How to Set Up a Trust: A Comprehensive Guide for 2025

Establishing a trust fund is a crucial aspect of estate planning and asset management for many individuals. Trusts offer numerous benefits, including control over asset distribution, privacy, and potential tax advantages. In this comprehensive guide on how to start a trust, we'll explore key concepts, terminology, and the step-by-step process of setting up a trust fund. So, let's dive in and unlock the power of trusts for your future financial security and peace of mind.

Key takeaways

Understand key concepts and terminology related to trusts.
Consider advantages such as control, privacy, and potential tax benefits when establishing a trust fund.
Seek professional assistance for tailored advice on creating the right trust fund solution for one's needs.

A serious-looking man working on a laptop

Step-by-step guide to setting up a trust fund

Setting up a trust fund involves several crucial steps:

Choosing the type of trust
Selecting assets
Appointing trustees and beneficiaries
Preparing trust documents

The upcoming sections will delve into each step, providing all the necessary information to establish a comprehensive estate plan and trust that accurately mirrors your intentions and serves your beneficiaries' best interests.

1. Choosing the type of trust

Different types of trusts serve different purposes. For instance, a revocable trust offers flexibility, allowing the grantor to amend or rescind the trust, while an irrevocable trust provides tax benefits and asset protection. When choosing the type of trust, consider your financial goals, the needs of your beneficiaries, and the level of control and protection you desire.

It's essential to understand the benefits and limitations of each type of trust and select the one that best aligns with your estate planning objectives. To make an informed decision and ensure the correct setup of your trust, consider consulting with an estate planning attorney or a financial professional.

2. Selecting assets for the trust

Once you have chosen the type of trust, it's time to select the assets to include. Trusts are designed to hold various assets. These include:

Cash
Stocks
Bonds
Mutual funds
Real estate
Other property

When selecting assets, including personal property, consider their value, tax implications, and the needs of your beneficiaries.

Be meticulously evaluate the potential benefits and risks of your chosen assets. High-value assets may enhance financial security, help minimize estate taxes, and protect them from creditors.

3. Appointing trustees and beneficiaries

Appointing trustworthy individuals or entities as trustees and beneficiaries is crucial to setting up a trust fund. The trustee manages the trust assets and distributes them to the beneficiaries according to the grantor's directives. You can appoint yourself as the initial trustee, with a successor trustee in case of incapacity or the grantor's death, or choose a third-party entity like a bank or trust company to serve as the trustee.

When selecting beneficiaries, consider the needs and financial situation of each person, spouse, family members, and other potential recipients of the trust assets. Remember the family dynamics and ensure the trustee and beneficiaries can work together effectively as they fulfill their roles in managing the trust.

4. Preparing trust documents

With the type of trust selected, assets chosen, and trustees and beneficiaries appointed, the final step is preparing the trust document. These trust documents should accurately reflect your intentions and comply with legal requirements. You can seek assistance from an estate planning attorney or use online services like LegalZoom to guide you.

After preparing the trust documents, have them executed in the presence of a notary public to render the whole trust agreement legally binding. With your trust now established, ongoing management and administration are essential to ensure the trust assets are preserved and distributed according to your wishes.

Why do you need a trust fund?

Trust funds typically transfer assets and avoid probate, determining where assets go after you die. With a trust fund, your beneficiaries and heirs gain access to your trust assets more quickly than if the assets were transferred using a will. This saves time and court fees and potentially reduces estate taxes.

A trust fund allows you to control whom the assets are distributed to and when. Properly constructed, your trust fund can also protect assets in your estate from your heirs' or beneficiaries' creditors and from heirs or beneficiaries who are not adept at managing their money.

Trust funds can also help your family members or other heirs to keep matters more private. This is because a probate court is a matter of public record, which is not usually an issue with trusts.

Understanding trusts: Key concepts and terminology

A young woman reads online about generation-skipping trusts, which transfer assets to younger generations.

A trust fund is a legal arrangement involving a grantor, trustee, and beneficiary, where the grantor deposits assets into the trust, and the trustee is responsible for administering the trust for the benefit of the beneficiary. Trusts come in various forms, such as revocable and irrevocable trusts, each serving different purposes. A revocable trust allows the grantor to amend or rescind the trust, whereas an irrevocable trust is permanent, offering tax benefits and asset protection.

Other types of trusts include:

Special needs trusts for beneficiaries with functional needs
Generation-skipping trusts to transfer assets to younger generations
Blind trusts to manage assets without the knowledge of public officials

To determine your trust needs and how to set up a trust accordingly, you need to comprehend the various types of trusts and their benefits.

What are the four major types of trust funds?

An artist paints on a canvas. Artwork can be designated to a beneficiary or beneficiaries in a trust..

There are four main trust categories: revocable, irrevocable, living, and testamentary.

Let's break them down.

