How to Set Up a Trust Fund

Setting up a trust fund is one of many ways you can transfer money, property, and other assets to your loved ones or worthwhile causes. Like a will, it’s an estate planning tool that outlines how your affairs should be handled after you pass. But a trust fund actually provides more control, privacy, and specificity. It can help you minimize estate taxes and avoid probate, and it can save your beneficiaries time, money, and piles of paperwork. A financial advisor can help you make this decision, especially one who specializes in estate planning topics.

What Is a Trust Fund?

A trust fund is an estate planning tool typically used to transfer assets or property from one party to another. The contents of a trust fund can include things like jewelry, cash, investments, real estate, cars or just about anything else.

While the grantor, or creator of the trust fund, is alive, the trust fund is holding the assets on their behalf. However, once the grantor passes away or becomes incapacitated, the trust fund’s control will go to the trustee. Trustees are usually neutral third parties that have no financial interest in the trust fund’s contents. Trust funds often have stipulations surrounding them, such as the beneficiaries reaching a certain age. This isn’t always the case though, as the grantor can arrange the trust however they want to.

Steps to Set Up a Trust Fund

Step 1: Choosing From the Different Types of Trusts

Before you set up a trust fund, think about the purpose it will serve. There are revocable living trusts and irrevocable trusts, living trusts and testamentary trusts. There are also trusts for particular cases that might apply to your family. Here’s a breakdown of each:

Education Trust: These trusts specify that their funds must be used to cover academic expenses.
Spendthrift Trust: These limit how beneficiaries can use their funds as well as how they’re distributed.
Special Needs Trust: These help allocate an inheritance or income to people with disabilities.
Charity Trust: These can help grantors bequeath gifts to charitable organizations. Figure out what purpose you’d like the trust to serve, and choose accordingly.

Step 2: Outline the Details of the Trust

Again, there are four components of a trust fund that you must set. Here’s a brief breakdown of each:

Grantor: This is the person whose name the trust is in.
Beneficiary: This is the person or people who are slated to receive the contents of the trust.
Property and assets: These are the contents of the trust that will eventually go to beneficiaries.
Trustee: This person is a fiduciary for the trust fund who carries out the grantor’s wishes. This may still be the grantor while they’re still alive. However, they should appoint a successor trustee to manage the trust and execute their wishes after they’re incapacitated or pass away.

Once you’ve chosen the right trust type of trust, you should record what assets you’ll place in the trust fund, how the assets will be managed and distributed, and who the beneficiaries and trustees will be. Also, consider how long the trust will last and what conditions will cease to operate.

Step 3: Make the Trust Official

Several websites offer DIY trust services, but they usually aren’t a safe solution. Trusts can be complicated, so most grantors opt to enlist the help of a professional estate planning attorney. Ask friends, family, and colleagues for referrals if you’re comfortable doing so; if you work with a financial advisor, he or she should also be able to point you in the right direction.

State and local bar associations also list attorneys who will be familiar with state trust laws. Since fees can vary widely, you should compare prices as well as testimonials. You should also check whether your employer offers discounted estate planning services as part of their employee benefits package.

Your attorney will create a declaration of trust, deed of trust, or trust instrument to formalize the trust details you’ve decided on. The document can be short or long, simple or complex. It depends on the type of trust, the assets in the trust, and the number of listed beneficiaries.

Once your attorney has completed the trust document, you must sign the document in the presence of a notary. Some states require you to file trust documents with the state; an attorney can advise you on whether you need to do that, or how to do so.

Step 4: Fund the Trust

Once you’ve created your trust, it’s time to fund it with the assets you intend to store in it. Take your trust documents to a bank or financial institution and open a trust fund bank account with the same name as the trust. You will need to provide the names and contact information of the trustees. You can either deposit a lump sum or pay into the trust over time. Eventually, the fund becomes the new owner of the assets.

Step 5: Register Your Trust Fund With the IRS

Once your trust fund is real, you have to register it for tax purposes. Each trust fund will usually require its own taxpayer identification number (TIN) for tax returns and financial accounts, among other needs. This is the equivalent of an individual’s Employer Identification Number (EIN) or Social Security Number (SSN). The IRS website makes it easy to file online, but you can download and submit Form SS-4 by mail if you prefer printouts.

How to Assign a Trustee to Your Trust

Since a trustee is responsible for managing and distributing the contents of the trust, choosing the right one is vital to the success of your estate plan. A trustee can be a person, like a relative, or an institution, like a bank. Either way, they will have a fiduciary responsibility to act in your and your beneficiaries’ best interest.

Trustee duties are far-ranging, including paying bills, keeping records, preparing taxes, and making investment decisions. Becoming a trustee may require conducting legal or financial research and seeking professional expertise. You should only appoint someone who knows your values and whom you trust to take these responsibilities seriously. People who have strong organizational skills and are competent and reliable usually make the best trustees.

Some grantors choose to appoint multiple trustees, combining family members or friends, professional attorneys or accountants, and a bank or trust company. Corporate trustees bring experience, objectivity, and professional resources to the table, but often charge a fee for their services. If you are naming a single trustee, name at least one successor trustee who can step into the primary role if need be.

It’s best to use flexible language in your trust, so you can add or alter trustees if something changes. In addition to personal relationship changes, there are bank troubles to protect yourself against.

What to Consider With a Trust Fund

Trust funds can be a great way to protect and pass on wealth, but they are not perfect. They almost always require the use of attorneys or other experts, who charge high hourly rates. You might not need trust if your finances and end-of-life wishes are relatively straightforward. However, make sure you do have some estate planning arrangements together, such as a will.

A good estate planning lawyer or financial advisor can help you determine whether a trust is something you need or want. They can also help you through the process of creating and funding a trust that clearly and specifically describes where your assets should go upon your death in an incontestable way. Finally, they can help you avoid common trust fund mistakes, like picking an unsuitable trustee, neglecting to fund the trust, or making trust instructions too rigid.

Bottom Line

Building a strong estate plan is often essential for making sure your family is in good financial shape following your passing. While a trust fund can certainly be one part of your plan, it should also include things like a will, power of attorney, funeral plans and more. Take care of arranging these things before it’s too late so you and your family can feel comfortable about the future.

Estate Planning Tips

A trust is just one of a wide range of financial matters you’ll need to deal with later in life. Working with a financial advisor can help to ensure you’ve covered all your bases and can enjoy your golden years without worry. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Before you start worrying about your estate, though, you need to make sure you save enough for retirement. Using SmartAsset’s retirement calculator can help you see whether you’re on track for your retirement goals.