Wealthy families have long used family trusts to protect wealth for future generations. The sometimes “infamous trust fund” has been a great asset distribution instrument for passing down wealth while ensuring tax benefits.
What is a family trust?
A simple definition of a family trust is a legal entity through which individuals can control the distribution of their assets during their lives and after their deaths. They are often managed by a trustee—a person or company that manages the trust for the benefit of the family member or heirs.
However, this simplicity is easily lost when dealing with actual trust law and choosing the best trust structure for the family.
Common misperceptions
While trusts can provide tax advantages, they do not completely eliminate taxes. Income generated by a family trust may still be subject to taxation in some jurisdictions. Additionally, although trusts can protect assets from certain creditors and legal claims, they are not a foolproof form of protection. Courts can actively challenge trust structures, especially when individuals set them up with the intent to defraud creditors.
Furthermore, a family trust requires ongoing management and is not a “set-and-forget” solution. This is because it must adapt to changes within the family and evolving laws. To ensure effectiveness and compliance, family trusts require regular monitoring to meet legal and tax obligations and manage investments.
