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How to set up a trust fund

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If you want to leave your legacy behind to those you love, you’ll need to get your affairs in order. Setting up a trust fund is part of estate planning, or planning for what will happen to your money and belongings after you pass away.

What is a trust fund?

Trust funds are legally binding accounts that place your assets and money into a trust. A trust is similar to a will, where both outline how you want your affairs managed after your death. But a will goes through probate court and might take longer to complete compared to a trust, which doesn’t have the same requirement.

Trusts have historically been used by the wealthy to pass along their assets to a set of heirs. But you don’t have to have a lot of property or money to have a trust. Anyone can have one, as long as you properly set one up.

How a trust works

There are a couple of main components to a trust, including:

  • Grantor: This is the person who opens the trust to include their assets, financials, and belongings. Sometimes called a trustor.
  • Grantee: This is the beneficiary or the beneficiaries of the trust. Once the grantor dies, the grantee(s) receive their distributions.
  • Trustee: This is the person or institution who owns the trust.

A trust agreement is a legally binding document that details how a trust account will disperse your belongings after you die. The trustee manages the trust account on behalf of the grantor. When the grantor passes, the trustee handles disbursement to the grantees.

How to set up a trust

A grantor can meet with an estate planning lawyer to find a trust that best fits their needs. Then the grantor can list each asset and the beneficiary of that asset that’s going into the trust. This can be something as small as a piece of jewelry or as big as a house. Investments, including bank accounts, can also be included. It’s up to you as the grantor to determine what goes in the trust to distribute among your grantees.

Once you finalize your trust documents, you’ll sign them with a notary and have the lawyer file your deed of trust (if the state you live in requires it). Then you’ll open the trust fund account in the name of the trust and fund it by transferring assets into the trust. Anything that was in the trust document should go into the trust. You’ll then register the trust with the Internal Revenue Service (IRS) and get a tax ID number for it. You’ll need this when you file your tax returns.

It can take a few weeks or upwards of a couple of months to complete this from start to finish. But it really depends on your assets and your detailed plans for after your death.

Different types of trusts

There isn’t a one-size-fits-all trust. Because everyone has different assets and needs, there are different types of trusts, including:

  • Revocable vs. irrevocable trusts. Revocable trusts let you change the document and terms whenever you want when you’re alive. Irrevocable means it’s set in stone. Any time you set up an account and transfer assets, it’s irrevocable.
  • Testamentary vs. living. A living trust means it can be managed and changed while the grantor is alive. Testamentary only goes into effect after the grantor dies and is only done in a last will and testament.
  • Educational trust. A type of trust where the grantee or beneficiaries can only use it for educational expenses.
  • Charitable trust. This is where a trust disburses assets to charities or even one single charity. It’s irrevocable. In most cases, it’s considered a private foundation.
  • Spendthrift trust. These are trusts with special circumstances for the beneficiaries. If the grantor feels that the recipient won’t use the funds responsibly, they can set up a spendthrift account that gives the beneficiary some access to assets with restrictions.
  • Joint trusts. This is usually best for married couples but can be used for anyone. All parties have control over the assets during their lifetimes and upon one’s passing, the other becomes a trustee.
  • AB trusts. Couples might also opt for AB trusts or a trust that’s split into two trusts upon one partner’s passing. It’s made to minimize tax implications, specifically estate tax, for surviving partners.
  • Blind trust. This is a type of living trust where the beneficiaries don’t know anything about the trust. If you suspect any conflicts among beneficiaries, this might be best.
  • QTIP trust. Qualified Terminable Interest Property Trusts, or QTIP, is another one couples might consider. It’s designed to make sure that income from the trust would be paid to the surviving spouse, and once they pass the remaining amount would go to other beneficiaries.
  • Special needs trust. Special or functional needs families might choose this option. This type of trust is specifically made for special needs children who are expected to need life-long care. They’re made to provide financial support without sacrificing government assistance or aid.

Pros and cons of trusts

Pros

Avoids probate

In most cases, a trust avoids probate court, which can draw out the process of distributing assets. Probate court is public, which means people can follow a probate case as it works its way through a court system. In most cases, a trust doesn’t involve probate. If you want to keep your matters private, you can use a trust fund.

Flexibility and control

You get to outline and manage the terms as best as you see fit. If anything changes, like you have kids, get a divorce, remarry, or experience another major life event, you can change many types of trusts (those that are revocable).

Not just for death

Having a trust is important for when you eventually pass away, but death isn’t the only factor. You can use trusts to manage affairs while you’re alive. Educational and special needs trusts, for example, are there for when you’re living.

Cons

It’s costly

Sometimes setting up a will can easily be done online without the aid of a lawyer. In most cases, setting up a trust requires a professional. An estate attorney is the one to handle your trust documents, which means you’re paying for their time and expertise to process your paperwork. Not everyone can afford a trust.

It doesn’t always include everything

While a trust is good for most things, it’s not always best for all things. Some things might not fit into a trust, like joint accounts. Unless you are creating a joint trust with the person on the joint account, you might run into some issues. Along with that, you might still need a will to cover any other assets that aren’t in your trust.

Might not save you during tax time

If you were planning to use a trust to save you during tax time, it may have more to do with where you live and less to do with your trust. Some states have estate and inheritance taxes regardless of what trust you’ve opened.

Bottom line

Everyone should consider estate planning regardless of where they are in their lives. Creating and maintaining a trust is an important step in estate planning, giving your beneficiaries a clear outline of your needs.

But not everyone should have a trust and if you do decide to get one, there are plenty to choose from. Make sure to do your research and ask around to find a trustworthy estate lawyer to walk you through the process. Everyone’s situation is unique and what works for someone else might not work for you.

Written by
Dori Zinn
Contributing writer
Dori Zinn has been a personal finance journalist for more than a decade. Aside from her work for Bankrate, her bylines have appeared on CNET, Yahoo Finance, MSN Money, Wirecutter, Quartz, Inc. and more. She loves helping people learn about money, specializing in topics like investing, real estate, borrowing money and financial literacy.
Edited by
Senior wealth editor