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8 Step Guide to Setting Up a Trust Fund

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Setting up a living trust allows you to pass your assets to your beneficiaries more quickly than a will would.

That’s because wills, unlike trust funds, usually must go through probate court, can be contested, and eventually become matters of public record. Both probate court and a court challenge to a will can add months and even years to settling an estate.

Here’s how to set up a trust:

  1. Decide which assets you want included in the trust.
  2. Determine how to place your assets in the trust.
  3. Choose between a revocable and irrevocable trust.
  4. Do you need an attorney to set up the trust?
  5. Create a Declaration of Trust.
  6. Select a trustee to be in charge of the trust.
  7. Name who your beneficiaries will be.
  8. Figure the costs to set up the type of trust you need.

In this article, I'll discuss each of these steps in turn. I'll also discuss how your response to each one affects the steps you'll take to set up your trust.

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1. Decide Which Assets You Want Included in the Trust

A trust isn't limited to cash assets or stocks and bonds. It also can include material assets.

You can include:

  • Your house.
  • Other real estate properties.
  • Your car.
  • A life insurance policy.
  • An IRA or retirement account.
  • Jewelry.
  • A coin, stamp, or art collection.
  • Other collectibles.
  • Antiques.

You can add anything you own to a trust fund.

You don’t need to include assets like life insurance, retirement accounts, or IRAs if your goal is to avoid probate. Your IRAs, for example, become payable to the beneficiary you name upon your death.

Assets such as these don't have to pass through probate.

Some states exempt estates worth less than a certain amount from having to go through probate court. Until the value of your estate exceeds that amount, you may not want to go to the expense of setting up a trust.

However, when you set up a trust, you transfer ownership of your assets to the trust. According to Investopedia, that transfer affords certain protections and benefits.

For instance, income from assets included in the trust no longer counts as your personal, taxable income. Instead, the trust pays those taxes, putting you and the trust in lower-income brackets.

Additionally, there’s no requirement for declaring them on financial aid forms for assistance like Medicaid or need-based college grants or scholarships for your children. That’s because the assets belong to the trust. 

Furthermore, they’re no longer subject to collection efforts directed at you because the assets belong to the trust. 

You’ll want to consider these issues when deciding what assets, if any, to put into a trust fund.

2. Determine How To Place Your Assets in the Trust

To place cash assets in a trust, you simply need to put them into a bank account that's opened in the name of the trust. Meanwhile, you must transfer your ownership to the trust to include stocks and bonds.

If you want to include real estate, you will need to transfer the deed to the trust fund. 

Likewise, you'll need to transfer the title of a car to the estate.

To transfer assets such as an insurance policy, an IRA, or a retirement account, you'll need to name the trust fund as the beneficiary. These assets become payable upon your death and transfer into the trust fund at that point.

Some assets, such as jewelry, antiques, art, and collectibles, don't have a legal ownership document. To transfer these assets, create a list that describes each item in a way that clearly identifies it.

3. Choose Between a Revocable and Irrevocable Trust

By comparing revocable and irrevocable trusts, you can determine whether or not you have a reason to end the trust. You may consider a revocable trust if you want flexibility in dissolving or reclaiming the trust.

An irrevocable trust, however, ensures a permanent transfer of your assets.

Revocable Trusts

Revocable trusts allow you to dissolve the trust and reclaim ownership of your assets at any time. You might want to do this to avoid paying administration fees for maintaining the trust if you feel the trust is no longer necessary.

For example, if the trust was for your children and they have matured, you may no longer feel you need to control how they use your assets. 

Suppose the trust was to reduce your tax liability, and you have retired. In that case, you are likely in a lower income tax bracket, so the trust served its purpose and is no longer needed.

Irrevocable Trusts

Irrevocable trusts permanently transfer your assets to the ownership of the trust. The reasons for setting up an irrevocable trust include: 

  • Providing for your family for generations into the future.
  • Providing for a family member who will never have the capacity to manage financial resources.

You cannot dissolve an irrevocable trust, so carefully consider whether or not you might have a reason to want to discontinue the trust when you set it up.

4. Do You Need an Attorney To Set Up the Trust?

You don’t need an attorney to set up a trust if your estate and reasons for creating it are straightforward. Still, to avoid mistakes, you may wish to consider getting a certified financial planner or using estate planning software from an online legal or financial service.

The service is not free, but it’s cheaper than paying the fees charged by an estate planning attorney.

Suppose you have decided that an irrevocable trust best suits your purposes. In that case, you will need the services of an estate planning attorney.

To provide all of the financial benefits available and operate correctly, irrevocable trusts must fulfill specific requirements. An estate planning attorney will ensure that your trust meets those requirements. 

