Wednesday, 1 December 2021

Here’s How to Set Up a Trust

Here’s How to Set Up a Trust
17 Feb
While there aren’t many things you can control after you pass away, one thing you can have a direct impact on is who receives the property you own afterwards. But how do you gain this type of protection for your assets and avoid the probate process? You might find a solution in a revocable trust. Below, we’ll explain how to set one up along with the advantages and disadvantages of doing so.

What is a trust?

A revocable trust, also sometimes called a living trust or inter vivos trust, is an estate planning tool you can set up during your lifetime to hold your assets. When you pass away, the trust controls who receives the assets and under what terms. Typically, trust beneficiaries receive their inheritance outright, without restrictions, or in trust, which can control when and how they receive trust income and principal.

Parties to a trust

There are typically three parties to a trust.

  • The grantor is the person who sets up the trust and funds it with his or her assets.
  • The trustees are the people who manage the trust assets. You would generally name yourself as a co-trustee during your lifetime. You have the option of naming one or more co-trustees, who might be family members or close friends.
  • The beneficiaries are the people who will benefit from the trust and its assets when you pass away. This might include your spouse, children, grandchildren or other close family members.

In addition to controlling the distribution of your assets at death, you can also use a revocable trust to determine what happens to your assets if you become disabled and are unable to make financial decisions. During your lifetime, you have full control over the assets in the trust. But if you become unable to manage those assets, a revocable trust will typically give co-trustees the ability to manage trust assets until you are once again in a position to manage them yourself.

Setting up a trust

The mechanics of setting up a trust are fairly straightforward. A revocable trust must follow the laws of the state where you have your primary residence. The best way to make sure this happens is to consult an attorney licensed in that state. While online tools are available to help you set up a trust, the legal complexity suggests that you may be best served to use an attorney to draft the trust.

Choose co-trustees and beneficiaries

After you hire an attorney, you will need to make several decisions. The first will be who — besides yourself — should be a co-trustee. People typically choose family members. At least some of your co-trustees should be younger than yourself so that they are more likely to survive you and can manage the trust when you are no longer able to do so.

Second, you have to decide who will be the trust beneficiaries. Typical candidates include your spouse, your children and grandchildren. You’ll also have to decide if they will receive money outright when you pass away or in trust. Often, younger beneficiaries might have their inheritance held in trust until they are old enough to manage it. A trust can also be a good way to protect an adult child who has shown he or she isn’t yet responsible enough to handle money or may be involved in a divorce or other situation where full access to assets might complicate things.

Customize the structure

Revocable trusts are easy to customize. As the owner or grantor of a trust, you decide when the trust begins operating, who benefits from it and under what circumstances beneficiaries can use the money. The trust structure allows you to grant beneficiaries access to funds at certain ages or for certain purposes, such as education or to purchase a home.

Trusts also come with some attractive benefits for beneficiaries. For example, if you name your adult child as a beneficiary, the assets in the trust are not part of his or her estate once you (the grantor) die and the trust becomes irrevocable. This helps protect these assets for future beneficiaries (perhaps your grandchildren) from events such as bankruptcy or divorce.

Draft the trust and retitle assets

There are also some mechanical tasks you need to handle. Your attorney will generally do a draft of the trust so you can comment on its provisions. Then he or she will use those comments to draft a final document for your signature. Your attorney will also get a taxpayer ID for the trust from the Internal Revenue Service.

The biggest mistake some people make after creating a trust is not completing the next step — retitling their assets in the trust’s name. If you want to include your bank and brokerage accounts in the trust, you need to change the ownership of each account to the name of the trust. For example, your savings account might now be owned by the Mary Smith Revocable Trust.

Some assets, however, are not well-suited for a trust. Most people don’t include things such as clothes, jewelry, furniture and other personal property. Rather, they use their will to pass this property to the people they want to have it. If in doubt about what property works well in a trust, it’s a good idea to consult an attorney.

What are some advantages of trusts?

There are a number of advantages to setting up a revocable trust.

  • A trust can help manage your assets if you become disabled.
  • A trust makes it easier to distribute assets to heirs and avoid probate when you pass away.
  • Revocable trusts are easy to change, including the trustee. Depending on the nature of the change you want to make, most changes can be made easily and inexpensively with an amendment to the original trust.
  • Revocable trusts are transparent for income tax purposes. Tax rules are no different than if trust assets were titled in your name.
  • You can name a revocable trust as beneficiary of your 401(k) and IRA plans and have the trust govern how to distribute those assets.
  • A revocable trust can protect heirs from creditors.

What are some disadvantages of trusts?

There are some disadvantages to revocable trusts as well.

  • You generally need an attorney’s help to set one up and will have to pay for this service.
  • Revocable trusts don’t allow you to designate a guardian for your minor children. You will need a will to do that.
  • The trust may become irrevocable when you pass away, limiting the ability to make changes after that time.
  • If you decide to have a professional administer the trust and manage the assets, doing so may be costly.

Trust costs vs. probate

Trust and probate costs vary by geographic area. Generally speaking, the cost to probate a portfolio of assets is around 5% of their value, split between the executor and his or her attorney. In contrast, the cost to administer similar property in a trust would be less than half that amount. Speak to a local attorney for exact information about local costs in your area.

Who should set up a trust

For many people, deciding whether to set up a revocable trust depends on their stage in life. Marianela Collado, a CPA and certified financial planner with Tobias Financial Advisors in Plantation, Florida, says that for single clients just starting out in life with not very many assets, “There is no need for a trust.” Most of these clients will find estate planning is relatively simple, including how they title their assets or who they designate as the beneficiary of life insurance or retirement plans.

As you start to accumulate assets, a revocable trust may be “a necessary and effective tool,” according to Collado. A trust, she emphasized, can do more than just pass assets to the next generation. It gives you a level of control and the ability to avoid probate. While probate varies from state to state, Collado said the probate process is the last thing many families want to deal with after a loved one has passed away. Collado has encountered some clients who believe having a will avoids probate. “It doesn’t,” she said. “But assets in a revocable trust do.”

Collado emphasized that clients who want to set up a revocable trust should seek the help of an attorney. After the trust is set up, “I get a list of every asset the client owns and retitle them with the trust as the owner,” Collado said. She points to a quote from one of the attorneys she works with as a good way to conceptualize their value: “A trust is like a house. After you build it, you have to fill it.”

Speaking about the benefits of revocable trusts, Collado cited a situation where a client’s son had gotten married for a second time and also had children from his previous marriage. She explained to her client that if her son died not long after she did, without a will, his mother’s money would likely go to his second wife and not to her grandchildren. A revocable trust could help ensure that the money went to her grandchildren instead.

Collado told another story about a client who developed dementia. Before she got sick, she added her two daughters as co-trustees of her existing revocable trust, which held all of her assets. The mother is now in the hospital and unable to make decisions for herself. “With a revocable trust, the family doesn’t need to go to court to prove Mom is incapacitated to manage her assets,” Collado said. “A revocable trust eliminates that frustration.”

Bottom line

Many Americans will find revocable trusts are a good way to manage their assets and avoid the probate process. Adding a co-trustee can also ensure that someone can manage their assets if they become disabled. And for many people, the only cost of the trust is likely the legal fees to set it up. (You may have to pay a recording fee to retitle real estate, including your home.) While revocable trusts aren’t right for everyone, they deserve a second look by people who want to have a say over when and how their heirs receive their assets.

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