You don’t need to be fabulously wealthy or have an excessively large estate to create a trust.
Erica Ellis, advanced planning attorney, was quoted in this article published on SuperMoney.com.
Trusts are typically only one element of a comprehensive estate plan and provide a way for people to manage their assets, as well as to control the distribution of those trust assets to beneficiaries once they pass away. For very simple trusts, you may be able to create one by yourself or with the help of an online service. However, most experts agree that for more complex trusts, it’s in your best interest to hire an estate planning attorney to help you.
You don’t need to be fabulously wealthy or have an excessively large estate to create a trust. People establish trusts to access a variety of benefits, such as gaining more control over how their assets are distributed, taking advantage of certain tax benefits, and avoiding probate, to name a few.
Keep reading to learn how to create a trust, as well as the reasons why you might want to set one up and the benefits you and your loved ones — that is, your designated beneficiaries — can reap from having a trust as part of your overall estate plan.
A trust is essentially a legal document created by a grantor — also known as the trust creator, trustor, or settlor — as an estate planning tool to both hold and manage their assets and arrange for the distribution of those trust assets after the grantor passes away. A trust is usually set up in addition to a traditional will.
There are essentially three parties, or entities, to a trust: the grantor, who creates the trust; the trustee, who manages the trust fund (and who may also be the grantor); and the beneficiary (or multiple beneficiaries). As Tracy A. Craig, a partner at Seder and Chandler LLP and chair of the firm’s Trusts and Estates Practice Group, explains, “A trust is an important and powerful estate planning tool that, when created, helps protect you and your family’s financial future. When creating a trust, you’re taking into account life’s uncertainties and providing security for your loved ones who will be most impacted by such circumstances. In addition, you are helping your assets pass to your loved ones in an efficient and organized manner.”
NOTE: The trust document dictates the rules of the trust and the trust fund is the legal entity that holds the assets in the trust, but you’ll often hear these words used interchangeably.
In a nutshell, you as the grantor will set up a trust document that outlines the rules of the trust agreement, such as the names of the trust’s beneficiaries and how you want the assets distributed. Then you need to transfer ownership of the assets into the trust and name a trustee, which can be you, a friend or family member, or an unbiased third party.
If you’re researching how to set up a trust, you probably have a pretty good idea of who you want the beneficiary (or beneficiaries) to be. Most commonly, the trust assets will pass down to immediate family members, such as the surviving spouse or children. However, many grantors set up trusts for other beneficiaries as well, such as charitable organizations or even a beloved pet.
As you start to prepare your trust documents, you’ll need to think carefully about when, why, and how you want your assets distributed after you pass away. This is especially true if you’re creating an irrevocable trust because they are very difficult, if not impossible, to modify once they’re set up.
For example, you may stipulate that a child gets access to certain assets when they reach 25 years of age, or you may want your spouse to gain access to the trust assets immediately upon your death. You can also make other conditions, such as a grandchild only having access to the trust funds if they use them for educational expenses.
A trust isn’t much use without assets, so you’ll need to decide which of your assets to add to the trust. Assets in a trust fund can include the following:
• Real estate, such as a house or other property
• Personal property
• Bank accounts
• Non-cash assets, such as stocks, bonds, mutual funds, or investment accounts
• Digital assets, such as cryptocurrency
• Life insurance policies
• Other assets, such as art or jewelry
To fund the trust, you’ll need to transfer ownership of the assets, effectively making the trust itself the new owner of each asset. Transferring ownership should be a fairly straightforward process that your estate planning attorney can help you with. You can also contact each financial institution to inquire about their exact process to transfer assets into a trust.
The trustee (which is sometimes also the grantor) is the person or financial institution that manages the trust once it has been created. It is generally a good idea to appoint a successor trustee who can take over the management of the trust’s legal arrangement if necessary. For example, if you as the grantor are acting as the trustee, you will need a successor trustee to assume responsibility for the trust fund when you pass away.
“Choosing the right trustee is of crucial importance to ensure that the trust instructions are followed closely for the benefit of your loved ones. If you’re not able to select a suitable person to serve as a trustee, an experienced estate planning attorney can assist with recommending a trust structure to address your concerns and even recommend reputable trust companies to serve as trustee,” says Erica Ellis, an advanced planning attorney at Hargrove Firm LLP. “Luckily, there are many reputable trust companies that are experienced in the difficulties that may arise with administration of a trust and can assist your loved ones through the process.”
Pro Tip: “Having a trust is like purchasing an insurance policy: you spend some time, money, and energy creating it, and if something bad happens (such as incapacity or death), then it’s much more efficient to deal with financial matters and ensure your wishes occur.” —Tracy A. Craig, partner and chair of Trusts and Estates Practice Group at Seder and Chandler LLP
Most people hire an estate planning attorney to help them create a trust, but it is possible to set up your own trust or even to use an online service that specializes in creating trusts for its customers. That said, if you want to make sure you establish it correctly, Ellis highly recommends hiring an experienced estate planning lawyer to guide you through the process.
