Simple Steps to Setting Up a Trust

To set up a trust, you’ll need to evaluate its purpose, select a trust type, choose a trustee and outline your beneficiaries, decide what assets to place, and complete the legal process for setting up your trust.

A trust is a legal agreement that allows you to transfer your assets upon your passing or when qualifying conditions occur. When you set up a trust, you’ll select a third party to manage the assets you place in the trust. Get a step-by-step guide to starting a trust from the financial experts at Benzinga.

Starting a Trust Fund: A Step-by-step Guide

Review this step-by-step guide if you’re considering a trust and want to better understand what to expect throughout the process. 

1. Evaluate the Purpose of Your Trust

You can set up a trust for various purposes to house and protect your assets effectively. Consider these purposes to ensure you structure your trust appropriately and put the best third party in charge of your assets.

• Asset protection: Placing assets in a trust can ensure that no creditor can access them or that the assets in the trust cannot be divided up during a divorce. Placing your assets in a trust can protect them if you need nursing home care as you age. That way, you still qualify for Medicaid and won’t be required to pay out all your generational wealth at the end of your life.
• Ensuring loved ones still qualify for means-tested programs: When you transfer assets to your heirs, you want to know that they will still get their benefits. If you have a special needs loved one with whom you are sharing your assets, you can place your funds in a trust to ensure the transfer of wealth does not disqualify them from programs like Social Security.
• Avoid probate: Without probate, wealth transfers faster and is private. If you don’t want your assets to become public knowledge, use a trust to privatize the process.
• Potentially reduce estate taxes: In some states, transferring assets via a trust can eliminate estate taxes for your loved ones.

2. Select the Right Trust Type

With a greater grasp of your trust's purpose, you can select between the two categories of trusts. 

• Irrevocable trust: Once you set up this type of trust, you cannot modify it unless you go to court and gain approval from all beneficiaries. These types of trusts are good for protecting your assets from being used to pay for nursing home care and to avoid estate tax for your beneficiaries.
• Revocable trusts: This type of trust is also known as a living trust. You can modify it at any time. You won’t have as strong asset protection with this option. Assets can pass to your beneficiaries without probate court. 

3. Select Your Trustee and Outline Your Beneficiaries

The trustee will manage your assets and act on your behalf. The beneficiaries are the individuals or entities that receive your assets once the qualifying event takes place for your assets to be released. 

With a living trust, you can be the trustee until your passing, or if you become incapacitated, you can appoint a different trustee at this point. Just be sure that the trustee you appoint is someone you can rely on to make wise decisions on your behalf and with the best interests of your beneficiaries in mind.

You can choose individuals or organizations to be the beneficiaries of your trust. Choose wisely and set secondary beneficiaries if something happens to your primary beneficiaries.

4. Decide What Assets to Place in the Trust

Once you select the assets to place in the trust, you’ll formally transfer the ownership of those assets into the name of the trust. Many asset types can go into a trust. For example, real estate and various financial account types.

If you place real estate in the trust, ensure you know how this will impact any loans tied to the account. Transferring real estate into the trust could trigger a “due-on-sale clause,” which means you’ll have to pay off the mortgage entirely. Some assets you might consider for your trust include:

• Real estate
• Bank accounts
• Bonds
• Business assets
• Cryptocurrency
• Life insurance
• Investments
• Collectible vehicles
• Personal property (such as jewelry or art)
• Cash
• Certificates of deposit (CDs)

You cannot place these assets in a trust:

• Medical savings accounts
• Retirement accounts
• Active accounts you use for monthly bills
• UGMA/UTMA accounts
• Standard vehicles

5. Complete the Legal Procedure

You’ll need to complete all required legal documents to put the trust in charge of your assets. Each state has a different required language for a trust. For this phase of creating a trust, you should seek legal counsel to avoid errors or the chance that you structure the trust incorrectly and trigger estate taxes for your heirs.

Why Do You Need a Trust Fund?

Not everyone needs a trust fund for their assets. However, creating a trust has many benefits. You might consider a trust in the following situations:

• To reduce taxes for your beneficiaries
• To outline specifically who you want to receive your assets once certain criteria are met
• To preserve your assets in case of a stroke, dementia, Alzheimer’s or other medical condition that could impact your ability to make financial decisions
• To aid your beneficiaries in managing their funds once you begin transferring the assets
• To minimize conflict among beneficiaries since trusts cannot be contested in court.
• To protect your privacy and avoid your assets going through probate 

How Much Money Do You Need to Have a Trust?

Trusts have no required minimum to get started. Anyone can set up a trust. However, you will need the required funds to create the trust, which can be costly. Plus, you’ll have ongoing costs for managing the trust, which means you’ll need to weigh the benefits of the trust with the costs.

To weigh the cost versus the benefit, consider the setup fees, trustee fees, and tax preparation fees you’ll incur when moving your assets to a trust.

How Are Trusts Managed?

Once you create a trust fund, its management and administration will vary depending on how you set it up. You can remain in charge of your trust fund until you are no longer able to do so, or you might give all management rights to a trustee.

The trustee ensures that the assets within the trust are transferred according to the contract that the trust outlines. In return, the trust pays the trustee ongoing management fees for the oversight. The management fee for a trust is approximately 1-1.5% of the estate value. If the estate is small, the trustee might also charge an annual fee.

Tax Considerations When Starting a Trust Fund

Understanding trust fund taxation is an important step in protecting your assets. Here are some key considerations:

• No standard deduction: Trusts and estates are not subject to the standard deduction.
• Trust deductions: When filing taxes, trusts can write off trustee fees, administrative expenses, investment advisory fees, legal fees, tax preparation fees, income distribution deductions, real estate/property taxes and charitable contributions.
• 65-day rule: Trustees can distribute to beneficiaries for the first 65 days of a new calendar year and still have those distributions counted as the previous year.
• 10-year rule: Trusts must distribute property held in the trust within 10 years of the settlor’s death or face large tax bills.
• Varying tax rules: Different types of trusts will face different tax liability. Talk to a financial advisor and lawyer before formatting your trust to minimize tax liability.

Protecting and Transferring Your Assets

Trusts allow you to protect your assets while making it simple to transfer your assets to your designated beneficiaries once certain criteria are met. They provide some tax benefits and can aid in avoiding probate and even estate taxes in some states and specific scenarios. Connect with an expert in your area before creating a trust.

Frequently Asked Questions