Establishing a trust fund for your heirs is a common way to pass on assets and minimize the hassles that come with probate. Setting up trust and making certain it is done correctly can be complicated. Because there are various nuances to trust formation, it’s common to retain an estate planning attorney to help you determine the right kind of trust and set it up. Online services can also help you set up a trust yourself. Whether you set up your trust with an attorney or do it yourself, you’ll need to follow the steps to create and fund your trust.
Step One: Determine What Type of Trust You Need
There are multiple types of trusts. The type you choose depends on your goals. There are two basic types of trusts:
- Revocable trusts. A revocable trust allows you to manage assets while alive and distribute them to your beneficiaries when you pass. Revocable means you have the power to amend your trust. It will enable you to control your assets while alive, and your heirs can avoid the probate process when you die.
- Irrevocable trusts: An irrevocable trust means what the term implies. Once the trust is created, it cannot be altered. Since it is inalterable, it is considered out of the individual’s hands and not part of the estate, therefore, minimizing taxes on assets.
In addition to these basic types of trusts, several types of specialty trusts apply to specific individual situations or estates. The person or service you hire to set up your trust can help determine which type will work for your situation.
Step Two: Choose a Trustee
There are generally three people involved in a trust.
- The grantor. This person creates and initiates the trust and places various assets in an account. This is the person who generally initiates the trust.
- The beneficiaries. These are the heirs who eventually receive the assets in the trust.
- The trustee. This is the person or organization that administers the trust.
The trustee holds a crucial role since this individual or entity distributes your assets to your heirs. A trustee can have several responsibilities ranging from making wise investments and distributions with the assets involved, ensuring taxes are filed, and maintaining impartiality so that any actions benefit the beneficiary.
The grantor appoints a trustee. Some people choose a family member or friend to administer their trust. Still, unless that person is specifically qualified, hiring an outside party for the job is generally better. Trustee roles require time, attention to detail, and expertise. It may cost more to hire an institution to take on the part of the trustee, but appointing a neutral third party can minimize the risk of mismanagement and other conflicts that sometimes arise when close family members or friends are chosen.
Step Three: Create a Trust Agreement
A legal document called the trust agreement can be part of your overall estate plan. The agreement designates the grantor, trustee, and beneficiaries and lists the assets and how they will be managed and distributed. This document will generally require signatures and notarization. Filing or recording the trust agreement with the state isn’t necessary. However, it is advisable to store the agreement securely in a safety deposit box or fireproof safe.
Step Four: Open a Trust Account and Transfer Assets
You can open a trust account at your bank, credit union, or financial institution. This account holds the different assets included in the trust. Assets can include stocks and bonds, cash, mutual funds, real estate, and other property. To include assets in a trust, you need to change the name on the asset from your own name to the name of your trust. Your attorney or service will help you fill out and file the necessary forms. Here is how to transfer common assets:
- House or real property. You must provide the original deed to transfer real property or house to a trust. This verifies that you own the property and that there are no issues with ownership. You will then get a new deed that includes the property’s legal description, the trust’s name, and the new owner (likely the trustee). The new deed will require notarization and must be filed with the appropriate local county office to be valid.
- Cars or other vehicles. New documentation will need to be filed with your DMV.
- Financial accounts. To be transferred, investment, checking, and savings accounts should be retitled in the name of the trust and name the trustees as account holders and certification of the trust filed with your bank.
Step Five: Obtain a Tax ID number
Once opened and funded, the trust must be registered with the Internal Revenue Service (IRS) and assigned a tax identification number. You will need this number to file taxes. Income from a trust is considered taxable. Taxing a trust depends on the type of trust and income and who receives this income.
How Long Does a Trust Last?
A trust is created for a specific reason and isn’t intended to last forever. How a trust ends depends on its purpose. Here are some different ways a trust can potentially end:
- All assets have been distributed. A trust can end when there are no longer any assets to distribute.
- Trust’s purpose fulfilled. If a trust’s purpose is fulfilled, then the trust also ends. For example, if an educational trust is created for a child or grandchild, the trustee makes tuition payments to make certain funds are only used for college. Once the tuition is paid and the child graduates, the trust is no longer necessary and can be closed.
- Trust’s end date has arrived. Some trusts are created with an end date in mind. When that end date arrives, the trust dissolves.
- Assets in the trust have been destroyed. If the asset no longer exists, the trust ends. For instance, if a home held in trust for a beneficiary is destroyed, the trust may end.
There are different state rules about the length of time a trust can remain open after the beneficiary passes. Legally, a trust is allowed to stay open for up to 21 years after the death of anyone living at the time of the trust’s creation. In most situations, 21 years is ample time for the trust to be passed to a beneficiary or its assets exhausted. However, in practice, there are situations in which 21 years is not sufficient. For example, a family member who has special needs or is incapacitated will likely need financial help for many years. This type of trust must remain in effect throughout the person’s lifetime. Rules also vary from state to state on how long a trust can remain open after the beneficiary passes.
This article is intended for general informational and educational purposes only, and should not be construed as financial or tax advice. For more information about whether a reverse mortgage may be right for you, you should consult an independent financial advisor. For tax advice, please consult a tax professional.