7 Reasons to Gift Your Estate to a Family Trust

What is a gift in trust and how does it work? Although testamentary trusts are the most popular estate planning tool, it’s still valuable to consider an alternative if you do have a family trust.

Due to the tax advantages and protection against the children’s estranged spouses, testamentary discretionary trusts are the “new black” in drafting wills. They are highly recommended by many lawyers but giving the estate to a family trust is still an option.

A discretionary trust established in a will is known as a testamentary discretionary trust. It is distinct from the primary kind of discretionary trust, which is established by a trust deed while the beneficiaries are still living. Lawyers refer to the latter type as a “inter vivos trust,” but the general public refers to it as a “family trust.”

Family trusts are established to divide income and protect the family’s assets, especially those of the important member. Testamentary trusts are formed to safeguard the assets of the will’s beneficiaries and give minors—the offspring or grandchildren of the deceased—access to advantageous tax treatment on distributions made to or on their behalf.

Gifting the estate to your family trust is one option. In fact, a lot of people who already have a family trust enquire as to why they are unable to accomplish that. Advantages and drawbacks both exist.

A gift in trust is used to avoid paying tax on gifts that are larger than the annual federal gift tax exclusion amount. The succeeding generation of heirs is frequently given wealth through the usage of this kind of trust.

Advantages

• Because the family trust is already in place, creating the testamentary trust after your death presents far less administrative challenges.
• Although there may be a problem if you wish to remove a family trust beneficiary from your will, the trust already provides for the members of the family, so you don’t need to be precise about the potential beneficiaries in your will.
• The majority of people utilise a private corporation as their family trust’s trustee, with the spouses serving as its directors and the spouse with the lowest financial standing serving as its shareholder. If your spouse is still living when you pass away, it is simple to transfer trust management. In reality, the surviving spouse merely keeps control of the trust; there is no transfer of control.
• Since the trust currently holds a large portion of your wealth, there is no need to transfer it, guaranteeing there won’t be any capital gains tax or transfer duty concerns.
• The trust deed for the family trust already contains the extensive trust provisions, so there is no need to include them in your will.
• It cannot be maintained by any claimant that the family trust was established as a sham or as a straightforward tax avoidance technique if it is eventually taken over by your children after it has been in place for years prior to your dying.
• Additionally, the one family trust that provides for all of your children eliminates the claim made by the creditor of one child that it is only a fictitious vehicle run by that child.

Just a word of warning. There is a belief that giving the estate to the family trust prevents you from accessing the tax benefits for minors. The issue has not yet been resolved by a judge.

The general consensus is that even if the assets of the pre-existing trust are excluded from these benefits, the donation from your estate can be held in a distinct division of the family trust to receive the tax advantages that result from a testamentary trust.

Drawbacks

• The inheritance will be accessible to the family trust’s current creditors once it is placed there, which is the one and only, major drawback. If there is even a remote possibility that the family trust will incur significant liabilities, don’t do it.
• Your children will be fully aware of one another’s financial situations as long as they are in charge of managing the family trust. As opposed to a testamentary trust, where there will be no wealth sharing or management, one for each child.
• Finally, if the children choose to dissolve the family trust or a portion of it, it may be difficult to separate the trust’s assets depending on whether they plan to keep or sell any of them. When it comes to the assets of the family trust, individual children may have quite varied needs and wants due to their presumably disparate financial situations. Others may want to sell and cut and go, while some will want to hold and possibly develop. A client once said, “If they can’t agree, then wind the whole bloody thing up and they can just get whatever’s left”.

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