How to Set Up a Trust : How to Set Up a Trust
How to Set Up a Trust for a Child
All parents want to make sure their family is taken care of after their death. Trusts are increasing in popularity as an alternative to traditional wills and probate. With some planning, you can create a pool of your assets that will be managed and used to benefit and support your child after your death.
Preparing to Set Up the Trust
Identify who the trust is intended to benefit.As the trust grantor, you may want to establish a trust to create wealth for future generations, pay educational expenses, or make sure a disabled child or grandchild is cared for in case something happens to you.
- List out the child or children who will be the beneficiaries of the trust, by age, and list your goals for them. The younger the children are, the more flexibility you have in funding the trust. You want to not only maximize the nest egg, called the corpus of the trust, but also reap as many tax and estate benefits as you can.
Decide what type of trust is best for your situation.You should strongly consider consulting with an attorney skilled in wills and estates or financial planning specialist to determine which trust will protect your assets while meeting your goals for the child's future. There are pros and cons to each type of trust.
Consider an irrevocable trust.This is a permanent trust that cannot be altered by the grantor once it is established. When you transfer money, land, or other assets to the trust, they no longer belong to you. The ownership effectively transfers to the trust to be distributed per the instructions you established when you set up the trust.
- The benefit to you is by transferring a portion of your assets to the irrevocable trust, you may reap significant tax benefits both now and when you pass away. Also, you are not liable for any taxes on the income generated by the trust's assets.The downside to an irrevocable trust is that it can be complicated and expensive to establish and the on-going trustee costs can be higher than other trusts.
- If you name yourself as a trustee to an irrevocable trust, you will lose many of the tax benefits that could accrue during your lifetime.
- Because of the tax consequences, an irrevocable trust should only be set up by a financial professional or skilled estate attorney.
Look at the flexibility of a revocable living trust (RLT).With this type of financial instrument, you can often avoid probate and still exercise control over the assets during your lifetime. An RLT is less expensive to create and maintain than a permanent irrevocable trust. Also, your RLT cannot be easily challenged during probate. The trust can state than any beneficiary that tries to contest the trust can be disinherited if they fail.
- The assets you assign to the RLT can range from investments and cash accounts to real estate and business assets. During your life, you control the assets and invest them as you see fit. The income from the assets can be rolled into the trust or you can disperse them to yourself.When you die, the trust goes to the beneficiaries, to be paid out by the trustees according to your instructions.
- You can designate yourself as the trustee for the term of your life with no adverse tax consequences.
Amend your will to include a testamentary trust.This trust is established by your will and does not come into existence until your death. Your assets are fully in your name and under your control until your will is probated. Testamentary trusts can be challenged during probate and the terms of your trust, including an accounting of your assets, will be part of the public record.
- A benefit of the testamentary type of trust is that there is no maintenance or tax complications while you are alive. In other trusts, if your assets change, you have to adjust the trust. With this trust, your assets, as they exist, can flow into the corpus at the time of your death. You know that your assets will be distributed to your child in an orderly manner, but there is nothing to worry about or deal with during your life.
- A testamentary trust should only be set up by an estate attorney because it will have to pass through probate and be open to be contested during probate.
Choosing a Trustee
Create a list of possible trustees.Your trustee is a fiduciary, meaning they are legally obligated to act in the best interests of the trust assets and the instructions you left for administering the trust, even if the beneficiary does not agree.A trustee's responsibility can last for your child's entire life.
- Your trustee must be willing and capable of managing the assets as well as administering the pay-outs to your child. Depending on the terms of your trust, this can be as simple as issuing a check, or as complicated as paying individual bills and household expenses.
- Being a trustee is a legal and contractual obligation. If a beneficiary believes that a trustee is mishandling the assets or not living up to the terms of the trust, she can sue the trustee. If the trustee is found to have breached his duty, he can be liable for reimbursement of lost or squandered assets.
- Any adult can be named as a trustee. However, you need to think about who you choose. You need to balance competency, cost, and commitment to your goals. You also have to think about succession and what will happen to your trust when your trustee retires or dies.
Evaluate your trustee choices.Depending on the complexity of your assets, your trustee must have the business acumen to manage and maximize the corpus and comply with the complicated record-keeping and reporting requirements.
Investigate a professional trustee.You have several choices. There are trustee companies, banks, attorneys, or professional individual trustees. Depending on their skill and reputation, any of these choices will be a competent and professional choice who can avoid all conflicts of interest with the beneficiary's family.
- The primary concern is cost. If you use a bank or trustee company to manage your trust, expect to pay a minimum of 1 to 2 percent of the trust's value per year.On one hand, over your child's lifetime, that is a considerable fee. However, a professional trust manager may be more likely to see the best returns on investments. An attorney may either charge a percentage or by the hour. Before you select a trustee, you should sit down with the financial officers of at least three different professional trustees and compare costs.
