A family trust can be an exceptional strategy for achieving various estate planning goals. A Santa Fe family trust lawyer can assist you with reviewing all of your options for setting up a family trust and selecting the ideal structure for your unique situation.
The benefits of a family trust can include probate avoidance, incapacity planning, and long-term financial security for generations to come. Certain family trusts can also offer benefits for estate tax planning, asset protection, and more.
The benefits you can obtain all depend on the structure of your trust, so refer to an attorney for guidance.
New Mexico Financial Law is ready to help you secure your legacy for your children, as well as generations to follow. Get started with trust drafting and building your unique estate plan when you call (505) 503-1637 to schedule a no-obligation consultation with a Santa Fe family trust attorney.
Trusts are created using a special type of deed, referred to as the trust instrument. In the instrument, the grantor describes the contours of the trust, including its trustee(s) and beneficiaries.
The family trust becomes active when the grantor transfers assets to it. Trust funding can happen immediately, which is usually the case with a living trust. Alternatively, the grantor could delay funding the trust until a later date. They may even wait until after they have passed. By including a testamentary trust in their will, the grantor can have their executor form the trust during probate.
While creating a family trust may sound simple, the reality is that it can only deliver the expected benefits through a carefully written trust instrument. Errors, omissions, or a lack of forethought could lead to operational issues. For example, careless wording could result in future generations losing their beneficiary status. An asset protection family trust may also fail to provide the expected security if it is not properly formed.
Because of these risks, the New Mexico Bar Association cautions that a trust shouldn’t be set up without the help of a Santa Fe trust attorney. Your lawyer can help you fully understand the decisions available, the implications of each choice, and how the trust operates. They can also advise you on specific aspects, such as when a distribution might be required or whether your trustee can also be a beneficiary.
A family trust is a general name for any trust that manages family assets and benefits relatives of the person who forms it.
To back up, a trust is a legal entity that is allowed to own property, similar in some ways to a corporation or limited liability company. All trusts have three main parties:
Once the trust is formed, the trustee oversees it. They are responsible for watching over the trust’s assets, protecting its growth and value, and ensuring that beneficiaries receive their distributions as promised.
The ability for a trustee to manage family assets gives family trusts one of their biggest strengths: they can prevent the need for a conservatorship or power of attorney in many situations.
A grantor has many options available for structuring their family trust. The rules they set dictate how the trust operates, affecting its benefits — as well as the complexity involved in maintaining it. You can go over the choices available and receive recommendations tailored to your unique goals and financial outlook by meeting with an experienced family trust attorney in Santa Fe.
A revocable family trust can be dissolved or altered at any time by the grantor. In many situations, the grantor appoints themself or a trusted family member as the primary trustee. They can also appoint a successor trustee or co-trustee.
Successor trustees can step in to help with trust administration when the grantor cannot. For example, the grantor may be traveling abroad, or they could become mentally incapacitated. A co-trustee can access the trust at any time, although they may have a different level of authority compared to the primary trustee.
An irrevocable trust, by comparison, cannot be closed or altered by the grantor once it has been started. In many cases, the grantor loses all control over their assets. Fortunately, the trustee is bound by the rules of the trust (as well as a general fiduciary obligation) to act in the best interest of the trust’s beneficiaries.
Irrevocable trusts can offer specialized advantages over a revocable trust. These capabilities can make them an ideal option for families with specific goals. An asset protection trust, for example, can protect precious family assets from creditor claims against the grantor or beneficiaries.
Different trusts have different advantages. Revocable trusts offer a measure of simplicity and convenience, and there is next-to-no risk that assets could be inaccessible in an emergency. Irrevocable trusts might fit neatly into plans for reducing estate taxes or preserving assets for future generations. Refer to a Santa Fe family trust lawyer for guidance on the trust arrangements that could provide the best outcome for your family — and the future you want them to enjoy.
A family trust can last for decades, but the actual duration depends on state laws and the rules set by the grantor.
