Create a Trust Fund

Although the idea of a trust fund is generally associated with estate planning for the very wealthy, middle class families can also benefit from the tax advantages and privacy of a trust fund. The idea that you have to be rich to utilize a trust fund is a fallacy. Trust funds allow people to distribute their property and assets to beneficiaries without having to involve the courts in the probate process and without having to pay some estate taxes. You can set up a trust fund with the assistance of a trust and estates attorney, or you can draw up the documents yourself.

Steps

Understanding the Basics of a Trust

1. Understand what a trust fund is. A trust fund is a legal entity that holds property and assets and distributes them to beneficiaries when certain conditions have been met. People choose to set up trust funds to avoid estate taxes and to avoid probate. All trusts have important parties. These are the grantor, the trustee, and the beneficiaries.
   • Probate is a time-consuming and expensive process that occurs after a person’s death. It includes verifying the validity of a will, inventorying and appraising property, paying debts and taxes, and distributing property.
   • A grantor is the person who creates the trust. The grantor establishes the nature of the trust, transfers initial assets to the newly established trust, and defines its rules.
   • The trustee is responsible for managing the trust and its assets. The trustee can be the grantor, a trusted family member or friend or a corporate trustee such as the trust division of a bank. If the grantor designates himself as the trustee, then he should also choose a successor trustee to serve as trustee in the case of his death or incapacitation. The trustee must follow the rules of the trust and act in accordance with state law. Grantors can also name a successor trustee(s) if the initial trustee(s) fail to serve for any reason.
   • The beneficiaries receive the property in the trust. The rules of the trust establish which property the beneficiaries receive, the circumstances that must be met, and the timing of the property distribution.
2. Learn the financial elements of a trust fund. A trust fund can hold tangible assets such as cash, stocks, real estate, and intangible assets such as patents and copyrights. The assets can grow while being held in the trust. The trustee is responsible for managing investments and growth of the trust fund. The rules established by the grantor dictate which beneficiaries receive the income, profits, or capital gains and principal of the trust.
   • The grantor of the fund has the power to establish rules and requirements in terms of how money will be distributed or invested.
   • The principal is the money or property that was initially given to the trust. It is also called the corpus.
   • Stocks and other investments earn interest and dividends. This is referred to as income.
   • Increases in value to the principal are the profits or capital gains.
3. Understand the difference between a trust and a will. The most significant difference between a trust and a will is that a trust allows the property to be distributed to the beneficiaries without having to go through probate. In addition, trusts are usually more private than wills. A trust, however, cannot name guardians for children. Also, a trust cannot designate how taxes and debt are to be handled. Therefore, those who set up trusts also write wills.

