When someone talks about a trust fund, you might just assume that it’s something that only millionaires or wealthy people need to be concerned about. However, a trust can be a very effective estate planning tool for even middle-class citizens when it comes to asset protection. Here are some reasons why you may want to consider creating one and the steps you can take set up a family trust.
What is a Trust Fund?
A trust fund is a legal entity that can hold property or financial assets. When someone creates a trust (the grantor), they name a neutral third-party (the trustee) to take possession and manage these assets on the grantor’s behalf. The trustee will then distribute the assets according to the instructions or terms outlined in the trust. A trust account is any financial account via a financial institution that is opened to be managed by the designated trustee or corporate trustees.
Why Would a Person Want to Set Up a Trust Fund?
Generally speaking, trusts are one of the most important documents in your estate plan because they will serve to protect your assets and ensure that they will be properly received by their heirs.
Though most people think a will should be enough to accomplish this task, the unfortunate reality is that wills offer very little legal protection to shield your assets. Because a will must go through the court process probate, it is subject to claims from creditors and other interested parties. That means if a judge determines these claims to be valid, then it could reduce or wipe out any assets you had planned on leaving for your beneficiaries.
By contrast, a trust can be used to avoid probate. Since the grantor will designate the trust as the beneficiary, assets will pass directly into the trust and not be open to claims made during the probate process. The trustee can then release these assets to your heirs with little interference.
What is the Best Type of Trust to Set Up?
The best type of trust fund to setup will be dependent on what you’re trying to accomplish. For example, when it comes to estate planning and asset protection, most attorneys will recommend that you create a revocable trust (also called a living trust). This allows you to retain complete ownership of all your trust assets while you are alive. Then, after you pass away, the assets will become the property of the trust and the trust property will be divided among your beneficiaries (family, children, surviving spouse, etc.) according to your wishes.
There are lots of other types of trust funds, including Special Needs trusts, testamentary trusts, life insurance trusts, land trusts, spendthrift trusts, inter vivos trusts, discretionary trusts and asset protection trusts, that can be created. For instance, some people create what’s known as an irrevocable trust to hold a portion of their trust assets in the years leading up to when they expect to enter into a nursing home and will likely need to apply for Medicaid.
Another irrevocable trust that people will often use for tax advantage is a charitable trust. Not only does it allow the grantor to support a worthy cause, but it also lets them bypass gift and estate taxes.
How Much Does It Cost to Create a Trust?
The average cost of working with an attorney to create a trust can range anywhere from $1,000 to $1,500 for an individual and $1,200 to $1,500 for a couple. By comparison, a trust is much more expensive to create than a will. Wills generally cost between $200 to $400 for an individual and $300 to $500 for a couple.
The reason why trusts cost so much more is because of their complexity. Typically, trust agreements can be several pages long containing legal instructions and details about which assets should be held and how they will be distributed. By contrast, wills are generally much shorter with only a few small sections that are customized to your wishes.
When you work with an estate planning attorney to create a trust, they will usually include a will as part of the overall package. This can be helpful since its best when these two important documents work in conjunction with one another.
How to Start a Trust Fund
1- Determine the right trust for your needs
The first step to take is to establish why you’re starting the trust in the first place. For example, if this is for estate planning, then your goal might be to ensure that your minor children will receive an inheritance when they reach adulthood. In that case, a revocable living trust would be the most suitable option to accomplish this goal.
2- Find a reputable attorney
The language used to create trust funds can be complicated and will require the help of an attorney who has experience creating these documents. Therefore, you’ll want to find an estate planning lawyer who can collaborate with you on what steps to take.
Anytime you’re looking for a lawyer, it's important to do your due diligence. Ask for recommendations from family and friends, and be sure to also check their credentials and reviews online. This will help ensure that they are reputable and a good fit for you to work with.
3- Specify what the trust will do
Since your trust fund will be a legal entity, it will be very important that you work with your estate lawyer to ensure that the language will accomplish your goals.
In the case of estate planning, your trust should give explicit instructions about who will serve as the trustee, what assets should be transferred, and how they will be distributed to your beneficiaries. It will be helpful to give some thought to these details ahead of time and even have conversations with those you plan on involving to ensure that they will accept this responsibility. If that individual should pass away, the estate will be managed by the successor trustee.
4- Prepare and finalize the trust documents
Once the trust fund documentation has been drafted, go through it with your attorney page by page so that you understand completely what is being agreed to. If you need clarification or there is something you don’t understand, then be sure to ask questions before signing the final copies.
It may also be necessary for you or your lawyer to also file the trust with the IRS so that it can be issued an Employer Identification Number (EIN). This is like a social security number for the trust and should be used in case income taxes need to be filed. Note that it is not necessary to file a separate income tax return for revocable living trusts.
5- Fund the trust
Now that your trust fund has been established, you may start transferring assets to it. Again, be absolutely certain you understand what type of trust you have created and what the ramifications will be after you move your assets inside. For example, if the fund is irrevocable, you will most likely not be able to access the assets out once they’ve been transferred.
For most revocable living trusts, the main step is to designate your new trust as the beneficiary on your bank and brokerage accounts. This will keep the assets under your control while you are living but will direct them into the family living trust after you have passed away.