Every grantor must decide on an expiration term for the trust. It can expire when they die, which means that their beneficiaries receive a trust settlement, similar to how they would receive property from a will. They can also set the trust to expire before they die, which is the case for some special trusts, like a grantor-retained annuity trust (GRAT).
The grantor is allowed to keep the trust active after they die, but only in compliance with the rule against perpetuities in the state where the trust is formed. New Mexico follows the uniform statutory rule against perpetuities, with its version (NM Stat § 45-2-901) stating that an interest in a trust automatically terminates unless it vests (i.e., is transferred) either:
Other states have much longer windows. Wyoming and Alaska allow for trust terms of up to 1,000 years. South Dakota, New Hampshire, and other states have no rule against perpetuities, making them a solid candidate for forming a dynasty trust.
Another limit on the trust’s longevity is that it has to actively hold assets with real value. Once the trust fully distributes its assets, it typically dissolves.
The duration of your trust should depend on your goals. You can decide, for instance, whether you would like the trust to last three or more generations. Or, you may prefer to terminate it within a shorter time frame.
You can even set the trust to automatically terminate and distribute its remaining assets on the passing of a certain event, such as the sale of a business. Discuss your plans and goals with a Santa Fe family trust lawyer to understand what options might be best.
If a grantor retains control over a trust’s assets, then it qualifies as a “grantor trust.” Grantor trusts pass through all income and losses as if it was the grantor’s. Examples of qualifying income may include investment gains or money generated from assets like a rental property. The grantor reports this income on their yearly income tax return.
Non-grantor trusts remove control from the grantor. The trustee must register the trust as a new taxable entity and pay taxes at trust tax rates. These rates typically end up being higher than individual income taxes, and it’s easier for the trust to qualify for the top bracket with relatively low income. The trustee of a non-grantor trust is responsible for filing Form 1041 to report the trust’s annual profits, losses, and net income.
Beneficiaries can report their trust distributions as either a gift or income. If they declare the distribution as a gift, it is deducted from the grantor’s yearly gift tax exclusion or lifetime gift tax exemption amount. The gift tax exclusion allows for a transfer of up to $19,000 each year to each beneficiary. Any amount in excess of that is deducted from the grantor’s $14 million lifetime gift tax exemption amount.
If you are concerned about income taxes, estate taxes, or other tax matters, either during your lifetime or upon your death, consult with a Santa Fe estate planning lawyer to explore options to mitigate their impact.
Transfers of money or assets from a family trust are called “distributions.” A trust is only allowed to make distributions to a beneficiary.
The grantor names all beneficiaries when they draft the trust instrument. The beneficiary does not have to be alive at the time they create the trust. For example, they can be referred to as “the children of my issue” or a similar phrasing to apply to grandchildren and great-grandchildren.
Trusts can also be configured to include beneficiaries on a per stirpes basis, which automatically incorporates descendants of the grantor’s children for as long as the trust is active.
All trusts have to make at least one distribution, paying out the remaining balance to at least one beneficiary upon the expiration of its term. More often, though, a grantor sets up a trust to make multiple distributions. Some common arrangements for family trust distributions include:
You can include a combination of these distribution rules or come up with a variation based on them. The arrangements you choose should be customized to facilitate how you want to support your family. You must also consider whether you are willing to risk the trust’s financial solvency to force a guaranteed distribution. Talk to a Santa Fe family trust lawyer to get more guidance and decide upon the distribution rules that make the most sense.
Examples of common family trust structures include:
A family trust can ensure that the wealth you earn now can benefit many generations to come. It can also facilitate other estate planning goals. Whether those include simplifying estate administration, reducing taxes, or protecting your loved ones from creditor claims, there’s likely a family trust option out there for you. Get the help of an attorney from an experienced Santa Fe family trust law firm to start building your lasting legacy. Call (505) 503-1637 to schedule a no-obligation consultation with New Mexico Financial Law today.
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