You can’t take it with you, as the saying goes, but you can manage your money after you’re gone in a way that shapes how people remember you and benefits others. One of the best ways to do this is through a trust fund. You’ve probably heard of a trust fund, but you may not know exactly what it is. Don’t worry; you’re not alone. It’s easy to get lost in the legalese and nuances of trust fund jargon. Additionally, to many people, the words “trust fund” conjure images of super-wealthy, entitled children born with silver spoons in their mouths. Today, however, both of these perceptions are far from the case. At its most basic, the purpose of a trust fund is to allow a person’s money to continue to be useful after they pass away, which makes trust funds an extremely valuable part of your wealth management system. The exciting part about trust funds is that they are flexible enough to meet your individual needs, even if you don’t consider yourself “rich.” The question that should drive your decision is this: How do I want to be remembered? You have more to protect than you might think. As I mentioned above, trust funds are not just for the super wealthy; they are for anyone who wants to leave a lasting and tailored legacy for their family or their business. A wide range of people can benefit from establishing trust funds. Many people have assets worth at least a million dollars without realizing it. When you consider life insurance, a home, retirement plans, checking accounts and other investments, you may be surprised at how much you’re worth. Additionally, if you strive to void high-interest debt, are focused on increasing your income, and have clear goals and plans to achieve them, you’re doing better than you think. Think creatively and test different waters. Trusts do not have to be boring or suck all the air out of the room. When you create a trust, be as creative as you want in a way that reflects who you are. For example, you can use trusts to support causes you believe in and show that you care about your community. You can leave money to an animal conservation that supports endangered animals, arrange a one-time cleanup of an animal habitat, donate to a nonprofit organization that works to provide clean water in developing countries, or contribute to any other charitable organization that you care about. Additionally, if you have children or grandchildren and want to think outside of the “trust fund box,” you have several options. I recently encountered an entrepreneur who benefited from a unique setup. His grandparents were wealthy and told all of their children and grandchildren that they would not be leaving any of their wealth to their children via inheritance. Instead, they set up a trust fund. Anyone who excelled academically would get money for their education. If any of the kids or grandkids wanted to start a business, they could borrow money, provided they had a good background and credit history. The trustee would make the final decision on whether to lend the money. This sort of trust fund reminds me of the famous Warren Buffett quote that he would give his children “enough money so that they would feel they could do anything, but not so much that they could do nothing.” I am considering a similar financial structure for my own kids. You can even have a combination of specialized trusts, such as stand-alone retirement trust, an irrevocable life insurance trust and a charitable remainder trust all working together. Statistics show that 70% of wealthy families lose their wealth by the second generation. Combining trusts could provide for your family while protecting the assets. Clear the air. Setting up a trust fund has several benefits, but it is important to note a few legal issues to keep your head above water (I promise not to be boring). First, because a trust is a legal contract, you’ll need a lawyer to set it up for you, so be ready to pay some legal fees. Also, remember there are three key parties that comprise a trust fund: 1. A grantor, or the person who sets up a trust and has the assists to give. 2. A beneficiary, or the person chosen to receive the trust fund assets. 3. A trustee, or the person charged with managing the assets in the trust. One last note: There are two main types of trust funds: a living trust (or revocable trust) and an irrevocable trust. The difference is that a revocable trust is a trust in which the terms can be changed at any time. An irrevocable trust describes a trust that can’t be modified after it is created without the consent of the beneficiaries. While each type of trust fund has its own parameters and stipulations, these are the basics you need to know to get started. How do you want to be remembered? A trust is about more than just money. It reflects the life choices that you made in the context of specific beliefs and values. You are much more than your financial portfolio and assets. A trust fund should reflect how you live your life, what you care about and how your values have influenced your decisions over the years. Even if you don’t have much money, you can still leave a legacy of family, community involvement and influence. 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 if he or she 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. But 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: Choose the Right Type of Trust

Before you set up a trust fund, think about the purpose it will serve. There are revocable 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 helps 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 It Official

How to Set Up a Trust Fund 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 or trust 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 that 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 types of trust, the assets in the trust, and the number of listed beneficiaries. Once your attorneys 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, how to do so.

Step 4: Fund the Trust

Once you’ve created your trust, it’s time to fund 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 that have strong organization skills and are competent and reliable usually make the best trustees. Some grantors choose to appoint multiple trustees, combining family members or friends, professional attorney 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 that 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

How to Set Up 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 a 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 late 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 qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one 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 – or whether you need to start saving more.

Photo Credit: ©iStock/RichLegg, ©iStock/simpson33, ©iStock/kate_sept2004 Liz Smith Liz Smith is a graduate of New York University and has been passionate about helping people make better financial decisions since her college days. Liz has been writing for SmartAsset for more than four years. Her areas of expertise include retirement, credit cards and savings. She also focuses on all money issues for millennials. Liz’s articles have been featured across the web, including on AOL Finance, Business Insider and WNBC. The biggest personal finance mistake she sees people making: not contributing to retirement early in their careers. If you want to leave your legacy behind to those you love, you’ll need to get your affairs in order. Setting up a trust fund is part of estate planning, or planning for what will happen to your money and belongings after you pass away.

What is a trust fund?

