If you’re considering setting up a trust fund as part of your estate plan, you’ll need to understand a few things before you hire a lawyer to start the process.
First and foremost, you need to understand that there are different types of trusts and that each type serves a specific purpose. The type of trust you set up will depend upon your goals.
For example, a revocable trust will allow you to make changes to the terms of the trust, whereas an irrevocable trust cannot be changed once the details have been finalized.
A living trust is a trust that is created while you, the grantor, are still alive. A testamentary trust, on the other hand, is a trust that is established upon your death by your last will and testament.
Additionally, it will help if you know that the choice between a trust and a will is not necessarily an either-or proposition. Many estate plans include both of these effective financial instruments to ensure that the grantor’s property is handled exactly as he or she desires.
Process for Creating a Trust Fund
Some sources refer to the creation of a trust as a two- or three-step process. In reality, though, each of these steps can, and should, be broken down further to better illustrate the time and attention involved in the setup and management of a trust.
Trusts can be complicated estate planning tools, and the process for establishing one should not be reduced to two or three basic parts.
- Grantor
- The person whose assets fund the trust
- Trustee
- The person or institution that takes over ownership of the assets
- Grantee
- The beneficiary of the trust, to whom the assets will be distributed upon the death of the grantor
To truly understand the steps involved in setting up a trust, you must first know the parties and their roles.
And then, of course, the assets themselves are a necessary component of a trust. Without the assets to fund a trust, the trust itself is worthless.
A trust can have multiple trustees and multiple grantees.
Drafting the trust instrument is only one step in finalizing a valid trust fund.
The following are detailed steps for setting up and funding a trust:
- Decide on the type of trust you need, based on your goals.
- Determine which assets you are putting into the trust.
- Designate your trustee or trustees.
- List your beneficiaries and decide how your estate will be distributed among them.
- Determine the duration of the trust and any factors that will result in termination of the trust.
- Hire a trust lawyer to draft the trust instrument.
- Finalize the details of the trust with your attorney and financial advisor.
- Sign the document in the presence of a notary.
- File the deed of trust with the state if the state mandates that the document must be filed.
- Open a trust fund account in the name of the trust.
- Fund the trust by transferring the title of the property or, in cases of personal property with no title, by describing the property in detail and noting that it is part of the trust.
- Register the trust with the IRS to obtain a taxpayer identification number for filing your tax returns.
How Long Does It Take?
The process of drafting a trust instrument — sometimes called a deed of trust or a declaration of trust — can be done relatively quickly. When you take into account the time it takes to determine your goals and how to best achieve them, however, the timeline expands significantly.
For example, if you want certain assets distributed at specific times or plan to use the trust to qualify for long-term care in addition to leaving assets to your heirs, this will take more strategy — hence, more time.
Likewise, creating a trust for a large estate and multiple beneficiaries will take longer than setting up a trust to hold limited assets for a single grantee.
The more control you want to retain over the assets, the more complicated the process becomes. Furthermore, transferring a property title requires legal documentation, a notary and witnesses, as well as recording and filing. So if you’re funding the trust with real estate or other assets whose titles must be transferred, this step could take a while.
Let’s Talk About Your Financial Goals.
Why Establish a Trust?
In addition to privacy and asset protection, a trust may make it possible for you to qualify for Medicaid or long-term care without having to “spend down” your retirement savings to meet asset limits. Considering that the Health and Human Services department estimates that Americans over the age of 65 have a 70 percent chance of needing long-term care at some point, this benefit is significant.
By transferring ownership of assets, a retiree can reduce the value of their estate by enough to qualify for government assistance. Stringent rules apply, and states are required to seek recovery of benefits from the participant’s estate after his or her death. If you plan to use your trust to qualify for benefits, make sure you understand the rules and account for reimbursement in your estate plan.
Other objectives, such as a commitment to land conservation or community support or avoiding estate taxes, can be achieved through a trust. Trusts can also be useful in cases involving the integrity of the property owner. For example, public officials often use blind trusts to avoid possible conflicts of interest that could compromise their dedication to their constituents.
If you’re uncertain whether you and your heirs would benefit more from a last will and testament or a trust, consider the function of each, and decide which better fits your objectives.
Looking for guaranteed income in retirement?
Trust vs. Will: Which One Do I Need?
If you’re ready to begin end-of-life planning, take some time to think about how you want your estate to be handled. There are several advantages to creating a trust, as opposed to a will, but if a last will and testament meets your estate planning needs, you’re better off creating a will and avoiding the complexity and expense of a trust.
Comparison: Trust vs. Last Will and Testament
| Trust | Will | |
|---|---|---|
| Avoids probate | ✓ | |
| Ensures privacy | ✓ | |
| Protects assets from creditors | ✓ | |
| Offers more control over asset distribution | ✓ | |
| Distributes all assets without grantor transferring ownership | ✓ | |
| Involves extra planning steps and associated fees | ✓ | |
| Requires minimal management | ✓ | |
| Is available to the public | ✓ | |
| Can be used to qualify for Medicaid or other government programs | ✓ |
Trusts and wills are not mutually exclusive. In fact, creating what’s known as a “pour-over” will along with a living trust allows you to cover all your bases in a comprehensive estate plan.
How Much Does It Cost to Create a Trust?
The expense of creating a trust varies. But because you have to transfer ownership of your property, which comes with additional fees, and because a trust must be maintained during your lifetime and beyond your death, the cost will be greater than that of creating a will, which needs no conveyance of ownership or ongoing maintenance.
Before you decide to set up a trust, ask your attorney for an estimate of the associated fees and weigh them against the expected financial benefits. If the benefits outweigh the setup and maintenance costs — as well as the hassle of your ongoing involvement in its management — then a trust may be right for you.