- Trusts can last for your child's lifetime, or even longer if the trust can pass to her children. Odds are the trust may outlive your trustee. However, you can't name a successor trustee that may not take over for 30 years. Because of this, consider naming a professional trust manager as successor trustee. This will ensure that if a trustee dies, either suddenly or decades down the road, that there will be a seamless administration of the trust.
Establishing a Trust
Designate the assets that you will transfer to the trust.If you are setting up an irrevocable trust, these assets will no longer be in your control and you will no longer have access to them, even in an emergency. In a RLT, you can transfer all assets that you eventually want to go to your child including real estate, business assets, life insurance pay-outs, and financial accounts. Consult with a tax professional on how to allocate your assets to receive the maximum tax benefits.
Detail the terms of the trust.Common trust dispersal plans range from periodic payments to lump sum disbursements for education or purchase of a house. Consider consulting with an attorney on the terms of the trust. Overly restrictive requirements in a trust can be challenged in court. For example, if you say that your beneficiary will only receive payments if she doesn't marry a certain person or doesn't have a child out of wedlock, this could open your trust to a legal challenge that could be very expensive and chew through the assets.
- Decide whether or not the trust will eventually go to your child in total. You can set it up so the trustee makes payments for education and living expenses until your beneficiary has completed her degree or reaches a certain age. At that time, the trust expires and she receives all the assets. Conversely, a disabled child may require the trust to last for her entire life.
Create your RLT document.Because a revocable living trust is fluid and can be easily amended, you can create the trust documents yourself. Forms are available online, through office supply stores, or possibly through your bank or brokerage.You can also consult with an attorney to create a customized RLT document. Regardless, it is a good idea to have an attorney review your trust assignments and amend as necessary.
- Address asset management and investment. You want to ensure that you have the right to specify exactly how the trust assets are invested. You can leave it to the trustee to invest your assets for maximum income or detail the level of risk and types of investments the trustee can pursue.
- Be to include a “trustee removal and replacement clause” as trusts that do not have this clause take away the beneficiary’s right to fire the trustee if unsatisfied with his services. You may also want to require the beneficiary to select a new trustee from legitimate bank trust departments if a trustee is fired. You can contact your state Department of Financial Institutions to get a list of licensed trust departments.
Fund the trust.How an asset is transferred to the trust depends on the type of asset. For example, real estate must be deeded into the trust. Stocks will require that new stock certificates be issued in the name of the trust. An attorney or financial professional can review your assignments and make sure that the documentation is done correctly. This is especially important if business assets are being transferred into the trust..
- To transfer a bank or investment account to a trust, simply change the name on the account to the name of the trustee. Name the specific trust, for example, “Jane Smith, as Trustee of the Jones Children’s Trust dated [date]”.
- Personal property can be transferred to the trust by describing the property in the trust instrument or by preparing an assignment, which assigns the interest in the described personal property to the trust and is then attached to the trust instrument.
Review your trust documents.An irrevocable trust is very difficult to change once it is established. However, you can amend your RLT as needed. You should review the trust documents annually (tax time is a good choice) and amend to add new assets, remove those that have been sold and confirm your beneficiary choices.
- Also amend your RLT at either the birth, adoption, or death of a child.
- If you divorce, you may need to change either the trustee or beneficiary designations.
- File the RLT documents with your other important papers where it will be easily recovered on your death. The trustee should also receive original signed copies of the trust documents.
QuestionHow do I leave a minor a portion of my insurance policy? I want to make sure it goes to the child and not the parent. What is the best way to set this up and at what age should the child be able to withdraw the funds?wikiHow ContributorCommunity AnswerDo this in your will or trust. Parents may think if they name a guardian for their minor children in their wills and something happens to them, the named person will automatically be able to use the inheritance to take care of the children. But, that’s not what happens. The court manages the money.Thanks!
QuestionIf I set up a trust for my four children, can I arrange to receive a portion of their funds at a certain age even if I am living?wikiHow ContributorCommunity AnswerNo, you cannot.Thanks!
I would like to form a Trust for the benefit of my minor grand-child to avoid clubbing of Interest Income earned on Term Deposits in Bank with the income of her parents?
- A grantor who wants to ensure that, upon his death, any assets remaining outside of the trust are transferred to it, he should consider having a “pour-over” will prepared. A Pour-Over will directs that all assets not mentioned specifically in the Last Will and Testament and not titled to the trust, be distributed to the trust.
Video: Setting up a Family Trust, Land Trust, and Living Trust to Protect Assets
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