Colorado Family Trust

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Corporate Structures & Strategies

A family trust allows a parent or grandparent to protect assets and funds for a child or grandchild. Along with this, a family trust is meant to minimize taxes and distribute the estates responsibly. The trust ensures that money belongs to the correct person at the right time. The person who creates a trust is known as the grantor. The purpose of a family trust is to benefit the family of the grantor. The family includes the people related by marriage, blood, or law (adoption).

Trust Terminology

Every trust has three participants i.e., the Grantor, Trustee, and Beneficiaries.

  • The grantor is the person who creates as well as funds the trusts. In family Trust, these are generally parents or grandparents.
  • A trustee is the institution or person overseeing the day-to-day functions of trust and ensures the proper functioning of the trust.
  • The beneficiary is the person who gets the benefit. This may be family members, charities, pets, etc.

Family Trust and Succession Planning

Family trusts are convenient and effective for succession planning as well as managing finances, assets, investments, and utilizing the returns that are earned for the benefit of beneficiaries. A family trust is independent of the founder and beneficiaries. It can be utilized to fulfill the basic needs of the family, such as health, education, marriage or travel. Family trust acts as a vehicle holding the assets for a particular purpose, safeguarding, multiplying, securing, and managing them for a specific purpose.

Importance of Family Trust

Family trust assists in succession planning, and the grantor has control over the trust and liberty to pass on the assets to the beneficiaries. The trustee may be a family member, beneficiary, a relative, or professional trustee that is appointed for trust management. Family Trust can be a useful tool for tax planning and safeguarding the interest of beneficiaries by specifying assets distribution, dealing with assets, money invested in the trust, and as a result, minimizing family disputes.

Consider these Legal aspects before setting up a Family Trust

Tax implication is an important legal aspect that is dependent on the structure adopted for tax creation. The point of tax incidence will alter depending upon the wishes and intention of the founder, whether to make a discretionary or specific trust. Tax may be levied on the founder, beneficiary, or trustee that too depends on the structure as well as the intention of the founder.

A trust is managed and governed by the trustees, as stated in the instrument of trust. This is a charter document, so it is important to set out everything, such as responsibilities, liabilities and powers of the trustees. It must mention the managing trustees, qualifications, the term of the trustees and disqualifications in certain situations, etc. The grantor may provide the type of trust that needs to be created considering the purpose.

Types of Family Trust

The classification is based on the type of document that creates trust and the amount of grantor’s control over the trust.

  • Inter Vivos Trust: Created while the founder is alive.
  • Testamentary Trust: Created in the grantor’s testament and last. It is an irrevocable trust.
  • Revocable: Allows the founder to cancel or revoke the trust. The assets are transferred to the grantor if the trust is revoked. Once the grantor dies, it becomes irrevocable. A revocable trust is useful to avoid probate.
  • Irrevocable: Here, the grantor is precluded from getting the assets back unless beneficiaries and the trustee agree. This trust type allows gaining additional advantages such as protecting assets from creditors, avoiding tax, and allowing certain public benefits such as Medicaid.

Setting up a Family Trust

Setting up a family trust is a two-step process:

Trust Agreement Creation and Execution

This document lists the beneficiaries, trustees, and sets the instructions for managing the assets.

Assets Transfer

Deeds and other documents must be executed to transfer the assets from the founder to the trustee. The document is ineffective unless the asset is transferred to the trust.

Spendthrift Provision

This is an effective tool for the protection of assets from creditors. The provision stipulates that distribution is contingent and discretionary upon the trustee’s approval. Indirect distributions can be crafted to avoid affecting the grantor and beneficiary’s lifestyle.

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