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Establishing a Trust Fund
Table of Contents
Benefits of Establishing a Trust
Types of Trusts
Specific-Use Trusts
Establishing a Trust
The Role of the Trustee
Providing Peace of Mind
People often associate trust funds only with the wealthy. But a
trust fund ("trust") actually can be an effective financial tool for many
people in many circumstances.
A trust is a separate legal entity that holds property or assets
of some kind for the benefit of a specific person, group of people or
organization known as the beneficiary (beneficiaries). The person creating a
trust is called the grantor, donor or settlor. When a trust is established, an
individual or corporate entity is designated to oversee or manage the assets in
the trust. This individual or entity is called a trustee. A trustee can be a
professional with financial knowledge, a relative or loyal friend or a
corporation. There are pluses and minuses to each type of trustee. An
individual trustee may provide a more personal touch, but may die or move away.
A corporate trustee may be less personal but provides experience, investment
skills, permanence and impartiality. More than one trustee can be named by the
grantor if he or she wishes.
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Benefits of
Establishing a Trust
Whether it makes sense to establish a trust depends on your
individual circumstances. Some common reasons for setting up a trust include:
- To provide for minor children or family members who lack
financial experience or who are unable to manage their assets
- To provide for management of your assets should you become
unable to oversee them yourself
- To avoid probate and transfer your assets immediately to your
beneficiaries upon death
- To reduce estate taxes or provide liquid assets to help pay for
them.
Keep in mind that you may not need to establish a trust to
accomplish these and other financial goals. A well-written will may distribute
your assets appropriately. Check with a lawyer before deciding if a trust is
right for you.
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Types of Trusts
There are two basic forms of trusts: after-death (or testamentary)
and living (or inter vivos).
An after-death trust will come into existence, usually by virtue
of a will, after a person's death. The assets to fund these trusts must usually
go through the probate process. In certain states they may be court-supervised
even after the estate is closed. An example of an after-death trust would be a
mother leaving land to a trust benefiting a young son in her will. The will
establishes the trust to which the land is transferred, to be administered by a
trustee until the boy reaches a stated age, at which point the land is
transferred to the son outright.
A living trust, on the other hand, is a trust made while the
person establishing the trust is still alive. In this case, a mother could
establish a trust for her son during her lifetime, designating herself as
trustee and her son as beneficiary. As the beneficiary, her son does not own
the property but can receive income derived from it.
Living trusts can be revocable or irrevocable. The most popular
type of trust is the revocable living trust, which allows the individual to
make changes to the trust during his or her life. Revocable living trusts avoid
the often lengthy probate process but, by themselves, don't provide shelter for
assets from federal or state estate taxes.
When an irrevocable living trust is set up, ownership of the
assets is turned over to the trustee. The trust becomes, for tax purposes, a
separate entity, and the assets cannot be removed, nor can changes be made by
the grantor. This type of trust often is used by individuals with large estates
to reduce estate taxes and avoid probate. However, if the grantor names himself
or herself as trustee or is entitled to trust income, the tax benefits would
generally be lost.
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Specific-Use Trusts
Before you set up a trust, ask yourself what you are trying to
accomplish. Here are just a few of the many special uses for trusts:
- A charitable trust is used to make donations and realize tax
savings for an estate. Typically, there is a transfer of property such as art
or real estate to a trust which continues to hold the asset until it is
transferred to the charity, usually after your death. The donor can continue to
enjoy the use of the property, then the charitable gift may be deductible for
estate tax purposes.
- A bypass trust allows a married couple, in certain cases, to
shelter more of their estate from estate taxes. The first spouse to die can
leave assets in a trust which can provide income to the surviving spouse for
the rest of his or her life, taking advantage of the unified credit provided
under Federal Gift and Estate Tax law. Upon the death of the second spouse, the
assets in the trust pass directly to the children or other beneficiaries,
without being taxed at the second spouse's death.
- A spendthrift trust can be a good idea if your bene-ficiary is
too young or does not have the mental capacity to handle money. The trust can
be established so that the beneficiary receives small amounts of money at
specified intervals. It is designed to prevent that person from squandering
money or losing the principal in a bad investment.
- A life insurance trust is often used to give your estate
liquidity. In this case, the proceeds are payable to the trust and the trustee
is empowered to lend money to or purchase assets from the estate.
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Establishing a
Trust
Establishing a trust requires a document that specifies your
wishes, lists beneficiaries, names a trustee or trustees to manage the assets
and describes what the trustee or trustees may do. For a living trust, you can
name yourself as trustee but, if you do, you should also name a successor
trustee to take over if you should become disabled or when you die. Once the
document is completed, you must transfer the assets to the trust. Keep in mind
that, in the case of certain assets, such as real estate, you may incur fees
and transfer taxes.
Some states require you to file a trust document with the state.
To find out about your state's laws regarding trusts, talk with an attorney who
specializes in estate planning.
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The Role of the
Trustee
The person who manages a trust, the trustee, has a legal duty to
manage the trust's assets in the best interests of the beneficiary or
beneficiaries. This might include managing rental properties, investing funds
or paying income to the beneficiary.
How much a trustee is required to do and how much access he or she
has to the funds should be specified in the trust. A simple or mandatory trust
requires the trustee to distribute income to the beneficiary. A complex or
discretionary trust may afford the trustee discretion over the principal and
income to be distributed.
Generally, trustees are paid for their services because of the
amount of work involved in managing a trust and the threat of potential
liability if assets are mismanaged. How much a trustee is to be paid should be
agreed upon in advance.
If you want to name someone as a trustee, talk with that
individual or entity about the trust. Be sure they agree to serve as trustee
and can comply with the terms of the trust. Because there is generally such a
high standard of duty and liability imposed on trustees, an individual or
entity cannot be forced into becoming a trustee just because he or she is named
in a trust document or will. If your designated trustee is unable or unwilling
to perform, the court will appoint a trustee for you, unless a successor
trustee, such as a corporate trustee, is designated.
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Providing Peace of
Mind
It's possible that a trust may be the answer to your estate
planning needs. Take the time to evaluate carefully what you are trying to
accomplish, then consult an attorney experienced in estate planning. A
well-written trust can help to provide peace of mind for you and your
beneficiaries.
Note: For affordable legal assistance Center For Debt Management highly recommends Standard Legal's Do-It-Yourself Software Kits. For credit repair service, Lexington Law Firm
is the most trusted law firm in America, with over 15 years of experience.
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Establishing a Trust Fund: Trustee, Living Trust, Charitable Trust
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