Skip to main content

A trust is a useful estate-planning tool for passing on assets that allows assets to be held by trustees for the beneficiaries. Setting one up can be complicated, so you should have professional help. Here are the basics of setting up a trust.

How to Set Up a Trust Fund

Setting up a trust fund offers many advantages in terms of passing on wealth or assets. It avoids probate, or the transfer of assets in court. This increases not only the ease of transfer, but also privacy. It helps you determine more definitively how your assets are distributed, and to whom. Depending on the assets you are attempting to pass on, it can also help avoid estate taxes that might make the transfer difficult for those receiving the assets. Setting up a trust is no simple task, and takes much more work than a simple will. Therefore, it helps to understand the steps involved.

Choose the Right Trust

First of all, make sure you have enough in assets that it's worth your time to go through this process. I've included a link to a very good article that discusses the extra tax headaches that can come from trust income. It isn't always worth it unless you're dealing with a fair amount of money. Once you've made the decision to set up a trust fund, decide what type of trust you wish to create. The type of trust you make is largely dependent on what you plan to do with it.

Revocable Trusts

Revocable trusts are trusts that can be altered. A revocable trust, or "living trust", might be the way to go if you believe you'll be alive and well for quite some time.

Because the trust is revocable, you can alter the design of how the trust will work over time if you change your mind about things. You can even terminate the trust if you wish. A revocable trust becomes irrevocable once you die and the distributions and assets shift to the beneficiaries. Moreover, if you have health problems, the trustee overseeing its management can help you. While a revocable trust can help you avoid probate, they do not help you avoid estate taxes. This is because they are still includable in your estate since you have power over them.

The revocable trust is mainly useful for helping protect your assets as you age, and/or help you manage assets for trustees that you deem not quite ready to handle the responsibility.

Irrevocable Trusts

Scroll to Continue

TheStreet Recommends

Conversely, an irrevocable trust cannot be changed once it has been implemented. If you're worried primarily about estate taxes, an irrevocable trust is probably where you'll end up. Because you are effectively transferring the assets away from you, they are not under your taxable estate.

The tough decision of which approach to take has much to do with whether or not you feel good about releasing your assets completely from your control. You basically have to do this in order to enjoy the tax benefits on an estate level, as well as when trying to qualify for government benefits based on assets.

This just scratches the surface of the intricacies of trusts. There are trusts that specifically set up distributions for schooling costs. There are trusts for the disabled. There are charitable trusts. To ensure that you set things up properly for what you want to accomplish, it is very important to seek the help of an experienced lawyer.

Break Down the Specifics 

- List all of your assets. You are considered the grantor - the one with the assets that you want to transfer through a trust. List all of the assets that you want included in the trust; your accounts, investments, real estate, everything that you're trying to preserve.

List all of the beneficiaries that will be the recipients of the trust.

Lay out the specifics of the distributions. How much will recipients receive? What percentage of the trusts annual income will be used? There are so many ways to do this. You might make a trust that will simply survive your children's lives. Or you might set it up to be self sustaining, and only issue distributions from yields. There are a lot of ways to do it.

-Decide on a trustee. The trustee is the one that will oversee the trust and carry out the trust directions. It might be you yourself at first, but perhaps you make it a lawyer or board of trustees after you pass away. These sorts of details are important.

Move Assets

Eventually, once everything is laid out, you'll be ready to fund the trust. Your chosen assets will shift over to the trust, and away from your estate. Once again, you should have a lawyer (and maybe an accountant) helping with this process. You'll also have to register the trust fund with the IRS. Once again, this is an oversimplified version of a very complicated endeavor. Get a lawyer to ensure it's done right.

Introducing TheStreet Courses:Financial titans Jim Cramer and Robert Powell are bringing their market savvy and investing strategies to you. Learn how to create tax-efficient income, avoid mistakes, reduce risk and more. With our courses, you will have the tools and knowledge needed to achieve your financial goals. Learn more about TheStreet Courses on investing and personal finance here.