Simply put: A Trust is a legal arrangement where property or assets are held by a third party (example: bank) for the benefit of one or more other people.
Why Would You Create One?
- To maintain control of assets in the event of incompetence (if you become unable to manage your assets due to a decline in health or mental fitness)
- To save on estate taxes
- To avoid probate
- When significant amounts of assets are involved, Trusts may also be established to maintain control over assets even after the original owner has died. For example, a Trust may be set up with the sole purpose of paying college tuition for a grandchild. In this scenario, the money in the Trust can't be used for any other purpose.
Determine the Type of Trust That You Need
Trusts can accomplish a range of goals, including avoiding probate, minimizing estate taxes, and making sure your heirs receive as much of your money as possible as quickly as possible. The type of Trust you set up will depend on what your goals are.
Do It Online Or With an Attorney
There are many online legal services that can help you create a Trust. Since Trusts can be complicated, you may want to consider working with a Trust and estate attorney. In addition, there are online services that offer personalized online legal advice from an attorney, which can be a more affordable option.
Online: Factors to take into consideration when choosing an online legal service include cost, completion and delivery time, and the services offered by the site. For example, some online legal services will submit your documents to review by a paralegal after completion, while others may not.
Attorney: The right Trust and estate attorney will be someone with significant experience in handling the issues you’re dealing with. Talk to friends, family members, and other attorneys to get recommendations. Always meet with the attorney you’re considering before hiring them.
The Four Main Components In a Trust
Grantor: The person who creates the Trust (also known as “donor,” “settlor,” or “trustor”)
Trustee: The person, people, or entity (such as a bank) that agrees to hold the property or assets (the grantor may be the Trustee)
Principal: The property or assets themselves, including money, which is held in the Trust and managed by the Trustee
Beneficiary: The person or people who ultimately receive the property or assets in the Trust
The Main Types of Trusts
There are many different types of Trust; depending on your goals, or the type of assets you’re trying to protect, some will better meet your needs than others.
When a Trust is created and immediately becomes effective, it is known as a “Living Trust.” [Dig Deeper: Living Trusts]
When a Trust is created and doesn't become effective until after your death, it is known as a “Testamentary Trusts.” In the case of Testamentary Trusts, you, as the person creating the Trust, are called the “testator.” Testamentary Trusts are often created within Wills.
How Do You Fund It?
Testamentary Trusts are generally funded only after your death often with the assets of your estate. In order to fund a Testamentary Trust, language in the Will must explicitly state that all estate assets should be moved into the Trust upon death. The estate assets can then be distributed and managed according to the terms of the Trust. [Dig Deeper: Testamentary Trusts]
Living Trusts vs. Testamentary Trusts
All Trusts you want to create must be set up by you, the grantor, during your lifetime. However, not all Trusts immediately go into effect. Depending on when the Trust becomes effective, it is either a Living Trust or a Testamentary Trust.
You retain ownership and control of the property in the Trust and can change the terms of the Trust, including the Trustees and beneficiaries.
How Do You Fund It?
If you are setting up a Revocable Trust, you will likely be the sole Trustee. As the sole Trustee, you can move assets in and out of the Trust at will, without too much hassle. Because of this, many people with Revocable Living Trusts put a large portion of their assets to be held in Trust, including real estate, financial accounts (stocks, bonds, etc.), and even bank accounts. [Dig Deeper: Revocable Trusts]
You give ownership and control of the property in the Trust to others (Trustees) and therefore no longer own or control the property, making you unable to enact changes to the Trust.
How Do You Fund It?
By putting assets into an Irrevocable Trust, you're essentially giving up ownership and control of those assets, so choose these assets carefully. Which assets will be used to fund an Irrevocable Trust are generally determined by the goals of the Trust. Choosing a funding method is something you should decide with the help of a Trust and estates attorney. Transferring property to an Irrevocable Trust also requires a formal transfer or property, meaning that the property must be re-titled in the Trustee’s name. An attorney can help you complete and manage a re-titling of property. [Dig Deeper: Irrevocable Trusts]
Fun Fact (that’s not really all that fun): All Trusts are either revocable or irrevocable.
An Even Funner Tip: Living Trusts must be funded during your lifetime; Testamentary Trusts are funded after your death.
Reasons For Choosing a Revocable Trust vs. an Irrevocable Trust
If the primary goal of the Trust is to avoid excessive estate taxes, you'll likely want to set up an Irrevocable Trust since you don't have to pay taxes on it. If the primary goal of the Trust is to maintain control of assets in the event of incompetence, you'll likely want to set up a Revocable Trust, since you'll want to retain control over the assets in the Trust and the beneficiaries. In addition, the rules of the particular Trust you’re establishing may dictate whether a Trust must be Revocable or Irrevocable. If you’re unsure whether you want to establish a Revocable or Irrevocable Trust, you should consult a licensed Trusts and estates attorney in your state.