“Setting up a trust is an involved legal process that requires careful consideration and proper documentation. While do-it-yourself resources are widely available, establishing a trust is best conducted with the guidance of an experienced attorney. A trust requires precise legal language and adherence to state laws to be valid and effective. When you pass away, your revocable living trust becomes irrevocable and the terms in place cannot be modified. Therefore, it is important to get the advice of an attorney to help you consider all of the legal implications when drafting your trust.”
Some advantages of trust funds include shielding some of the estate from going through the lengthy probate process and keeping certain assets off the public record, adds Ellis.
“Trusts can help your estate to avoid probate, which is a time-consuming and potentially costly legal process that occurs after a person’s passing. Trusts also offer greater privacy, as they are not subject to public record — unlike a will, which is filed with the court and becomes a matter of public record in many states.”
Other advantages of trusts include the following:
• Security for your family’s financial future
• Higher level of protection of your assets from creditors or other legal situations
• Faster and more seamless transfer of assets to beneficiaries
• Preventing heirs from misusing the trust income due to set distribution rules
• Certain tax advantages (depending on the type of trust fund)
• Ultimate control of how the trust income is distributed
• Allowing you (or your beneficiary) to maintain eligibility for certain government benefits, such as Social Security or Medicare
It’s important to point out that the advantages mentioned above don’t necessarily extend to every type of trust fund. However, your estate planning attorney can clarify the specific benefits of the type of trust you choose to establish.
There aren’t many drawbacks to worry about when it comes to setting up a trust, but there are a few factors to consider. For one, it can be pricey to hire an estate lawyer to create your trust documents. Also, the more complicated the trust, the more money it will cost you, but it’s worth the investment, says Craig.
“The only drawback to having a trust is the cost of creating one. However, the benefits of creating the trust far outweigh the financial stress and consequences of having not created one.”
Notably, Ellis adds, “While trusts offer significant benefits, they are not suitable for everyone’s circumstances. Depending on the structure of a trust and the types of assets owned by the trust, it may require more ongoing management than a simple will. Similarly, it may be uneconomical to provide for ongoing management for the beneficiaries.”
Pro Tip: Just because you’ve created a trust fund or you are the beneficiary of one does not mean you are immune to the reach of the Internal Revenue Service (IRS). You may still need to pay estate taxes or other taxes on income generated from the trust. Talk to a tax professional about the tax code ramifications regarding your particular trust documents.
There are multiple different kinds of trusts, and which one you choose will depend on your specific financial needs and objectives. If you need help deciding, a good financial advisor can steer you in the right direction based on your circumstances. The following is a brief overview of a few common trusts you may want to consider:
Revocable trusts are among the most common types of living trusts. They give you the benefit of maintaining control of your assets while you’re still alive and the power to distribute them however you choose. Revocable trusts also give you the flexibility to alter the trust as you see fit during your lifetime.
Irrevocable trusts are much more structured and cannot be amended or revoked by the grantor once the trust is created, explains Tarek El Ali, CEO of Smart Insurance Agents:
“Once established, you relinquish control over the assets; irrevocable trusts are often used for asset protection or minimizing estate taxes.”
Like revocable trusts, however, irrevocable trusts allow you to avoid probate and assure the smooth transition of your assets to your beneficiaries.
Testamentary trusts are built into a will and don’t go into effect until after the grantor passes away. Unlike living trusts, testamentary trusts need to go through the probate process, which is usually a lengthy process that can leave your beneficiary without assets for some time.
As Ellis explains, testamentary trusts are “often used to provide for minor children, manage assets for beneficiaries, or support beneficiaries with special needs.”
This is a trust specifically set up to donate to a charitable organization of your choosing after you pass away. It does not have to be a single charity, either; you can have multiple beneficiaries in this type of trust as well. On top of that, it also provides tax benefits to the grantor.
According to Ellis, a special needs trust, or SNT, is “designed to support individuals with disabilities without jeopardizing their eligibility for government benefits, allowing them to receive supplemental assistance while preserving their eligibility for public assistance programs.”
• A trust is a legal entity that holds assets for the benefit of the creator of the trust (the grantor) and their beneficiaries.
• Some advantages of a trust agreement include avoiding probate, limiting estate taxes, providing asset protection from creditors, and enabling the seamless distribution of assets to the beneficiary or beneficiaries.
• Some common types of trusts include the revocable trust, the irrevocable trust, the testamentary trust, and the special needs trust.
• If you want to set up a simple trust, you may be able to do so on your own or with the help of an online service. For more complicated trusts, however, you’ll want the expertise of an experienced estate planning attorney.