Revocable trust

A revocable trust describes a trust you create during your lifetime. It gives you, as the grantor or settlor, the ability to change the beneficiaries and assets while you're alive and physically and mentally able to. It also gives you the right to dissolve the trust at any time. There are no tax benefits or creditor protections associated with these trusts.

This type of trust is typically used for:

Planning for incapacitation. Revocable trusts allow you to get your affairs in order when you're diagnosed with a debilitating condition before you become incapacitated. When you become incapacitated, your successor begins managing your trust's assets.
Avoiding probate. Assets in this type of trust can bypass probate, and the details of the trust remain private.

Irrevocable trust

Unlike a revocable trust that can be changed, an irrevocable trust is permanent. This type of trust can't be changed once it has been funded.

An irrevocable trust is usually used for these specified purposes:

Minimizing estate taxes. Since the assets technically belong to the trust and not the grantor, beneficiaries can escape many, if not all, estate taxes.
Asset protection and retention. This type of trust can receive and hold assets after you die and can also hold lifetime gifts for your heirs and beneficiaries.

Living trust

Living trusts, also called loving trusts and inter-vivos trusts, can be revocable or irrevocable. The trust document details your assets in the trust that will be used for your benefit during your lifetime and how they'll be distributed after your death.

For example, a living trust might state how your bills will be paid if you become incapacitated. This type of trust is not the same as a healthcare power of attorney. That separate legal document gives a third party the power to make medical decisions on your behalf.

Testamentary trust

A testamentary trust, also called a will trust, specifies how your assets are designated after you or your surviving spouse, the grantor, dies. As the trust terms are established in your will, you're free to change the terms at any time.

Trusts can be funded or unfunded. With a funded trust, you will return certain assets to your trust during your lifetime. An unfunded trust contains no assets, only the trust document. The trust becomes funded upon your death or can remain unfunded. An unfunded trust exposes your assets to many risks that trusts are designed to avoid, so it's important to fund your trust as soon as possible for the best interests of your beneficiaries.

Determining your trust needs

A leatherworker creates a bag for his client. Who inherits your business and its assets can be spelled out in a trust.

When determining your trust needs, consider factors like:

Asset protection
Estate planning
Life insurance policy
Educational expenses
Special needs provisions

For example, if you have a family member with a disability, a special needs trust may be an appropriate solution to provide financial support without compromising their eligibility for government benefits, such as Supplemental Security Income.

Additionally, consider the type of assets you want to protect and their potential tax implications. You can ensure your trust aligns with your specific needs and financial circumstances by consulting with an estate planning attorney or a financial professional.

How much money do you need to have a trust?

While having a trust fund is generally associated with the very wealthy, the reality is that there is no set amount of money required for you to set up a trust. Anyone can set up a trust regardless of income level if they have significant assets worth protecting.

You can start a trust fund for as little as $100 in initial deposit and a few hundred dollars in fees, but if you have $100,000 or more and own real estate, then a trust might be beneficial to protect your assets.

What assets shouldn't be in a trust?

A woman cuts a piece of fabric in her shop. Retirement accounts, health and medical savings accounts, and active financial accounts cannot be included in a trust.

Having a trust is a great way for people to protect their assets and ensure that their assets will be handed off to their beneficiaries smoothly. However, some things shouldn't be included in your trust. Here are some things that you should not put into your trust:

Retirement accounts. Accounts like 401(k), IRAs, 403(b), and some qualified annuities shouldn't be transferred into your trust. Putting these investment accounts into a trust would require a withdrawal, which could trigger income tax for your benefits.
Health and medical savings accounts. Because they allow you to use tax-free money for allowable medical expenses, they can't be transferred into a trust.
Active financial accounts. You shouldn't transfer the accounts used to pay monthly expenses into a trust. An exception can be made if you are the trustee and have been given full access and control of the trust's assets.

Advantages of establishing a trust

Unlike more common estate planning documents, such as last wills, establishing a trust presents many benefits. Trusts provide:

Greater control over asset distribution
Privacy by avoiding probate, which is a public and often lengthy process
Potential tax advantages include reducing estate taxes by removing assets from the estate through an irrevocable trust.

However, the advantages of trusts must be weighed against the costs and complexity of setting up and maintaining a trust. A professional consultation and analysis of trust fund alternatives can guide you in deciding if a trust is the best fit for your estate planning objectives.

What are some disadvantages of a trust?

While the benefits of a trust are clear, you should be aware of some of the disadvantages of having a trust. Trusts often require substantial initial and ongoing costs and can be difficult to maintain.

Here are four of the most common challenges:

Setup fees. The initial trust setup using an estate planning attorney can range from $1,000 to more than $3,000, depending upon the complexity of the trust and attorney's fees. There are also recurring administrative costs, such as trustee, tax preparation, and legal fees.
Ongoing recordkeeping. A trust can be complex and difficult to understand and manage. It requires meticulous recordkeeping. There is a strict legal framework you or your trustee must adhere to, which can be intimidating.
Asset risk. Not all trusts offer creditor protection. For instance, the assets in a revocable trust are not protected because you retain control over your assets.
Potential tax burden. Some trusts may be subject to a higher income tax rate than individual taxpayers in certain situations.

