One of the most popular ways to transfer assets like money, investments, and even property to those close to you is to create a trust fund. Trust funds are more specific and private than a will and offer the grantor more control over how their assets are distributed after they pass. However, there are more steps to starting a trust fund, and they can be more complex overall.
To start a trust fund, you'll first need to decide which type of trust to establish. Then you'll need to outline the trust details, such as trustees and beneficiaries, and have the trust formalized by an attorney. After that, all you need to do is fund it, and make sure the IRS is notified.
While they offer a wide range of benefits, they are also slightly more complicated to set up and start than a standard will. There are more steps and considerations to make before having a trust officially established, but they are worth it. If you're new to setting up a trust fund, here's the only guide you'll need for starting your first one.
What Is A Trust Fund?
A trust fund is one of many different tools used to create an estate plan. They are used to ensure assets like money, property, investments, cars, and almost anything else are transferred properly from the grantor to the beneficiaries. They are used primarily to help provide more control and specificity over the asset disbursement, but they also offer significant tax and privacy benefits as well. The main thing trust funds are known for is having certain stipulations applied to them, such as only being accessible once the beneficiaries reach a particular age, though this isn't always the case.
Trust funds also do not have to deal with probate processes, so they can save the beneficiaries significant amounts of time and money following the passing of the grantor. The grantor is the party who creates the actual trust, and while they are alive they retain full control over the fund holding the assets for them. Depending on the terms of the trust fund, control of the trust fund will pass to one or more trustees when the grantor passes away or, in some cases, becomes incapacitated. A trustee can be any trusted party that has no financial interest in the fund itself.
Setting Up A Trust Fund
Setting up a trust fund will require several different steps and are more involved than simply laying out your wishes, having it notarized, and filing it with a probate court. To set up a trust fund, you will need to establish a trust, which is the actual legal arrangement, which specifies the purposes the property is being transferred from the grantor to the trustee and, finally, the beneficiary. Once the legal arrangement has been established, the trust will be funded with nearly any type of property or assets, from cash to art and even copyrights or patents.
There are two main classes of trusts, revocable and irrevocable trusts, and before you create a trust, you'll need to decide which type will best suit your needs. A revocable trust allows the grantor to retain ownership of the assets while they are in the trust, as well as control, for a limited term. The grantor will be liable for taxes due on the trust as well as for keeping the assets safe from creditors. An irrevocable trust permanently transfers property ownership from the grantor to the trustee. Irrevocable trusts cannot be sought by the grantor's creditors and relieve them of tax liability as well.
How Do I Start A Trust Fund?
Starting a trust fund can be significantly more complex than drafting a will and in most cases, will require an estate planning attorney to complete and finalize. There are boilerplate DIY solutions that can be found in many places online, but these are generally not ideal, as they allow significant room for error and unintended outcomes. Below are the 5 steps that you will need to take to create a trust fund.
Choosing The Right Type Of Trust
The first step to setting up a trust fund is to decide which type of trust fits your needs the best. This will depend heavily on the purpose that it will serve and whether it will be revocable or irrevocable, a living trust, or a testamentary trust. Here are the most common types of trusts:
- Spendthrift Trust – This trust will set limits on how the trust beneficiaries will be able to use the funds and will determine how the funds are to be distributed.
- Charity Trust – A charity trust will help the grantor donate assets or property to charitable organizations or other non-profit organizations. These can be incredibly diverse and can serve any charitable need the grantor wishes.
- Education Trust – These types of trusts specifically stipulate that the funds are used for expenses related to academia.
- Special-Needs Trust – A special needs trust is designed to help designate income or additional inheritance to those with special needs.
Lay Out The Details Of The Trust
Once you have determined the type of trust you're going to create, you'll need to decide on details for 4 components of the trust. These 4 components are the grantor, the beneficiary, the assets, and the trustee. The assets include the money or other property the trust will contain. The beneficiary will be the person to receive the contents of the trust fund. The trustee may be the same person as the grantor while they are alive but must designate a successor in the event of their incapacitation or death.
Formalize The Trust Officially
Since trust funds are often so complex, finalizing one is not usually a simple job. They will often require the help of an attorney who specializes in trusts or another professional estate handler. If you don't already have an attorney, generally, the bar association for your state will have a list of estate planning specialists.
They will create a declaration, deed, or another instrument to formalize the details, which must then be signed, notarized, and filed with the state. Depending on your location, these documents will need to be filed with the state, and while sometimes your attorney will take care of this part, sometimes it will be up to you.
Fund The Trust
Once the trust has been established, you can take supporting documentation into a bank, open an account, and fund it. The account will need to be in the same name as the trust beneficiary. You will also need to give the bank the names and frequently the contact information as well, for the trustees. This account can be fully funded immediately or simply added to over time.
Get IRS Recognition For The Trust
The final step in starting a trust fund and making it official is to register it with the IRS so that it can receive a TIN or taxpayer identification number. You can even do this step with relative ease online, but it can be done by mail as well. This will be needed for the annual tax filings related to the account.
How To Start A Trust Fund For A Child
In many situations, a parent or grandparent will want to create a trust fund for their child, to ensure that they have access to certain property when they come of age or in the event of the grantor's passing. These trust funds will require the same general process for being started, although depending on the age of the child and the type of trust fund, there may need to be a trustee designated to assist with the property management.
How To Start A Trust Fund For A Baby
Starting a trust fund for a new baby is incredibly common in families that have significant assets and property. In these situations, the parents or even grandparents will want to immediately make sure the infant is taken care of in the event of their passing, and so will create a trust fund. Since the beneficiary is still an infant, the grantor will generally create an irrevocable trust and designate a trustee to help the child manage their assets once they begin drawing on the fund, unless it is required that they be of a certain age before they can access the property.
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Understanding How To Start A Trust Fund Can Help You Pass On Your Assets Effectively
Creating a strong and effective plan for your estate is one of the most vital measures you can take to ensure your wishes are upheld, and creating a trust fund is one of the best ways to do that. They can help make sure each member of your family and any additional beneficiaries are taken care of and that your assets are distributed and used in the manner that you choose. A trust is only one part of a solid estate plan, however, but it can be a robust way to ensure your finances aren't squandered.
Shawn Manaher is a former financial advisor, has founded 5 online businesses, and is a coach, speaker, podcast host, and author. He's been featured on Forbes, The Consults Corner on TAE Radio, The Writing Biz, What's Your Story, and more.