When Should You Set Up a Trust?
by Unbundled Legal Help
Trust funds are often thought of as something only for the wealthy. Yes, having a lot of money is one reason that people set up a trust. In general, however, it is a financially savvy strategy for anyone with assets they plan to distribute to others to consider a trust while they are alive or upon their death.
Everyone’s financial situation is unique. In general, if you have assets that you plan on distributing to family members, charitable organizations, etc., then it may be a good idea to look into setting up a trust. This is especially true if you plan on giving specific instructions about how your assets should be distributed.
Depending on the type of assets you have and how you wish them to be distributed, setting up a trust can be difficult and complex. It’s usually in your best interest to contact an estate planning lawyer in your area to discuss your financial needs and goals before going the DIY trust fund route.
Learn more about when you should set up a trust below.
What is a Trust?
Before discussing when you should set up a trust, it is important to have a grasp of what a trust is and what it isn’t. A trust is an agreement that gives instructions about how your assets will be distributed upon your death or at some other specified time. Though trusts and wills are similar, they have clear differences.
You can use a trust to minimize estate taxes, transfer property, hold assets for children until they reach a certain age, or help a charity. Unlike a will, the terms and conditions of your trust are private and will not become public knowledge.
Trusts are just part of a comprehensive estate plan. There are many types used for a variety of purposes. Some of the more common types of trusts include revocable trusts, irrevocable trusts, asset protection trusts, and charitable trusts. Learn more about each below.
A revocable trust (also called a “living trust”) can be changed or revoked when the creator of the trust is still alive. In many cases, the creator of a revocable trust also serves as the “initial trustee.” The trust maker (also called the grantor or settlor) can move assets in and out of a revocable trust until they die or become incapacitated (if stipulated in the trust).
Many set up a revocable trust to avoid probate. Probate is a legal process wherein a person's last will must be “proven” in court. If there is no will, then a judge helps to decide how the assets of the deceased person are distributed to inheritors and creditors.
A revocable trust allows you to bypass the probate process (in many situations). If your assets are transferred to a revocable trust while you are alive, they will not be subjected to probate fees upon your death. This is because once assets are transferred into a trust, they no longer belong to the grantor, they belong to the trust.
However, assets in a revocable trust may still be accessed by creditors while you are alive if their petition to the court is approved.
A revocable trust turns into an irrevocable trust upon the death of the trustee. In most cases, an irrevocable trust cannot be changed or revoked after it has been created. Once your assets (money, property, etc.) have been transferred to an irrevocable trust, not even the trust maker can move assets out of the trust.
Since the assets in an irrevocable trust can no longer be accessed by the trust maker, they will not affect the wealth, the overall value of the estate, or tax liabilities. Trusts have a tax identification number. The trustee is responsible for paying taxes with funds from the trust. This can lead to major tax-saving benefits.
Once the grantor of the trust passes away, the funds will be distributed to the listed beneficiaries as the predetermined rules stipulate. You cannot be sued for the assets in an irrevocable trust as long as your current creditors don’t have a legal claim to the assets that you placed inside of it.
In addition, assets in an irrevocable trust cannot be touched should you have long-term care expenses. In some cases, you can change an irrevocable trust, but you will need the approval of all of the beneficiaries and/or create a new trust with updated terms and then transfer (also called “decanting”) your assets to the new trust.
The rules for changing an irrevocable trust vary state-to-state. It is best to connect with a proven estate planning lawyer in your area before you begin the process.
Other Types of Trusts
The most common types of trusts include revocable and irrevocable, but there are many others. People use trusts for a variety of scenarios to help themselves and/or others. Other types of popular trusts include:
- Asset Protection Trust
- Charitable Trust
- Constructive Trust
- Special Needs Trust
- Spendthrift Trust
- Tax By-Pass Trust
- Totten Trust
Who Should Set up a Trust?
As you can see, trusts are not used for one purpose, they are multi-faceted. Who should set up a trust will depend on their financial needs and specific desires for their assets. In general, those who choose to set up a trust fall into one or more of the following categories:
- Avoid probate fees
- Tax benefits
- Asset protection from creditors
- Privacy concerns
- They want more control over how their assets are distributed
- Allows them to still qualify for certain government benefits such as Medicaid, Social Security, etc.
