Your Guide to How to Set Up a Trust Fund

If you are worried about how your wealth will be appropriated after passing on, or if you are a parent or guardian continually thinking about providing for your family and securing their future, you may want to consider setting up a trust fund. Trusts are an excellent way to set your children or grandchildren up for future financial success, but you may have questions about how to get started. 

This guide will help you understand the crucial aspects of the trust fund creation process, including what they are, what they can do, and the different types available. 

Understanding Trust Funds

A trust refers to a legal tool designed to hold assets or property on behalf of another person, group, or organization. The person managing a trust is called a trustee and is supposed to be a neutral third party. The fund may include a business, stock, property, money, or a combination of any or all of these. Ideally, the trustees are mandated to hold onto the trust until such a time that your chosen recipient is of age to receive it. There are different types of trust funds, including:

  • Irrevocable trusts 

Irrevocable trusts are funds that, once established, cannot be changed. Ideally, the grantor cannot rescind or modify the trust’s distribution and terms once it has been set up. It is crucial to note that in this type of fund, the grantors can no longer pay income and estate taxes on profits generated by the assets since he no longer owns the assets.

  • Living or revocable trust funds

Revocable trusts are those whose terms and distribution can be changed at any given time. Ideally, you are free to update the trust by adding or removing beneficiaries and assets to the trust as need be. Ideally, the changes can be made until the time the grantor passes on. 

  • Charitable remainder trust

A charitable remainder trust is an estate planning tool that allows you to pass your wealth to your preferred charity instead of a loved one. This kind of trust benefits from charitable contribution tax credits and will enable you to donate your assets to a great course.

Understanding the types of trusts is a crucial step, but learning how your loved ones or recipients will benefit from them is even more important. Let’s explore who benefits when you set up a trust.

Who Recipients Benefit from Trusts

A trust offers unique benefits to you and your family members. Here are a few benefits of adding trust to your estate estate planning efforts:

  1. They help you avoid a probate court process.

Trusts don’t go through lengthy probates during distribution. Unlike a will that is made public, a trust stays private, and your attorney and trustees will be the only persons to execute the agreements. By avoiding the probate process, trusts are often a quicker and simpler way to have your assets and money distributed to your loved ones after your death.

  1. They may provide tax benefits.

Since a trust can be revocable or irrevocable, it may or may not lead to tax advantages for you and your loved ones. Notably, the contributions to a trust may be subjected to gift tax requirements, but assets in the trust can be exempted from estate tax once you pass on if certain conditions are met.

  1. They offer guidance on the use of your assets.

A trust can help you customize your estate and have a say on how it will be managed. Ideally, you can include conditions that guarantee your wishes are met. A good example is where you state that the money in the trust will be given to a grandchild only once they turn 18. You can also state that the money will be used for a specific purpose, e.g., on college tuition

  1. A revocable trust can cover emergencies.

Unlike wills and irrevocable trusts that go into effect only after you die, a revocable trust can help your loved ones during a crisis such as illnesses and disability. Ideally, the trust money can pay bills, file tax returns, and make distributions on your behalf.

A wealth management professional can help walk you through any concerns you have about setting up a trust for your family, plus discuss any questions you may have throughout the process. 

Kids sitting at a table holding 100 dollar bills

5 Steps to Help You Set Up a Trust 

You now know the basics about trusts, but may not completely understand the process of establishing one. The steps below will help you set up your fund:

Step 1: Collect all the necessary data

It is advisable to be very clear and specific to the goals of setting up your fund. This helps you in the collection of all details to create the legal entity, including on the:

  • Grantor
  • Type of trust, e.g. revocable, irrevocable trusts or special needs trust
  • Assets to be placed on trust — including money, property, and more
  • Beneficiaries to access trust fund bank account
  • Trustees
  • Method of managing and investing the assets, plus the timing of distribution
  • Duration of trust before termination

Armed with all the data you need, it is now time to look for a reputable attorney who will guide you on the process.

Step 2: Work with a reputable attorney

Your next move is to hire a skilled estate planning attorney who knows how to set up a trust fund within the state where you want the trust to be domiciled. Ideally, the state laws that you use to establish a trust agreement significantly influence how the court oversees it. Make sure to consult qualified and experienced attorneys when creating a trust. Your attorney can help you create a trust declaration or the full trust instrument that establishes the family trust fund.

Step 3: Register the trust with IRS

A trust needs a taxpayer identification number (TIN) and employer identification number (EIN) to be fully operational. The EIN is helpful when the trust is filing its stand-alone tax returns. You will also use the number to open bank accounts at banks and other institutions. You receive the EIN once you complete the online IRS process. You can also download IRS Form SS-4, fill it out and submit it to IRS by mail.

Step 4: Transfer the assets

Your next move is to fund the trust. Funding involves retitling all the property or funds that you want to transfer to trust. The retitling process can be complicated, and it is a good idea to work closely with your attorneys at this stage. Ideally, the retitling can be done as “[Name of Trustee] as Trustee for [Name of the Family T. Fund] on [Date].” Personal finance differs with individuals and you don’t need a large lump sum of funds to get started.

Step 5: Keep detailed records 

Your last step is to ensure all records, including accounting records, are appropriately updated. Keeping all paperwork in order helps you and the trustee manage the fund well and will aid the court process in case of lawsuits.

The process becomes a lot easier when you work with a wealth manager, trusted attorney, and other professionals to keep legal and financial matters moving smoothly. Do not be afraid to ask for help throughout the process and to trust key details to time-tested experts.

6 Common Pitfalls When Setting Up Trust Funds

As with any situation, you can run into problems when you’re setting up your trust fund — especially if you try to do so without the help of a professional who understands the process. The following are common mistakes that you should try to avoid when setting up your trust fund:

  • Choosing the wrong trustee
  • Not considering a minor’s maturity level.
  • Setting the wrong goals for the trust assets, including real estate
  • Designating the wrong beneficiary, trustee or successor trustee
  • Not including asset protection provisions
  • Not reviewing the trust annually 

Trusts are an important legal tool that protect your assets and safeguard your loved ones’ financial futures once you are gone. Remember, setting up a trust account is a legal process, and you need to work with an experienced attorney with a keen eye and foresight to ensure all crucial considerations are taken into account. If a trust is on your mind this year, contact Bogart Wealth today to speak with an expert about any questions you might have about how to set up a trust.

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