Trust funds are legally binding accounts that place your assets and money into a trust. A trust is similar to a will, where both outline how you want your affairs managed after your death. But a will goes through probate court and might take longer to complete compared to a trust, which doesn’t have the same requirement. Trusts have historically been used by the wealthy to pass along their assets to a set of heirs. But you don’t have to have a lot of property or money to have a trust. Anyone can have one, as long as you properly set one up.

How a trust works

There are a couple of main components to a trust, including:

  • Grantor: This is the person who opens the trust to include their assets, financials, and belongings. Sometimes called a trustor.
  • Grantee: This is the beneficiary or the beneficiaries of the trust. Once the grantor dies, the grantee(s) receive their distributions.
  • Trustee: This is the person or institution who owns the trust.

A trust agreement is a legally binding document that details how a trust account will disperse your belongings after you die. The trustee manages the trust account on behalf of the grantor. When the grantor passes, the trustee handles disbursement to the grantees.

How to set up a trust

A grantor can meet with an estate planning lawyer to find a trust that best fits their needs. Then the grantor can list each asset and the beneficiary of that asset that’s going into the trust. This can be something as small as a piece of jewelry or as big as a house. Investments, including bank accounts, can also be included. It’s up to you as the grantor to determine what goes in the trust to distribute among your grantees. Once you finalize your trust documents, you’ll sign them with a notary and have the lawyer file your deed of trust (if the state you live in requires it). Then you’ll open the trust fund account in the name of the trust and fund it by transferring assets into the trust. Anything that was in the trust document should go into the trust. You’ll then register the trust with the Internal Revenue Service (IRS) and get a tax ID number for it. You’ll need this when you file your tax returns. It can take a few weeks or upwards of a couple of months to complete this from start to finish. But it really depends on your assets and your detailed plans for after your death.

Different types of trusts

There isn’t a one-size-fits-all trust. Because everyone has different assets and needs, there are different types of trusts, including:

  • Revocable vs. irrevocable trusts. Revocable trusts let you change the document and terms whenever you want when you’re alive. Irrevocable means it’s set in stone. Any time you set up an account and transfer assets, it’s irrevocable.
  • Testamentary vs. living. A living trust means it can be managed and changed while the grantor is alive. Testamentary only goes into effect after the grantor dies and is only done in a last will and testament.
  • Educational trust. A type of trust where the grantee or beneficiaries can only use it for educational expenses.
  • Charitable trust. This is where a trust disburses assets to charities or even one single charity. It’s irrevocable. In most cases, it’s considered a private foundation.
  • Spendthrift trust. These are trusts with special circumstances for the beneficiaries. If the grantor feels that the recipient won’t use the funds responsibly, they can set up a spendthrift account that gives the beneficiary some access to assets with restrictions.
  • Joint trusts. This is usually best for married couples but can be used for anyone. All parties have control over the assets during their lifetimes and upon one’s passing, the other becomes a trustee.
  • AB trusts. Couples might also opt for AB trusts or a trust that’s split into two trusts upon one partner’s passing. It’s made to minimize tax implications, specifically estate tax, for surviving partners.
  • Blind trust. This is a type of living trust where the beneficiaries don’t know anything about the trust. If you suspect any conflicts among beneficiaries, this might be best.
  • QTIP trust. Qualified Terminable Interest Property Trusts, or QTIP, is another one couples might consider. It’s designed to make sure that income from the trust would be paid to the surviving spouse, and once they pass the remaining amount would go to other beneficiaries.
  • Special needs trust. Special or functional needs families might choose this option. This type of trust is specifically made for special needs children who are expected to need life-long care. They’re made to provide financial support without sacrificing government assistance or aid.

Pros and cons of trusts

Pros

Avoids probate

In most cases, a trust avoids probate court, which can draw out the process of distributing assets. Probate court is public, which means people can follow a probate case as it works its way through a court system. In most cases, a trust doesn’t involve probate. If you want to keep your matters private, you can use a trust fund.

Flexibility and control

You get to outline and manage the terms as best as you see fit. If anything changes, like you have kids, get a divorce, remarry, or experience another major life event, you can change many types of trusts (those that are revocable).

Not just for death

Having a trust is important for when you eventually pass away, but death isn’t the only factor. You can use trusts to manage affairs while you’re alive. Educational and special needs trusts, for example, are there for when you’re living.

Cons

It’s costly

Sometimes setting up a will can easily be done online without the aid of a lawyer. In most cases, setting up a trust requires a professional. An estate attorney is the one to handle your trust documents, which means you’re paying for their time and expertise to process your paperwork. Not everyone can afford a trust.

It doesn’t always include everything

While a trust is good for most things, it’s not always best for all things. Some things might not fit into a trust, like joint accounts. Unless you are creating a joint trust with the person on the joint account, you might run into some issues. Along with that, you might still need a will to cover any other assets that aren’t in your trust.

Might not save you during tax time

If you were planning to use a trust to save you during tax time, it may have more to do with where you live and less to do with your trust. Some states have estate and inheritance taxes regardless of what trust you’ve opened.

Bottom line

Everyone should consider estate planning regardless of where they are in their lives. Creating and maintaining a trust is an important step in estate planning, giving your beneficiaries a clear outline of your needs. But not everyone should have a trust and if you do decide to get one, there are plenty to choose from. Make sure to do your research and ask around to find a trustworthy estate lawyer to walk you through the process. Everyone’s situation is unique and what works for someone else might not work for you.


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