Family Trust

There can be a no stronger instinct than a father or mother’s need to protect their children. In legal terms, a family trust is established to protect the general financial interest of a family group. This can especially apply where there is family business involved, possibly unincorporated. A parent or for that matter will establish a family trust to protect the assets of the family or to enjoy certain tax benefits.

In order to meet the criteria demanded by law and monitored by the IRS, the trust has to have been the subject of a family trust election; this election provides the trust with certain tax advantages, provided that the named beneficiaries are part of the named family group. The major advantage of establishing a family trust however is to protect the interests and assets of any member of the family group in the event of insolvency or bankruptcy.

A family trust also provides the framework to pass the assets owned by the family on to its named beneficiaries. Members of the family trust can take full advantage of any tax benefits through their "tax–free thresholds."

By establishing a family trust with clear defined assets and named beneficiaries the person or persons establishing the trust (known as the settler in legal terms) protects the estate from any challenges to the will of any members of the family group.

Once it has been established then a family trust will be managed by an appointed trustee. The role of the trustee is to hold and manage the assets of the family trust. In many cases, the trustees will be the parents or a company which is owned as a partnership by them. The parents can still run the trust, which may even include their business assets as well as their personal property assets. The point of having a family trust is to protect the family assets in the event of personal bankruptcy.

Additionally, members of a family trust are not required to pay income tax on income paid out by the trust during a fiscal year. On the other hand if the family trust earns profit which is not distributed during a financial year, then the trust will be liable to pay income tax on these specific profits. Obviously the role of the trustee is to ensure that any profits earned are divided within the financial year.

In many cases the trustee will suggest to the trustor and the beneficiaries of the family trust that it will be financially viable to increase the assets of the trust through acquisition. If the trust is especially profitable then it can grow indefinitely. It can even acquire debts and take on mortgages, as long as the borrowings of the family trust does not exceed a reasonable percentage of its value

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There may be instances where the trustee, acting on the wishes of the trustor and with the agreement of the trust beneficiaries, agree to sell of an asset of the trust and reimburse the trustor. The trustor in this case will be liable to pay capital gains tax on this income. Unless of course he decides to establish a separate family trust with the proceeds.

This can happen, for instance, if the trustor remarries and wishes to set up a similar fund for their new family, while partially maintaining and protecting the interests of the original family fund beneficiaries.

To sum up, establishing a family trust has many benefits in estate planning for the present and in the future. Any family who run their business as a partnership stand only to gain from the protection that establishing such a fund provides as well as enjoying the tax benefits.