Setting Up a Trust Fund

Trust funds are often associated with well-heeled individuals and affluent families looking to pass on their wealth to future heirs. But the reality is there are a variety of advantageous reasons to set up a trust, even if you aren’t especially rich. Still, establishing up a trust fund isn’t easy. Before you go through the process of opening a trust, consider the steps required, how a trust is structured and the ways in which a trust can help protect your assets and preserve your wealth for successors.

What Is a Trust Fund?

A trust fund refers to a fund made up of assets, such as stocks, cash, real estate, mutual bonds, paintings or antiques, or even a business, that are distributed after a death. The person setting up a trust fund is known as the grantor, while the person, people or organization receiving the assets are known as the beneficiaries. And the person the grantor designates to ensure his or her wishes are carried out is the trustee. While setting up a trust may seem similar to drawing up a will, they’re two different legal vehicles: A will details what you would like to happen to your assets after your death, while a trust fund ensures that it will happen.

[Read: 5 Estate Planning Strategies to Keep Your Money in the Family.]

Why You May Need a Trust Fund

You may be considering setting up a trust not only because you have a complicated financial situation and you want to preserve your heirs’ wealth through asset distribution, but also to seize upon other financial advantages.

Trust funds offer a variety of benefits, including tax advantages such as reducing estate and gift taxes and asset safekeeping. With a trust fund, you can establish rules on how your beneficiaries spend the money and assets you’ve allocated through provisions. For instance, you may want to set up a trust to guarantee that your money will only be used for a specific purpose, such as going to college or starting a business.

For families, there’s another compelling reason to set up a trust fund. “A trust fund can be set up for minor children, to distribute assets to adult children over time — for instance, at ages 25, 35 and 45 — in order to give them more than one chance to not blow an inheritance,” says Kathy Fish, a certified financial planner and president of Fish and Associates, a financial planning firm in Memphis, Tennessee. Plus, “it can be used for children with special needs, so that they are not disqualified from government benefits,” she explains. Because the assets in the trust aren’t actually owned by your kids (and aren’t considered part of their wealth), they wouldn’t lose out if those benefits are eliminated or reduced, such as Medicaid or Social Security income. In short, setting up a trust for a child with disabilities can help provide them with financial security once you’re no longer around.

“Some trust funds are set up to keep money in the family in a case of death or divorce. These are all high-level reasons, but they are indeed useful for middle class and wealthy families,” Fish says.

[Read: Estate Planning Is Important for People Without Children.]

How to Set Up a Trust Fund — and When to Seek an Estate Planning Attorney

“First, determine the purpose the trust will serve,” advises Claire Steinman, an estate planning attorney and partner at Wingate, Kearney & Cullen, LLP in Brooklyn, New York. “There are many types of trusts, such as charitable trusts, life insurance trusts, revocable trusts and irrevocable trusts,” she says. A charitable trust is simply a trust that gives your assets to a charity. With a life insurance trust, instead of the money going to the beneficiary, the trustee would manage it and administer it to the beneficiary. A revocable trust means that you can make later tweaks to the trust, such as who the beneficiaries are; with an irrevocable trust, you can’t make changes.

“Whatever the individual’s needs are, the types of trusts should be discussed with an attorney to determine what is the best fit,” Steinman says. An estate planning attorney or financial planner is generally the ideal advisor to connect with when starting a trust fund. Whatever type of professional you use, he or she can help you understand the steps you’ll need to take, such as registering the trust with the IRS, transferring your assets to the trust fund and ensuring your paperwork is in order. Another hurdle a professional can help you navigate is familiarizing yourself with the nuances of trust law, which varies according to state.

After you find a qualified attorney or professional to work with, such as an investment advisor, they’ll draw up a legal document. You’ll also need to decide who your trustee will be. You could pick a friend or a relative, or it could be your spouse. But you want that person to be reliable and level-headed. Or you could pick a corporation, like a bank or trust company, to be your trust fund’s trustee. That can get costly, though; typically, a bank or corporate trustee will charge 1 percent of the trust’s assets a year to manage the funds.

Keep in mind, if you do pick a family member or friend, you should also select a successor, or allow your trustee to designate one, in the event something should happen to your trustee.

Pitfalls to Avoid When Setting Up a Trust Fund

There are a variety of mistakes to avoid when establishing a trust fund. You’ll want to carefully consider how you structure the trust. After all, you don’t want to put a lot of money into an irrevocable trust and then later decide you want to make changes. Additionally, “assets must be transferred into a trust to fund it,” Steinman says.

People make the effort to have a trust written and then neglect to add their assets to the fund, Fish explains. “Then, at death, the estate may still have to go through probate.”

It’s an understandable blunder, according to Steinman. Transferring those assets “can be an arduous process, requiring trips to the bank and lots of paperwork.”

Remember: A trust is essentially a record of assets for your beneficiaries after you’re no longer around. It isn’t enough to record in your will that you want all of your earthly possessions to be doled out to family and friends. For instance, if you have property that needs to go into the trust, the deed has to be transferred into the trust. And if you want to sell the property or other assets later on, you would likely have the trust sell it, but it’s best to consult an attorney. And keep in mind, if you want a beneficiary to have a certain amount of money, you need to put that money into the trust.

[Read: How to Choose Between a Revocable and Irrevocable Trust.]

Another common misstep: Giving the trustee too many rules, says Adam Fleming, a partner and attorney who works in the estate planning group at WilliamsMcCarthy LLP, a law firm in Rockford, Illinois.

“While thinking through the guidelines to give your trustee for distribution of trust assets is a good thing, in our practice, we often try to dissuade clients from adopting detailed and rigid rules for asset distribution in their trusts,” Fleming says. “Life has a habit of developing in unpredictable ways, and no matter how many permutations of a possible situation a trust grantor has provided for, it is impossible to predict every possible circumstance. For this reason, setting forth general guidelines for use of trust assets is usually a better approach than laying down detailed rules.”

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