- Financial support while disabled
If you have any of the aforementioned goals, it may be in your best interest to speak with an experienced estate planning attorney to discuss your options.
When Should I Set up a Trust?
There is no exact date, age, or level of asset accumulation that dictates when you should set up a trust. Generally speaking, if you have assets (i.e. personal property, life insurance benefits, real estate, etc.) that you wish to distribute upon your death with specific instructions, then it may be in your interest to begin the process of setting up a trust.
In addition to deciding when you should set up a trust, it is important to consider how long you wish your assets to be held by the trust before they are distributed to the beneficiaries. This will depend on who the trust is for as well as when/how the assets will be distributed.
How Do I Choose a Trustee?
One of the most important considerations when setting up a trust fund is deciding who will be your trustee. A trustee is a person or entity that is entrusted with managing the assets in the trust as well as following all instructions dictated by the trust maker.
When choosing a trustee, it is best to pick a person or company that has the following characteristics:
- Has familiarity with your finances as well as your beneficiaries
- Understands their fiduciary responsibility (i.e. financial management, taxes, investments)
- Has the time, experience, and willingness to properly oversee your trust, meet tax requirements, and make distributions as stipulated by the trust.
It can be tempting to have a family member or friend as a trustee, but there are potential drawbacks to doing so. To overcome the disadvantages of naming one person as a trustee, you can also designate a co-trustee to assist and/or take over should the original trustee is no longer available.
When dealing with major assets, many opt for a corporate trustee. One advantage of hiring a company to oversee your trust is they can do so for generations. In addition, you can be assured that they have the proper training and experience to manage your trust.
A potential drawback of a corporate trustee is they may not have a relationship with the beneficiaries and may strictly enforce rules without empathy.
Setting Up a Trust
Setting up a trust can be an intricate process. In most cases, it is recommended that you work closely with your financial advisor as well as an estate-planning attorney before doing so. While the language in trust agreements themselves can be relatively complicated, the process of setting up a trust only takes two steps. Learn more below.
Creating the Trust Agreement
The trust agreement is created by the grantor with help from their attorney and financial advisor. The document identifies the trust maker, trustee, and beneficiaries. It also defines how the assets within a trust will be managed and distributed.
As noted, a trust and a will serve different purposes. In some situations, you may only need a will. But if you decide to move forward with a revocable trust, you will also need a will. Discuss your financial situation with a proven attorney before making a choice.
Funding a Trust
The second and last step in the process is to fund your trust. This involves the trust maker transferring assets into the trust. A trust agreement does not mean anything until the grantor funds the account. Examples of assets that can be put into a trust include real estate, vehicles, stocks, bonds, other personal property, cash, etc.
Do I Need an Estate Planning Attorney to Set Up a Trust?
The law does not require you to hire an estate planning lawyer to help set up a trust. However, doing so by yourself can be confusing, time-consuming, and potentially detrimental to your finances (if done incorrectly).
Having a strong supporting cast like an estate-planning attorney and financial advisor can help to ensure that you are financially protected and your assets are distributed as you intend them to be. Trust attorneys can be helpful in many ways that include:
- Helping your family avoid probate and other financial penalties
- Lowering real estate taxes
- Drafting a trust agreement
- Understanding your state’s laws as well as other financial implications
- Being the trustee
- Having an impartial third party to help your trustee and beneficiaries
How Much Does it Cost to Set Up a Trust?
The exact cost of setting up a trust will depend on how complex the assets you place in your trust are. Your costs to hire a trust lawyer will depend on the type of trust, the stipulations you put in place, how much time it takes to create the agreement, and the value of assets you decide to place in the trust.
In general, an estate planning lawyer will charge anywhere from $2k - $7k upfront to set up a trust agreement. You may also be charged an hourly rate on top of an upfront fee depending on how much time your lawyer spends on your case. In most cases, the trust is part of your overall estate plan, so the costs could potentially be much higher.
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