How To Set Up a Trust Fund

A trust fund is one of the many tools of estate planning, the main purpose of which is to help you transfer funds, assets or property to family members, loved ones or a worthwhile cause. A trust fund provides more privacy, control and specificity on behalf of the estate holder than a will does, all while allowing the estate to minimize taxes, avoid probate and guarantee that the beneficiaries will receive the money after your passing or incapacitation. Trust funds vary in complexity and purpose, and while many believe they are a tool only for the ultra rich, it is no longer the case. The Orange County trust attorneys at Evolution Tax and Legal is breaking down trust funds: what they are, how to set them up and how you can benefit from setting up a trust fund.

What Is a Trust Fund?

A trust fund is an estate planning tool that is used to transfer property from one individual to another. The trust can contain any number of monetary assets or property, including cash, stocks, real estate, jewelry and cars. A trust fund can be created while an estate holder is still alive, and while they are alive the trust will be holding the assets on their behalf. Upon their passing, the control of the trust will be passed along to a trustee, typically a third-party which has no financial stake in the contents of the trust. Sometimes, trust funds have stipulations such as age limits on the beneficiaries, but these stipulations can be put in place however the grantor, or the creator of the trust, sees fit.

Should You Set Up a Trust for Your Child?

Trusts can help parents plan for the future financial needs of their children in a secure and controlled way, while also helping to optimize their own tax and estate planning. Trusts are an effective tool for many families, not just those with large estates. Parents whose total estate values exceed the estate tax threshold, set at $12.06 million, can remove assets from their estates by transferring ownership to trusts. This will help give their children access to the money, while also minimizing the taxable monetary value of their estate. Parents who are more affluent and have assets that they are not using can transfer money to a trust, which will be included in the taxable value of the child’s income, likely to be less than their own, since the trust is ultimately belonging to the beneficiaries. If you feel that you have large amounts of money that you would like to pass along to your children, that won’t affect your living situation, setting up a trust is an excellent way to optimize tax benefits and provide your children with money that can help them in the future. Other benefits of setting up a trust include avoiding gift taxes in the future, keeping your estate out of probate, allowing you to protect loved ones with special needs and offering protection from any lawsuits or creditors your child may face in the future.

How To Set Up a Trust Fund for a Child

The process of setting up a trust can be simple, if you follow the right steps and avoid common mistakes parents make when setting up a trust. Working with an estate planning attorney can help make this process even more streamlined, and ensure the process is completed with your specifications in mind.

Choose the Right Type of Trust

The first step will be choosing the right type of trust for your situation. In order to ensure you are choosing the right trust, you should specify the purpose of the trust and who the trust will benefit. If you are designating certain assets to specific beneficiaries, the details must be noted in the trust. Common types of trusts that parents may set up include:

  • Education Trust: If you are setting up a trust to cover the costs of education for your children, this is a good option. The funds in this trust must be used to cover academic expenses, so the money has a very specific purpose and the beneficiaries must use it as such.
  • Spendthrift Trust: If you would like to specify how a beneficiary can use the funds of a trust, and how they are distributed to beneficiaries, a spendthrift trust may be a good option. You can use this trust to provide specific instructions for the use of assets and property, and split the distribution of funds among multiple beneficiaries as you see fit.
  • Special-Needs Trust: If you have a child with special needs, this trust will allow you to provide an inheritance or income to that individual, to cover future costs of living, care or other expenses. This is a great option for parents of children with special needs, especially if they serve as the primary caretaker and financial provider.

Outline the Details of the Trust

Once you have decided which type of trust is right for your situation, you must outline the details of the trust. This includes outlining what assets you will place in the trust, how these assets should be managed and distributed, how long the trust will last, under what conditions the trust will cease to operate and who the beneficiaries and trustees will be. There are a few important people that will need to be named when creating the trust:

  • The Grantor: This is whoever is creating the trust, and whose name the trust will be in.
  • Beneficiary: This is the person or people who will be receiving the contents of the trust.
  • Trustee: This is the individual with the fiduciary responsibility to the trust fund, typically a third-party with no financial interest in the trust. While the grantor is alive, they can act as the trustee, but typically a trustee will need to be named should the grantor be incapacitated or become deceased.

Make the Trust Official

Making a trust official can be complicated, which is why it is recommended to work with an estate planning attorney to ensure this process is done correctly. Your attorney will work with you to create a declaration of trust, deed of trust, or a trust instrument to formalize the details of the trust you have been working on. The length and complexity of this document depends on the specificity and details of the trust. Once this document is completed, it will need to be signed by the grantor in the presence of a notary, and some states will require this documentation to be filed with the state.

Fund the Trust

Once the trust is official and filed with the state, if necessary, you can begin funding the trust. You can take the official paperwork you have drawn up with your attorney to a bank or trusted financial institution and open a trust fund bank account in the same name as that on the official trust paperwork. You can deposit money into the trust in a lump sum, or fund the trust overtime. The bank will also need the name and contact information of all the beneficiaries on the trust.

Register Your Trust Fund With the IRS

Once the trust fund is official and funded, you can register the fund with the IRS. The trust fund will usually require its own taxpayer identification number, for tax purposes, among other needs. This can be filed online through the IRS website, or by mail using Form SS-4.

Mistakes Parents Make When Setting Up a Trust Fund

There are a few common mistakes that are often seen when parents set up a trust fund for their children. These mistakes include:

Not Choosing the Right Trustee

Not choosing the right trustee happens very often, and this often happens due to the fact that parents don’t want to think about a future in which they are not around, and as such do not put as much thought as necessary into who will become trustee once they pass. Some important considerations to think about when considering a trustee include: their age, their distance from your residence, their health, their trustworthiness, what their past decisions have shown about their basic judgment skills. Choosing the wrong trustee can lead to mismanagement of the trust, and issues for your children in the future.

Not Reviewing the Trust Annually

It is important to review your trust annually, as with the rest of your estate plan, since things are always changing. It is important that as things in your life and financial situation change, the trust must change with them. By annually reviewing your trust, you can reassess things like:

  • Who have you chosen as the trustee? Are they still the right choice for this job?
  • Have all necessary beneficiaries been included on the trust? Are there any beneficiaries included that should be removed?
  • Have there been any births or deaths in the family that will require changes to your trust?

A trust is not necessarily set in stone, therefore reviewing it annually is important and can benefit you and your beneficiaries in the future.

Not Being Clear About the Goals of the Trust

When you created the trust, chances are you thoroughly thought through the goals of your trust. If you weren’t totally clear about these goals, it can lead to children or young adults in your family accessing money that may do them more harm than good. Thinking through how, when and for what purpose the children in your trust will receive the money or assets will ensure that the money is used for the intended purpose, such as education, real estate or care for the children. Be thorough and thoughtful about the goals: a trust allows you to set specific arrangements and requirements, and you should take advantage of this to protect your assets and the future of your children.

Setting up a trust fund for your children can be a great way to ensure they are taken care of in the future with money and assets you have set aside for them, while also serving to minimize estate and gift taxes they will face. Setting up a trust can be an easy process, however there are a lot of considerations that must be thoroughly thought through before creating the trust. Working with an experienced estate planning and trust fund attorney can ensure that you don’t make the common mistakes listed above, and help you have peace of mind knowing your children and funds will be taken care of in the future. Contact the experienced professionals at Evolution Tax and Legal today to learn more about setting up a trust fund and other aspects of the estate planning process.

May 18, 2022

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