Understanding the Laws
There are many state and federal laws that must be carefully followed when setting up a Trust. While some states will allow you to set up a Trust on your own using an online legal service, others require that you work with an attorney. Even in states where residents are able to establish Trusts on their own or online, it’s always a good idea to consult with an attorney before finalizing the documents.
Setting Up Trusts Online
Many legal websites offer tools for setting up Trusts online, which are generally simple Trusts that achieve the basic goals of naming Trustees and beneficiaries. If you choose to set up a Trust online, you should still consult an attorney before finalizing any documents to make sure that they're legally binding and achieve all your goals.
The cost of establishing a Trust can vary based on the type and complexity of the Trust, and the method of establishment. Online legal services can charge anywhere from $30-$300 to set up a Trust, while consulting with a lawyer can cost anywhere from $1000-$3000, generally. While the cost of consulting with a lawyer may seem high, a lawyer can make sure the Trust you’re setting up is completely valid and legally sound, which can potentially save you or your heirs money later.
Tax Implications During Your Life
With a Revocable Trust you're still treated as the owner of the property in the Trust, and can be taxed on that property during your life. With an Irrevocable Trust, you give up ownership of the property in the Trust and are therefore no longer liable for that property and can't be taxed on that property.
All You Need To Know About Trustees
Trustees are responsible for managing, investing, and distributing the property in the Trust. This includes administration and accounting, paying any taxes on behalf of the Trust, working with beneficiaries to determine their goals for the Trust, and working fairly and with transparency around issues of management, investments, and distributions.
Managing Trust Assets
The Trustee is responsible for the accounting and administration of the Trust. This includes preparing. filing, and paying income tax returns for the Trust, and adhering to any and all applicable state and federal laws around Trust administration. The Trustee must also keep accurate records of all transactions.
Investing Trust Assets
Depending on the needs of the beneficiaries, the Trustee is responsible for determining whether to invest the principal to earn income, to grow the principal in the Trust, or other goals that the beneficiaries might have.
Distributing Trust Assets
The Trustee must follow the instructions of the Trust in distributing income or property to the beneficiaries in a timely and responsible manner.
Who Can Serve as a Trustee?
The Trustees can be yourself, your family members or friends, professionals (accountants, attorneys, etc.), a bank or a Trust company, or any combination of these people. [Dig Deeper: Duties of a Trustee]
If you are naming only a single Trustee, you'll want to be sure to name at least one Successor Trustee. In case the primary Trustee is not able to serve, the Successor Trustee can step into the primary role. If you are the sole Trustee you'll also want to name a Successor Trustee so that the Trust can continue to be managed after your death.
If you’re establishing a Revocable Trust, you will likely name yourself as the sole Trustee.
How to Choose Trustees
These are the qualities you want in your Trustee...
- Attention to detail
- An understanding of his or her duties, and a commitment to taking those duties seriously
- An understanding of finances and perhaps investing, accounting, or law
- Good communication skills
- Aligned with your morals and values
When choosing Trustees, it's important to think about the structure and goals of the Trust and the specific requirements of the Trustees. While some Trusts may require Trustees with extensive experience in investing or accounting, other Trusts may benefit from Trustees who have close personal relationships with the beneficiaries or the grantor.
In some cases, the person best suited to be a Trustee may not be your closest friend or family member, but instead may be a friend or colleague who you believe to be competent, honest, and intelligent. You may also appoint someone close to you to act as a Trustee and specify that they hire professionals to advise them on certain aspects of the process.
Appointing a Professional as a Trustee
If you don’t feel like you have anyone in your life to entrust with the role of Trustee, you may appoint a professional, such as an attorney or an accountant. These people will most likely require a fee for their services.
The End Result: Beneficiaries
Beneficiaries of a Trust are the people or organization(s) who are named as the recipients of any benefits of the Trust.
Choosing Beneficiaries of a Trust
If you're setting up a Trust that is intended to avoid Probate and seamlessly transfer assets to your family, you'll likely want to name your family members as the beneficiaries. If you're setting up a Trust that is intended to hold assets for your grandchildren, you'll most likely name those grandchildren as the beneficiaries. A Trust intended to provide support for a charitable organization will name the charity as the beneficiary.
Based on the goals of your Trust and the number of beneficiaries you name, you can decide how you would like those beneficiaries to receive distributions. For example, if you have three children you may name all three as equal beneficiaries, or you may name them as unequal beneficiaries, with each child receiving different distributions from the Trust.
You may also decide whether or not the beneficiary designation applies to linear descendants—that is, whether or not your children’s children would become beneficiaries in the event that one of your children should die before the assets in the Trust are fully depleted.