How To Setup a Trust Fund

How To Start A Trust

There can be several reasons why you might want to set up a trust fund. You may do so to create a way to fund an individual, organization, or cause that gives you more control and privacy in how the money is disbursed and used. As an estate planning tool, it can help you minimize estate taxes and avoid probate. This can save your beneficiaries time, money, and piles of paperwork.

When setting up a trust fund, it’s a good idea to consult with a financial advisor who specializes in trusts and other estate planning issues.

Here, we outline what you should know at the very beginning when thinking about trust funds.

What Is a Trust Fund?

In simplest terms, a trust fund is an estate planning tool often used to transfer property or other assets from one party to another. The trust fund can be made up of various things, such as real estate, vehicles, jewelry, investments, cash, or anything of value.

The trust holds the assets on behalf of the creator of the trust fund—also known as the grantor—while they’re still alive. Once that person passes, however, or becomes otherwise incapacitated, control of the trust fund moves to the trustee. These are usually individuals with no financial interest in the trust fund’s assets and are generally seen as a neutral third party.

Often, you’ll find that trust funds can include specific stipulations. The most common stipulation involves the beneficiaries reaching a certain age, but the grantor can set the trust up however they want.

The Five Steps To Creating a Trust Fund

Creating a trust fund involves going through a few steps. Remember that you do not have to go it alone. A qualified financial planner or estate lawyer can be a great help throughout this process.

Step 1: Selecting the Type of Trust

First, you need to determine what type of trust will suit your needs and wishes. What purpose will it serve? Do you want a revocable trust or an irrevocable one? Do you want a living trust or a testamentary trust? This is where a financial advisor can be especially helpful in describing what each type of does, who they benefit, and who is in control.

Other types of trusts include ones that limit how beneficiaries can receive and use their funds (Spendthrift Trust), ones that earmark funds for academic purposes (Education Trust), ones that grant gifts to charitable organizations (Charity Trust), and those that present an inheritance or income to people with disabilities (Special-Needs Trust).

Step 2: Define the Elements Of the Trust

This is a relatively simple step in that all it requires is to lay out who is in the trust and what the assets are. For example, most trusts will break down like this:

• Grantor: This is the person—the creator of the trust—whose name the trust is in.
• Beneficiaries: These are the individuals designated in the grant to receive assets. Often, there are several beneficiaries, but it is also possible for there to be just a single one.
• Assets: These are the contents of the trust designated to the beneficiaries. These can be anything from property to personal items.
• Trustee: This is the individual tasked with managing the trust and carrying out the grantor’s wishes.

After you’ve determined what kind of trust you’re going to create, you need to make a detailed record of what assets will be placed in the trust fund, how they will be managed and distributed, and who the beneficiaries and trustees will be.

You may also need to outline how long the trust will last and what conditions should exist for it to cease.

Step 3: Finalize the Details

While it’s possible to do this yourself with access to an online service, you should find an estate attorney to help you with this step, so you’re confident everything is in order. An attorney can help you create a declaration of trust, deed of trust, or trust instrument to formalize the details of the trust. Once your attorney completes the trust document, you must have the document notarized. In some cases, you may have to file the trust documents with the state.

Step 4: Fund the Trust

Now that the trust has been created, it’s time to fund it.

Open a trust fund bank account under the name of the trust. You’ll need to bring your trust documents to the bank or financial institution you’re doing this with. You will then need to list the names and contact information of each of the trustees. From there, you either deposit the total sum of the financial assets or pay into the trust over time.

Step 5: Register With the IRS

Once the trust fund is established, it needs to be registered for tax purposes. Each trust fund will need a taxpayer identification number (TIN) for tax returns and financial accounts. This is essentially a trust’s version of an Employer Identification Number (EIN) or Social Security Number (SSN).

Assigning a Trustee

When appointed, a trustee accepts specific legal responsibilities for managing, preserving, and distributing the assets and property according to the instructions in the trust document. Trust administration often includes duties such as:

• Listing all assets and property, then having them appraised.
• Contacting creditors who may have claims against the estate.
• Notifying beneficiaries to inform them of their inclusion in the trust.
• Following the terms of the trust regarding asset management.
• Reviewing and paying outstanding and current debts and taxes.
• Managing existing investments or making new ones.
• Releasing assets and property to beneficiaries according to the conditions of the trust.
• Keeping records of all transactions involving the trust, including income, expenses, and distributions.

Common Concerns Regarding Trusts

While your estate attorney is your best resource for any questions you may have about your trust, here are some quick answers to common questions.

Can You Sell a House That’s In a Trust?

You generally have two options. Either the trustee handles the sale, and the proceeds become part of the trust, or the trustee can transfer the title over to you and sell it as you would any other house.

Who Owns the Property In a Trust?

Legally, the trustee owns the property in trust, but only in a fiduciary capacity for the beneficiaries who are the equitable owners of the property. Trustees thus have a financial responsibility to manage the trust to the benefit of those equitable owners.

Do I Have To Pay Taxes On a Trust?

Trusts are taxed differently from other investment accounts. Trust beneficiaries pay taxes on income and other received distributions, but not on returned principal. Those receiving disbursements should file IRS forms K-1 and 1041.

Your Estate Planning Experts

Creating a trust fund can be pretty straightforward, but there are still a lot of issues that come up for which you’d benefit from expert advice. To get the most out of your trust, it’s best to have a team of experienced and knowledgeable estate attorneys on your side.

Reach out to Heban, Murphree, & Lewandowski today for a free consultation!