It’s natural for someone who has spent their time and effort to build significant wealth to want to protect their assets, and to ensure that they can continue to benefit both themselves and their loved ones in the long term. This is a real challenge, considering that we may not always be healthy enough to manage our own assets, and that the next generation might not turn out to be as financially capable as their parents.
While there are a lot of financial options available to help people manage and grow their wealth, family trusts are an unparalleled tool when it comes to keeping assets safe and productive in the long term, particularly over multiple generations.
What is a family trust?
In the most basic sense, a trust is established when a person, called the settlor, gives up ownership of some of their assets to a third party, called the trustee, who is required to manage and disburse those assets in the way that the settlor indicates in the trust deed. This means that the assets involved are no longer considered the property of the settlor. Similarly, the beneficiary of a trust, whether that is the settlor, their relative, or anyone else, does not own the trust, and can only receive funds from the trust at the discretion of the trustee according to the conditions stipulated by the deed.
While losing legal ownership of an asset might sound like a bad thing, it’s ultimately what makes trusts so useful. Because the beneficiaries of a trust don’t own it, there is very little they or their descendants can do to put those assets at risk.
Family trusts are particularly useful in specific situations
Family trusts are especially useful in protecting a family’s assets from creditors, spendthrift beneficiaries, and undesirable claims. This is helpful both for the settlor in their own lifetime, as well as for as their loved ones with respect to their inheritance.
Mitigate personal and professional financial risks
By placing their assets in a trust with themselves as a beneficiary, a settlor can place their property out of the reach of creditors. This can be very useful for someone looking to start a business, who doesn’t want to place all their prior success at risk to do so. Entrepreneurship is expensive, depending on the type of business, owners can be personally liable for their business’ debts. Since the assets held in the trust are not the property of the beneficiary, however, they can never be at risk.
Protect assets from relationship property claims
Unless previously agreed otherwise, spouses have a right to half of any relationship property in the event of a divorce. Assets held in a trust, though, are the property of the trustee, and exclusively provide value to the beneficiaries, not their spouses. This can keep assets protected, for example, by protecting children from predatory relationships.
Improve estate planning
A family trust is more useful than a traditional will in a number of ways. Not only does it help loved ones avoid the hassle of probate court, it can also interactively provide support to loved ones long after the settlor’s death. Funds can be issued from the trust at specific times and under specific conditions at the discretion of the trustee. For example, a beneficiary could receive funds for specific purposes, perhaps to start a business, to purchase a home, or to pay for medical costs and long-term care.
While a family trust might not be necessary in every situation, it’s a uniquely useful tool that shouldn’t be dismissed. Even though a settlor loses ownership of their assets to their trustee, that trust allows them to better ensure that their wealth isn’t squandered or snatched up by creditors, and that it’s ultimately put to the uses that they hoped for.