How to Set-Up a Family Trust? - Damalion - Independent consulting firm.

A family trust is a powerful tool for estate planning. It can be used by families to create a financial legacy for years to come. There are several advantages and benefits to creating a family trust, including ensuring your loved ones receive your wealth while effectively avoiding public disclosure of trust assets. 

At the core of every family trust involves three parties:

  • Grantor is responsible for creating the trust and transfers assets into it. 
  • Trustee is responsible for managing the trust on behalf of the beneficiaries.
  • Beneficiaries are individuals who will receive the financial benefit from the trust.

In a family trust structure, family members are listed as primary beneficiaries. So, that means children, grandchildren, siblings, and other relatives can be named as beneficiaries. Family trusts may also include spouses. 

The Different Types of Family Trust Funds

Here is a brief overview of the different types of family trust funds. 

Irrevocable Family Trust 

This type of trust cannot be cancelled nor easily changed after its creation. The Grantor automatically losses access to and control over assets once the family trust is funded. Irrevocable trusts are typically used for asset protection. 

Revocable Family Trust

A revocable trust may be changed or dissolved anytime the person who created and funded the trust decide to do so. This is a flexible type of trust for individuals who desire to make changes over time. 

Living Family Trust

A living trust is a legal document that can hold assets while you are still alive. It consists of comprehensive detail of your wishes for assets after your passing. 

Marital Trust

A marital trust, also known as A trust establishes that assets will automatically be passed on to a surviving spouse upon the death of the first spouse. In case both have passed away, the trust will then be passed to designated beneficiaries. 

Step-by-Step Process of Family Trust Formation 

Selecting a Trustee

One of the most crucial decisions when establishing a family trust is choosing the right trustee. A trustee may be one person, a group of people, or a company that is specifically set-up as a trustee. 

A trustee of a family does not have to be a professional, as the role can be assumed by a family member or another trusted individual such as close relative. The person/s chosen as trustee must be known for their sense of integrity with full understanding of trustee obligations. A trustee/s must act in good faith with the capability carry out all duties in the best interest of the beneficiaries of a family trust, and not themselves. 

If a company assumes the role of a trustee, it must be a fully-established company set up mainly to act as the trustee of a family trust. An existing company cannot be used as a trustee for a family trust. The director/s of a trustee company should be selected with the same criteria as above required from individual trustee. 

In many cases, the best trustee structure for a family trust will be a newly-incorporated proprietary company (Pty Ltd.). One of more individuals will be assigned as the director of the trustee company. 

Several roles that a trustee assumes are listed below:

  • A family trust must issue shares. 
  • Legal advice should be sought on who should issue the shares in a trustee company structure. Typically, shareholders can vote the directors in and out of the company, as the company legally holds and controls all assets within a family trust. 
  • Ideally, the shares in a company trustee must be held by a person who is “safe”, which refers to someone who is likely to go bankrupt. Furthermore, shares must be held by an individual who will not hand the control of a trustee company to creditors.

It is also in this step that an appointor should be delegated. An appointor, also called as a principal, is defined as an individual with the absolute power to appoint and/or remove trustees. 

An appointor of the trust is not involved in the daily administration of a family trusts. The control is solely given to the trustee/s or company trustee and its directors. The successor of an appointor must be determined at the early stage of family trust formation. This is to ensure ultimate control of the trust passes smoothly to the next generation. 

Drafting of the Family Trust Deed

After designating the role of trustee and appointor to suitable person/s or a trustee company, the next step is to obtain legal advice regarding trust deed creation. Ideally, a lawyer must be involved in ensuring smooth trust establishment structure with the advice of a certified accountant. 

Settle the Family Trust

A crucial aspect of setting up a family trust is settlement. The settlement of a family trust involves an independent person unrelated to the beneficiaries to transfer the settlement sum to the trustee. In this step, there should be a physical transfer of the settlement sum from the settlor to the trustee. The amount is meant to be the first deposit made into the bank account when a family trust bank account is established. 

The settlor must hand over the settlement sum to the trustee to be held on the terms enumerated in the trust for the best interest of the beneficiaries. A trustee must then issue a receipt to record that the transfer of settlement has occurred. This is the defining point in which a trust is established and funded. 

By executing the family trust deed and providing the settlement sum:

  • The settlor has automatically put the trustee in charge of the trust property.
  • The settlor has assigned to the trustee the individuals that fall under the category of beneficiary, as stated in the trust deed.
  • The trustee has agreed to act under the conditions of the trust deed. 

This is also where a settlor steps out of the picture. From a legal point of view, it is recommended that a settlor limits its role in a family trust to the initial establishment phase and payment of the settled sum. This is to avoid the misconception that the settlor’s declaration of trust is revocable. By rule, the settlor must not be related to the trustee and the beneficiaries of a family trust. 

At this time, the trustee/s of the family trust has already signed the trust deed to accept their appointment of being the trustee/s of the trust. By signing the trust deed, a trustee/s display their agreement of adhering to the rules contained within the trust deed. 

Trust Deed Stamping 

Whether a family trust deed needs to be stamped or pay stamp duty will be largely dependent on the country a family trust is established in. 

Setting Up the Bank Account

The bank account for a family trust must be under the name of the trustee/s. A bank will require a few crucial documents to establish a family trust bank account under the trustee or trustee company’s name. Once all documents are submitted, the settlement sum should be deposited into the bank account of the trust. 

Choosing the suitable bank account type for the family trust is a crucial step. A trustee must make sure that main bank account is fit for the purpose of asset protection, wealth preservation, and wealth management purposes. Other factors that trustee/s may consider when choosing a bank account type includes its primary use. Will it be used to execute investment purchases? It is going to be used for transactions for a business, and many more. 

Once the bank account has been successfully set up and active, a family trust is officially operations and can receive additional deposits or capital via borrowings, buy investments, and for business operation purposes. 

Establishing a family trust is a worthwhile activity. But before you set-up a family trust, it is important to understand its complexities to ensure that you optimize its many benefits. Damalion being a premier financial consulting firm will help you determine whether a family trust is in your best interests and choosing the ideal jurisdiction to set up one. We will guide you through the formation process, bank account opening assistance, and recommend the best measures to take to ensure a smooth and hassle-free formation process. Wherever you are located, our expansive global service network consists of professionals who will expertly guide you every step of the way. Reach out to a Damalion expert today to learn more. 

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.