• Keeps your family's assets and business private since probate is public

• Allows you to begin distributing assets to heirs during your lifetime

• Allows for a successor trustee to manage your assets should you become incapacitated

• Can potentially reduce the size of your taxable estate

Drawbacks of a living trust

Despite the benefits, living trusts are not without tradeoffs. It's essential to understand the drawbacks to ensure a living trust is the right choice for your situation:

• Can be significantly more expensive to set up than a will and much more complex to administer, requiring both an estate planning attorney and a financial advisor

• Revocable living trusts, through which you retain control, do not offer the same tax benefits or asset protection as irrevocable trusts, creating a tradeoff between flexibility and asset protection depending on whether you have a revocable trust or an irrevocable trust

• Require consistent oversight to administer benefits

What is a family trust?

A family trust benefits family members exclusively. These trusts are usually irrevocable and geared to protecting and preserving assets for future generations. Family members are the primary beneficiaries; a paid third-party trustee typically manages the trust. While these trusts offer greater tax benefits and protection from creditors, they often require a grantor to surrender control of the assets.

How family trusts protect kids' financial future

Family trust accounts are more common tools to provide for a family long-term because of a few key benefits:

• Provide clear guidelines for how you want to distribute assets, eliminating the need for the probate process

• Keep your family's assets and business private

• Provide greater asset protection from creditors

• Can reduce your taxable estate

• Can increase your eligibility for government programs like Medicaid by reducing the value of assets in your name, allowing your family to save money on end-of-life care and medical costs

Drawbacks of a family trust

While there are several key advantages, family trusts do have a few drawbacks:

• Can be very expensive to set up and administer, especially since they require an independent trustee to manage

• You must surrender control of assets, so you need to be positive about trust terms before you set it up

Key differences between a living trust and a family trust

There are a few key differences to note between living trusts and family trusts:

• Family trusts focus on family members, while living trusts may have outside beneficiaries like charities or friends

• Family trusts prioritize long-term asset protection and inheritance, while living trusts prioritize the distribution of assets during the grantor's lifetime

• Family trustees may require an independent trustee, while living trusts typically offer the grantor more control

Which trust is best for your family's needs?

You may think a family trust is always the better option since the word is in the name. However, that's not always the case.

Family trusts tend to be better for:

• Families with significant non-cash asset holdings, like stock or property

• Families in the public eye and/or have considerable wealth to distribute across generations

• Families with debts that could expose assets to seizure

• Families with a substantial estate that may be taxed upon inheritance

• Large families with complex estate plans and many beneficiaries

Living trusts tend to be better for:

• Individuals who want to oversee the distribution of their assets during their lifetime

• Individuals who want to distribute their wealth to charities, friends, or other non-family members

Older individuals with young kids who want to distribute wealth to their minor children during their lifetime might consider a testamentary trust.

Understanding the costs and tax implications

For many people, the primary benefit of creating a trust is to save money and protect assets in the long term. However, it costs money to set up and administer a trust. Administrative costs could outweigh the tax benefits. Before you set up a trust, always work with a reputable, qualified estate-planning attorney and financial advisor to help you understand the benefits for your specific situation.

Build your family's financial future with Greenlight

You can use trusts to help manage and distribute assets during your lifetime and according to your wishes after death. But there are many additional ways to support your family's financial future now. Set everyone up for success with all-in-one tools like Greenlight, the #1 family finance and safety app.

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