September 13, 2023
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.
Summary
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.
What is a trust?
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).
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.
Key steps to set up a trust
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.
Identify your trust’s beneficiaries
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.
Draw up the trust documents
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.
Fund the trust
A trust isn’t much use without assets, so you’ll need to decide which of your assets to add to the trust.
- 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.
Select a trustee
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.
“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.
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.”
Do you need an estate lawyer to create a trust?
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.
“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.”
Pros of creating a trust
- Security for your family’s financial future
- Protection of assets from creditors or legal situations
- Faster transfer of assets to beneficiaries
- Avoiding probate
- Privacy (not public record)
- Certain tax advantages
- Control over asset distribution
Cons of creating a trust
There aren’t many drawbacks to worry about when it comes to setting up a trust, but there are a few factors to consider, including cost and ongoing management depending on complexity.
Pro Tip: Just because you’ve created a trust fund or you are the beneficiary of one does not mean you are immune to taxes. You may still need to pay estate taxes or other taxes on income generated from the trust.
Types of trusts
- Revocable trust – Flexible and can be modified during your lifetime
- Irrevocable trust – Cannot be changed once created; used for asset protection
- Testamentary trust – Created through a will and activated after death
- Charitable trust – Designed to benefit charitable organizations
- Special needs trust (SNT) – Supports individuals with disabilities while preserving benefits
Key Takeaways
- A trust is a legal entity that holds assets for beneficiaries
- Helps avoid probate and may reduce estate taxes
- Provides asset protection and structured distribution
- Professional guidance is recommended for complex trusts