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Tuesday, September 26, 2023

How to set up a trust fund

How to set up a trust fund

family members talking about trust accounts

Imagine: You’ve worked hard over the years to grow and manage your assets so you can leave a lasting legacy to your family and ensure they are taken care of when you are gone. Now imagine that your family, unfortunately, is irresponsible with your assets and within two years, they’re pretty much depleted. It’s not the prettiest picture.

One way to help ensure that doesn’t happen — and to preserve and protect your family’s legacy — is to set up a trust account.

How trust accounts work

A trust account, often called a “trust fund” colloquially, is essentially governed by a trust agreement specifying how assets are to be managed for the benefit of another person or persons. These assets can be in the form of money, real estate, stocks and bonds, and even a life insurance policy. Trusts are at the heart of many estate plans.

A trustee is responsible for managing the trust for the beneficiary, or recipient. You, as the grantor or trustor, can set up a trust for multiple beneficiaries, typically children, but other family members may be beneficiaries also. Grandchildren, for example, can be provided for if specified in the language of the trust. After you pass away or become incapacitated, the trustee you appoint will be your replacement. This trustee can be a person, professional trustee service or even a combination of both.

Historically, trusts were predominantly used by the wealthy to control how their inheritance was passed on to family, friends or entities (such as charities) after they die. But trusts aren’t just for the rich. Today, many average, middle-class Americans use trusts to dictate how funds can be used by their beneficiaries. In addition, trust accounts can help prevent an estate from having to go through probate, which may be an expensive and time-consuming legal process.

Trusts can be useful for transferring assets to children incrementally. For example, many children are not mature or financially savvy enough to manage the assets at age 18. The terms of the trust can dictate assets to be sprinkled over a period of time. For example, one-third at age 25, one-half at 30 and the remainder at age 35.

Trust fund benefits

Trust funds have several key benefits over using a will to distribute your assets. Some of them include:

Privacy — Trust funds can help retain a level of privacy. For example, if you have an estate with a will that gives $5 million to each of your children and it requires settling through probate, then it might be listed in public paperwork. A trustee is typically designated as your estate’s executor and could go to probate court to settle any disputes between creditors or beneficiaries of your estate. If no such disputes occur, a trust can keep family affairs away from the probate court.

Control — Trust funds allow you to call the shots in terms of when and how the money is distributed. So instead of your heir receiving the assets of your estate in a lump sum in his or her early 20s, for example, your trust can specify how and when your beneficiary would receive the inheritance. Many people will let beneficiaries have most or all of a trust by age 35, but some financial advisors suggest stretching disbursement out even longer to make sure there’s still money for your children as they near retirement age.

Why set up a trust fund?

Families set up trust funds for different reasons. Distribution requirements can be an especially good idea if recipients haven’t shown an impressive degree of financial responsibility. Trusts can be specifically set up for educational expenses or charitable giving, as well. You can also set up a trust fund for a special needs child that would continue to fund his or her care after you’re gone.

One major benefit of trusts is avoiding probate, which is the often-lengthy legal process to authenticate a will. Depending on your state’s laws and how long it might take to verify details, pay off debts and distribute assets to the designated beneficiaries, probate can be expensive.

Many people often figure out how long the probate process is in their state, and if there’s some reason it’ll be involved, a trust account might be a better route to go.

How to set up a trust fund

Follow these steps to set up a trust fund:

  1. Choose the type of trust you want to establish. There are several different kinds of trusts designed to accomplish different objectives. Revocable, testamentary and irrevocable trusts are different types.
  2. Decide about the trust details. The main parties to a trust are the grantor, beneficiary and trustee. The grantor is the creator of the trust, the beneficiary receives the benefit from the trust assets and the trustee is the party responsible for fulfilling the goals specified in the language of the trust. Other considerations are who shall manage the trust if you as the creator pass away or are incapacitated and to whom and when will assets be distributed upon your death.
  3. Formalize the trust. An estate planning attorney will create a declaration of trust that formalizes the trust details listed above. You will then sign it in the presence of a notary public. Your local estate planning attorney should guide you in the process regarding your state’s requirements to effectuate the trust.
  4. Fund the trust. An important step in the process is to fund the trust. With a revocable living trust, one of the primary objectives is to minimize probate. Titling real property such as one’s home into the trust is imperative to ensure probate minimization. In addition, taxable investment and bank accounts can be titled in the trust. How to list beneficiary designations for retirement accounts such as IRAs and 401(k)s is another important consideration. The estate planning attorney who drafts the trust documents should have a recommendation for how to list beneficiaries and assist with titling real property into a trust.
  5. Register the trust with the IRS for tax purposes. Many irrevocable trusts will have their own taxpayer identification number (TIN). However, revocable trusts do not need a separate TIN because they use the Social Security number of the grantor, which is the person who created the trust.

It’s not absolutely necessary to hire a trust attorney to draft your trust agreement. There are some online solutions to create an estate plan, which can typically introduce a local attorney if your situation becomes complex. But many estate planning strategists say that it’s often safer and smarter to hire a trust attorney because drafting a solid trust agreement is complicated and exacting.

Trust attorneys can help ensure that the assets in the trust account are handled as tax advantageously as possible for your beneficiaries. A trust attorney can create an agreement that makes clear the purpose of the trust, which might be more elusive than you’d think.

Drawbacks of trust funds and alternatives

The main drawback to creating trusts are the fees with setting them up. The expertise of a trust attorney doesn’t come cheap. The more detailed the language may need to be, the more time to create the trust and consequently the costs are likely to increase. However, some of the upfront costs of creating a trust can be offset in the back end by minimizing probate time and costs.

Please note, even if one creates a trust, they still need a last will and testament. Preparing a will is usually much less expensive than creating a trust. However, a will won’t give you nearly as much control over your assets as you have with a trust. Also, a will going through probate is less private than assets transferred with a trust. In addition, transferring assets using a will generally takes more time than with a trust.

Uniform Gifts to Minors Act (UGMA)/Uniform Transfers to Minors Act (UTMA) custodial accounts are another method to transfer assets. These are typically used to pass on assets to minors and sometimes for education purposes. However, custodial accounts provide no control over how the assets are actually used. Upon turning a requisite age, typically 21 in most states, the beneficiary has full control over the assets. Also, money in custodial accounts is considered to be owned by the beneficiary and has a more adverse impact for financial aid than a 529 college savings plan.

Choose trustees wisely

One of the most important aspects of establishing a trust is picking your trustee or co-trustees. You obviously want someone you can trust, so your spouse or one of your children might seem like an obvious choice. But you might want to consider a third-party entity such as a bank, attorney or professional fiduciary to act as trustee.

A family member or friend might do this for free, and sometimes people pick a family member and a professional as co-trustees. However, keep in mind that family dynamics can be complicated during an emotional time. If one sister is named a trustee and has control of a trust for her and her siblings, she might have to deal with resentment or haranguing from brothers and sisters unhappy about how she’s handling their shares.

You don’t want to put a child in a position where they’re pressured or that could damage family dynamics. You want someone who can keep emotions out of it.

Next steps

Empower can provide guidance to help you establish a trust. First, sign up for our free personal finance tools to get an overview of your financial life, all in one place.


Matt Carey, J.D., CFP®

Matt Carey, J.D., CFP®


Matt Carey, CERTIFIED FINANCIAL PLANNER™, is the Senior Estate Strategist at Empower.

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