Setting up a Trust: An Easy 8-Step Guide

It’s important to know how to set up a trust. Looking to secure your loved ones’ financial future by making your financial decisions today?  A trust fund is a great way to achieve strength in your financial planning and to make sure that your assets are secured. Trust funds aren’t just for wealthy people – they’re for anyone interested in protecting their assets after they’ve gone. That’s important – and it’s easier than you might think: many kinds of trusts can be set up to achieve a variety of goals.  

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Estate planning: Why would a person want to set up a trust?  

Trusts are financial tools that individuals use to preserve assets and to designate them for family, loved ones, charitable organizations, retirement funds, public works, and more. Perhaps the best way to get started in thinking about setting up a trust is to answer this question for yourself: Why is the trust needed? What are some of your valuable assets that might need to be protected or distributed after you’re gone? 

A trust may be necessary to: 

  • Shorten process of probate court 
  • Seamlessly transfer business or real estate after death 
  • Give assets to a minor relative 
  • Protect assets from creditors or avoid lawsuits 
  • Parcel out an inheritance over time  
  • Provide for a special-needs child 
  • Reduce estate taxes or gift taxes 
  • Maintain privacy by preventing your estate from becoming public record 
  • Leave money to charitable organizations 

How does a trust work? 

First, let’s go over some important terms related to trusts 

The grantor of a trust is the person who creates it. This person is also known as the trustor

The trustee of a trust is the legal owner of a trust’s assets. That’s the person responsible for handling the assets, tax filings, and distribution according to the trust’s terms.  

The beneficiary of a trust is the person or entity specified in the trust to receive the assets. 

A revocable trust is one that can be modified or canceled by the party who creates it. People tend to use revocable trusts together with, or instead of, their wills. Any income earned by the trust’s assets goes to the grantor. When the grantor dies, the assets go to the beneficiaries of the trust. These trusts can help survivors shorten the lengthy probate process that is often associated with a will.  

An irrevocable trust is one in which the terms cannot be revised or canceled after it has been signed without the beneficiary’s permission. The grantor yields control of the assets placed in the trust, and the assets are removed from that person’s estate. The grantor is then no longer responsible for paying taxes related to the trust fund’s assets. This can give an individual better protection from creditors, and it can reduce estate taxes.  

Can I set up a trust by myself? 

Yes, individuals can set up trusts by themselves. With a DIY approach to setting up trust documents, like some sites offer online, no attorneys are involved in the process. It can be done; however, this is not always a good idea.  Having a partner in estate planning can strengthen the process for you. 

A trustee must be chosen who will be in charge of managing the trust assets and distributing them. Generally, the grantor is named as the initial trustee, with an alternate or successor trustee as a backup. It is also possible to choose a company, such as a bank or a trust company, to be the trustee. The trustor also must choose the beneficiary or beneficiaries. This is, most often, a spouse or family member.  

How to Set up a trust: 8 Important Steps 

Whether you go with an online DIY approach or choose to hire outside help, it is important to know how to set up a trust. Here are the basic steps involved in setting up a trust: 

1. Decide what kind of trust is best for you. 

Different kinds of trusts are available for all different situations, depending on an individual’s financial interests and needs. We’re focusing on the most common, a revocable living trust. Many other kinds of trusts may be better suited to your interests. The trustor must decide whether to make it an individual or a shared trust. An individual trust contains property that only the grantor owns, and a shared trust contains property owned by the grantor or their spouse, or co-owned by the grantor and their spouse. 

2. Decide what property will be included in the trust.  

In a living trust, the grantor will want to include their most valuable property and items. This can include any variety of assets, including but not limited to:  

  • Houses and other real estate 
  • Stocks, bonds, the contents of safety deposit boxes, money market funds, mutual funds, or other non-retirement investment and brokerage accounts  
  • Small business interests (stock in a closely held corporation, partnership interests, or limited liability company shares) 
  • Savings and investment accounts 
  • Patents and copyrights 
  • Precious metals 
  • Valuable works of art, furniture, antiques, collections, or other personal property 

Other assets that should not be included in the trust:  

  • Mortgaged property: While it is possible to include mortgaged property in a trust, the owner would have to refinance it into the name of the trust, and this can be quite difficult, with some lenders. 
  • Financial accounts: The grantor can include accounts from which they pay your monthly bills without creating any complications as long as they are the trustee of the trust. That way, the grantor can have full control of the trust assets and can use the funds to pay bills. 
  • Retirement accounts: IRA’s, 401(k)s, 403(b)s, and other qualified annuities should not be transferred into a living trust. With any transfer of accounts like these, the recipient would have to pay the income tax on them. Instead, experts recommend naming the trust as the primary or secondary beneficiary of the retirement account. 
  • Medical savings accounts: These accounts are tax-free, so they cannot be named under a living trust. If the trustor must tie such accounts to the trust, the trust should be named as the primary or secondary beneficiary of the account. 
  • Life insurance: Naming a living trust as a beneficiary of a life insurance policy should be avoided. When trustors own a revocable trust and name themselves as the trustee on that revocable trust, assets in the trust are still considered their property and are part of the estate’s worth. In this circumstance, the government can impose heavy estate taxes on them. Speak with a lawyer or tax professional before transferring a life insurance policy into a trust. 
  • Vehicles: Cars, trucks, boats, airplanes, etc., can be transferred into a revocable living trust, but states often impose estate taxes when certain assets are retitled in the name of a trust. Also, because of depreciation or potential loans against a vehicle, it is best to speak to a highly experienced professional or an estate planning attorney before transferring such a title. Some states do not allow vehicle owners to name a beneficiary after death.  

3. Choose a successor trustee. 

When creating a revocable living trust, choose someone trustworthy to assume the role of a successor trustee. This is the person who will manage the trust and its assets should the trustor pass away or become incapacitated or unable to execute the trust’s terms. This person should have integrity, objectivity, and good judgment.  

4. Decide who the beneficiaries will be. 

The beneficiaries are those who will receive the assets designated by the trust. This is entirely up to the trustor’s discretion. However, most individuals transfer assets to a surviving spouse or to their children.  

5. Create the legal trust document. 

While this is something that can be achieved online, it is wise to consult with an outside source such as a financial advisor or another qualified professional. Websites like LegalZoom or TrustandWill can help guide individuals through the process if they decide to create a living trust by using an online service.  

6. Sign the document in front of a notary public.  

Once the Trust is prepared, it must be executed. This means that the trustor must sign it in front of a notary public and/or witnesses. This requirement varies by state, so make sure to research and understand your state’s laws. There is no need to file the trust with any court or agency; just keep it in a secure location with easy access. 

7. Change the title of any property that appears in the trust that has a title document. 

 The new title should reflect that you now own the property as trustee of the trust

8. Set up a schedule to review the trust.  

Living trusts should reflect any changes to an estate or financial situation. To keep things up to date, review the trust, its assets, and its terms at least once each year. As a rule, it should be officially updated every 3-5 years

Create the trust: make the decisions. 

The more varied and sizable a person’s estate, the more likely that the person will need assistance in estate planning. Fortunately, Cope Corrales offers expert assistance with setting up trusts as part of their personalized overall wealth management plan. Contact them to confer with a financial professional who will help you build a secure estate plan for your loved ones.   

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