Structuring a Trust Fund

1. Establish the nature of the trust. Choose from a variety of trust structures to perform different functions. The kind of trust you set up depends on the type of property and assets you want it to hold and the circumstances surrounding the beneficiaries you designate. In addition, trusts can be living (which means coming into effect during your lifetime) or testamentary (coming into effect upon your death). Trusts can also be revocable, meaning you can change the terms of the trust, or irrevocable, which means the trust cannot be changed.
   • A living trust can distribute assets to beneficiaries after your death or use assets to provide for your long term care while you are still alive if necessary.
   • With a revocable trust, you retain some ownership of the assets in the trust, allowing you to make changes in the way the assets are handled if you deem it necessary. With an irrevocable trust, you transfer complete ownership of the assets to the trust. Revocable and irrevocable trusts also have different tax implications. Revocable trusts are subject to some estate taxes, whereas irrevocable trusts may be set up to avoid estate taxes.
   • A bypass trust is useful for married couples with assets in excess of $5 million. It allows them to avoid some estate taxes when passing inheritances to heirs. A bypass trust is also known as a credit shelter trust, a marital trust, or a family trust.
   • A special needs trust provides for a disabled person.
   • A spendthrift trust defines the terms under which the beneficiary can receive the property, such as at a specific age or as a series of payments over a number of years. It may also limit the types of expenses on which the money can be spent, such as college tuition.
   • A charitable remainder trust donates assets to a charity upon your death.
2. List the beneficiaries. Choosing beneficiaries requires careful consideration of the amount of property to be distributed and the person’s ability to manage the money responsibly. Trusts can be set up to provide for children so they can enjoy the same lifestyle they had while you were alive. It can also protect your assets from their creditors. You can distribute property equally to all beneficiaries or leave unequal amounts to each.
3. Appoint a trustee. The trustee’s job is to manage the trust and all of its assets. The trustee must abide by all of the rules of the trust and follow any applicable state laws. You can be the trustee of your own trust, or you can appoint your adult children, other relatives, a trustworthy friend or a corporate trustee such as a bank.
   • If you appoint yourself as the trustee, you should also name a successor to take over as trustee upon your death or if you become incapacitated.
   • If you choose an individual to be your trustee or successor trustee, choose someone whom you trust to manage the assets responsibly and to respect your wishes. You can also nominate joint or successor trustees.
   • When choosing a trustee, consider the value of the assets and the complexity of the trust. Choose someone who has the capabilities and the time to manage the responsibilities.
   • If you choose a bank to be your trustee, you may also appoint an individual co-trustee.
   • The advantages of having a bank as a trustee include professional record keeping and tax preparation, objectivity, no conflicts of interests and protection against misappropriation of funds.
   • Disadvantages of using a bank as a trustee include the lack of a relationship with the beneficiaries, meaning they may not understand the dynamics and relationships within the family. Bank investments are also generally conservative, which may have a negative impact on the trust's potential to earn income.
   • Banks do charge fees for acting as a trustee, but an individual may also expect to be paid a fee for serving as a trustee.
4. Notify beneficiaries of the terms of the trust and who the trustee is. Generally, the trustee notifies the beneficiaries that he is in charge of the trust. He also explains when they can expect to receive the property and assets from the trust and under what conditions.
   • Some states require that the trustee use specific language to do this. Others allow a trustee to use his own words.
   • Most states impose a time limit within which trustees must make contact with beneficiaries upon the grantor's death.
5. List the assets used to fund the trust. Assets used to fund a trust include income-bearing or cash assets. Other funding sources include stocks, bonds, and real estate, as well as intangible property and life insurance policies. Funding the trust is the process of transferring ownership of the assets from you to the trust. The titles of your assets are physically changed from your name to the name of the trust. For stocks, bonds and other assets with listed beneficiaries, the beneficiary becomes the trust.
   • Note that transfers from living persons will be subject to gift taxes.

Opening the Trust Fund

1. Create a trust document. The trust document contains all of the information about your trust. It explains what kind of trust you want to set up, names the trustee and beneficiaries and transfers assets to the trust fund. You can have an estate attorney draw up the trust document or you can do it on your own. After you write the document, it must be signed in front of a notary.
2. File the document with the state if you are required to do so. Some states require you to file trust documents with the state so there is a legal record of it. An attorney can advise you about whether or not this is necessary and how to do it.
   • If you decide to use an attorney, find a trust and estates attorney who regularly handles matters that match your concerns and situation. For example, if you are setting up a trust for a disabled child, find an attorney who frequently deals with that area. If you don’t already know an attorney, you can search for one on sites such as FindLaw or Lawyers.com. Look for a trust and estates attorney who is a member of the American College of Trust and Estate Counsel.
   • You can create a trust document on your own without an attorney. Find high-quality self-help materials to assist you. Nolo, a publisher of legal self-help books and software, publishes an Online Living Trust application that can guide you through the process. You can also visit their Estate Planning Library to find books that can help you write the document. Do be cautious, however, as trust laws and taxation of trust assets are complicated. Establishing a trust without legal advice is possible but not recommended.
3. Open the trust fund bank account. Take your signed agreement to a bank or financial institution to open your trust fund bank account. Open the account in the name of the trust. You will need the names and addresses of the trustees. Also, provide the bank with the names and contact information of anyone who will be authorized to access the trust fund account.
4. File taxes for the trust. The trust is considered a separate legal entity, and a separate tax return must be filed. The trust will receive a deduction for any income distributed to beneficiaries, but the beneficiaries are responsible for paying the taxes on that income. You will need to complete Schedule B of Form 1041 (https://www.irs.gov/pub/irs-pdf/i1041.pdf) for the trust, and the beneficiary must complete Schedule K-1.

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