Duhaime's Law Dictionary


Family Trust Definition:

A trust device generally restricted to beneficiaries of a same family.

Related Terms: Trust, Estate Freeze

A form of inter vivos trust, a trust instrument in which a settlor (aka donor), often the wealthy elder family member, transfers property to a trust, to be managed by a trustee, for the benefit of the children and descendants of the settlor - the beneficiaries of the family trust, usuallly descendants of the settlor.

The family trust is often created to avoid higher taxation brackets and to protect the investments from the discretion of  arbitrary spending on the part of a generation; handing out the wealth in stages only, to maximize tax avoidance and to avoid the loss of family monies in divorce settlements.

The family trust also has a not entirely undeserved reputation as the legal instrument of choice of the wealthy of ensuring that their next of kin retain the family wealth. A 2010 American law journal article written by Associate Professor, University of Tennessee College of Law Iris Goodwin was entitled: "How the Rich Stay Rich: Using a Family Trust
Company to Secure a Family Fortune
".

In a 1933 article still relevant (the law of trusts is extremely stable), Illinois lawyer Frank Breckinridge wrote a succinct summary of the features of the family trust:

"... the main purpose of the usual creator of a family trust is to secure financial safety for his dependents, and to erect a structure which can perpetuate a present fortune through the uncertainties of the future....

"The chief object of a family trust is to separate the various duties and responsibilities and to place them in the hands of those persons best able to exercise them. These rights and duties relate to the various elements involved in a trust, which are: (a) equitable or beneficial ownership; (b) custody of the securities; (c) title or legal ownership; and (d) investment management and supervision....

"The legal ownership may be kept in the members of the family. For example, a group of five trustees may be created consisting of the settlor (father), the wife, the eldest son, the eldest daughter and the settlor's brother. Some of these may be beneficiaries. Besides holding the legal title these trustees should have but three duties specifically set forth in the trust document: (a) to select a successor trustee upon the death of any one of their number; (b) to appoint one of their number as a managing trustee for a given period of time; and (c) to review the management of the trust quarterly or semi-annually.

"The managing trustee, acting in the name of all the trustees, appoints the investment manager, the custodian, the auditor, tax counsel and whatever other advisers or assistants may be necessary which selection, of course, includes the power to dismiss....

"The trust document sets up the trustees and creates and limits their powers....

"The provisions giving the powers to trustees should be broad and should aim at flexibility rather than detailed instruction. It is far better to give broad general powers than to try to write into the document prohibitions of all sorts to guard against any possible contingency."

Because of the potential that family trusts can be structured to evade taxes or, more legitimately, to avoid taxation, many jurisdictions impose conditions and limitations as to the valid creation of a family trust.

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