5. Create a Declaration of Trust

When you set up your trust, you will need to create a legal document called a Declaration of Trust. This trust agreement information includes:

  • The name of the trust. The name can be as simple as “The Doe Family Trust.”
  • Your name as the trustor, the grantor, or the settlor. In other words, you are the person opening and funding the trust.
  • The list of the assets contained in the trust.
  • Instructions on how to manage the assets.
  • Your beneficiaries.
  • The trustee who will manage the fund. You can name yourself as the trustee.
  • A successor trustee who takes over when the original successor can no longer fulfill the duties of a trustee.

When deciding how to manage the assets, you can determine how the beneficiaries can use the assets. You also can specify the conditions that must be met for the assets to be released. 

For example, you could release the funds depending upon the beneficiary's age, upon the beneficiary applying to a college or another institution of higher education, or upon some other life event. 

You also could make the funds in the trust available for living expenses but limit the amount to be withdrawn each month.

You could turn the deed to a house over to your children with the provision that your spouse or someone else is allowed to continue to live there. That provision could remain until that person permanently moves to a senior living or similar facility or until their death. 

Once you establish the trust, review the trust agreement annually as recommended by Trust&Will.com. You may need to change the trustee, add or remove beneficiaries, update the list of assets in the fund, or change the terms regarding how assets are managed.

6. Select a Trustee To Be in Charge of the Trust

Choosing a family member to be the fund's trustee is tempting, but family members may not be your best choice.

When choosing a trustee and successor trustee, you should consider:

  • How well the trustee and successor trustee know you and your beneficiaries.
  • How well the trustee and successor trustee will understand and abide by your goals and purpose for setting up the trust.
  • The quality of the choices and decisions made by the trustee and the successor trustee in the past.
  • How far away the trustee and successor trustee live from you and your beneficiaries.
  • The age and health of the trustee.
  • The age and health of the trustee at the time when the trust fund would begin releasing assets to your beneficiaries.
  • The age and health of the successor trustee at the time that person is likely to take over duties as the trustee.

An accountant, lawyer, accounting or law firm, a bank, or a trust company are good candidates for helping you manage your trust. SmartAsset.com suggests appointing multiple trustees that include those who know you and your beneficiaries and those with legal and financial expertise.

7. Name Who Your Beneficiaries Will Be

Usually, your beneficiaries will be your spouse and your children. You also can have an estate planning attorney write a Declaration of Trust that includes your grandchildren and all of your descendants. 

You aren't limited to choosing family members or even people as beneficiaries, though. You can include causes, charities, and other organizations as beneficiaries.

For example, your beneficiaries could include:

  • The college you attended.
  • Your church.
  • A local theater or art group.
  • A community support group.
  • A national cause or charity. 

When you make your annual review of your Declaration of Trust, you can add or remove the beneficiaries as you choose.

8. Figure the Costs To Set Up the Type of Trust You Need

Irrevocable trust funds cost more to set up because you will need an estate planning attorney to ensure that it meets all the legal requirements to operate correctly. However, in exchange for those attorney fees, you and your assets receive a higher level of protection from taxes and creditors.

Trusts have ongoing costs in bank fees and other fees associated with maintaining and managing the trust. Choosing an attorney, an accountant, an accounting or law firm, a bank, or a trust company as the trustee adds fees to the ongoing costs of the trust. 

You can save money by using an online financial or legal service to set up a revocable trust. You'll need to make sure it satisfies the legal requirements of your state, however. It still can cost several hundred to over a thousand dollars.

Additional Resources for Setting Up a Trust

The key to avoiding confusion when setting up a trust fund, it helps to determine who your beneficiaries are and what you want to accomplish for them. You could even write out a goal statement. 

Then make all the decisions based on which choices best accomplish your goals. 

Amazon.com offers the fourth edition of The Complete Book of Wills, Estates, and Trusts by attorneys Alexander A. Bove, Jr. and Melissa Langa for more in-depth suggestions about estate planning options

It also explains the latest changes in estate law with entertaining examples and actual cases. With 100,000 copies in print, this book has become a classic guide to protecting your assets, whether you have a large estate or a smaller one.

Final Thoughts

Setting up a trust can be challenging, but you can manage it effectively by asking yourself important questions like who you want to include in your trust, who to manage your trust, and what you don’t want to include in the trust.

It’s important to look around for the best rates when hiring a reputable attorney. And it’s also important to determine whether a revocable or irrevocable trust is best for you.

A revocable trust may be best if you want more flexibility in dissolving or reclaiming the trust. 

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