How to Set Up A Trust

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There are two steps involved in setting up a trust. Most people get the first step right, but then fail to perform the second step properly. However, both steps need to be completed properly in order for the trust to achieve the estate planning objectives for which it was created.

The first step in setting up a trust involves drafting and signing a trust agreement. A trust agreement is essentially a legal document that specifies:

  • Who is creating the trust;
  • Who will manage the trust;
  • Who will benefit from the trust assets; and
  • When and under what conditions distributions from the trust will be made.

That being said, the person creating the trust is referred to as the settlor or grantor. The person (or persons) given the authority to manage the trust is referred to as the trustee. And those who are entitled to benefit from the trust assets are referred to as trust beneficiaries.

In most cases, the settlor also acts as the trustee while he or she is alive and able, and will specify who will step into that role when he or she dies or becomes incapacitated.

Funding the trust

The vitally important second step in setting up a trust, that so many fail to perform properly, is referred to as funding the trust. What this means is to transfer ownership of your assets to the trust by modifying the deed or title so that it names the trust as the owner of the asset rather than you.

Should you neglect to transfer ownership of any asset to your trust, that asset will need to go through probate after you die and before it can be transferred to your heirs. This can be time-consuming and expensive and may result in a loss of privacy and possibly estate tax consequences.

Testamentary Trusts

Another way of setting up a trust is through your last will and testament. By including certain language in your will, you can create what is called a testamentary trust. This type of trust differs from others in that it is not implemented until after you pass away.

A testamentary trust is most often used to provide for minor children and/or to ensure that your heirs don't spend their entire inheritance all at once, by distributing the income or assets to them a little bit at a time, rather than in one lump sum.

So Who Needs a Trust?

A trust is a legal entity that is created to hold title to property for the benefit of others. The trustee holds legal title to the trust assets, but not full title.

This means that the trustee can only use the trust assets for the benefit of the people named as beneficiaries in the trust agreement, but never for his or her own benefit.

The beneficiaries of the trust own what is referred to as equitable title to the trust assets. This means that they have the right to have the assets used for their benefit, in the manner specified by the trustor when he or she set up the trust provisions.

There are many different reasons why you might want to set up a trust, for instance:

  • To avoid probate;
  • To protect assets from creditors;
  • To provide for minor children and those who lack the ability to manage money and assets on their own;
  • To dictate when and how your assets are to be distributed to others; and
  • To provide for a charity

These are just some of the many reasons why you might want to set up a trust. Other reasons include, Medicaid spend down avoidance, federal estate tax avoidance, and charitable giving.

To learn more about how to set up and properly fund a trust and why you may need one, consult with an experienced estate planning attorney.

How an Experienced Estate Planning Attorney Can Help

While it is a good idea for you to learn as much as you can about trusts and other estate planning mechanisms, you can't expect to become an expert in the subject right away.

An experienced estate planning attorney will have the knowledge and expertise needed to help you set up and fund a trust properly, so that it will meet your individual estate planning goals.

To discuss all of your estate planning concerns and find out how he or she can help address them, contact a qualified estate planning attorney to arrange a free consultation.

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