Trust management and administration

An elderly couple holds hands at a kitchen table. Ongoing trust management is crucial to ensure the trust serves its intended purpose and provides financial security for your beneficiaries.

Trust management and administration involve carrying out the grantor's directives, managing assets, and distributing funds to beneficiaries. Trustees are responsible for overseeing the trust assets, ensuring the trust is conducted appropriately, monitoring expenses, accounting for and reporting on trust assets, and preparing tax and regulatory filings.

Trustees receive compensation for their work, while the costs tied to trust management and administration can fluctuate depending on the trust's complexity and the beneficiaries' requirements. Ongoing trust management is crucial to ensure the trust serves its intended purpose and provides financial security for your beneficiaries.

Costs and considerations for creating a trust

The costs of creating a trust vary depending on its complexity and the necessary upkeep. Legal fees for establishing a trust typically exceed $1,000, with additional fees for transferring property, transferring ownership, and continuous maintenance. Before deciding, it's necessary to balance these costs against the trust's benefits and juxtapose them with alternative options.

When assessing the costs and benefits of establishing a trust, consider the potential tax advantages, the level of control and asset protection that will be offered, and the needs of your beneficiaries. Consulting with an estate planning attorney or financial professional can help you make the best decision for your unique circumstances.

Taxes to consider

A woman takes notes while on a Zoom meeting with her attorney, who tells her about tax considerations for her trust.

As with most things related to estate planning, trust tax laws can be complicated. If you want to take advantage of the tax benefits related to your trust, it will be helpful to consult with an estate tax attorney or professional while creating your trust.

Here are the taxes to keep in mind:

Estate taxes. When you pass away, a large estate may be subject to federal estate tax. In 2023, the federal estate tax ranges from 18% to 40% and generally applies to assets over $12.92 million. Some states have their own estate taxes, so you could be looking at paying two estate tax bills. Irrevocable trusts can lower such taxes by removing assets from your estate.
Inheritance taxes. Your beneficiaries and heirs pay this tax. Rates can vary depending upon the inheritor's relationship to you, such as a spouse versus a child. There is no federal inheritance tax, but some states have inheritance taxes. Only Maryland has both estate and inheritance taxes on top of the federal estate tax.
Capital gains and income taxes. Some trust assets can generate income, triggering income taxes or capital gains taxes. Exactly who pays the tax depends on who legally owns the assets. Charitable donations may be exempt.

Ongoing taxes

A woman on a bus checks her smartphone for her state's tax code regarding trusts.

If your trust has property that gains value, loses value, or otherwise creates income, you must pay the Internal Revenue Service taxes on that trust income on Form 1041. When filing your state income tax returns, you'll want to check your state tax code to see if you need to file locally.

Seeking professional assistance

A woman sits at a cafe counter working on her laptop computer to set up an appointment with a financial advisor to create a trust.

Considering the complexity of establishing a trust fund, it's advisable to enlist professional help from attorneys, financial advisors, or online services. This can ensure the trust is set up correctly and optimizes potential tax benefits. A trust attorney can help guarantee that the assets in the trust account are managed in the most tax-beneficial way for your beneficiaries.

Summary

A man adds figures on a calculator and takes notes as he determines what details to outline in his trust. With a trust, you can ensure your assets are protected and distributed according to your wishes.

In conclusion, trust funds are crucial in estate planning and asset management, offering control, privacy, and potential tax advantages. By understanding the key concepts and terminology, determining your trust and needs, and following a step-by-step guide to setting up a trust fund, you can ensure your assets are protected and distributed according to your wishes.

Frequently asked questions

A father has set up a trust for his son which stipulates that the child's educational expenses be paid from the trust.

How do I transfer ownership of my house to my trust?

To transfer ownership of your house to a family member, first spouse, or other beneficiary in your trust, you would:

Draft a new deed by copying the old one and updating the necessary information
Fill out a quit claim on your house
Fill out a real estate deed transfer form
Copy your certificate of trust
File all those documents with your county clerk

Can I make some legal arrangements to ensure my child graduates from college before certain other assets are distributed?

Yes. When setting up a trust, you can ensure a beneficiary meets a certain age requirement before receiving assets. In this case, you could designate that all educational expenses would be paid through the university level. You can then designate that your child would receive all or a portion of the assets you have set aside for the educational expenses of that individual.

How much money do you need to have trust?

What are the three types of trust?

There are three primary classes of trusts: revocable trusts, irrevocable trusts, and testamentary trusts. A revocable trust can be altered or terminated during the trustor's lifetime, while an irrevocable trust cannot. Finally, a testamentary trust is created within the context of a will.

What are the disadvantages of a trust?

Trusts can be quite complex to understand due to specific legal language. Additionally, administrative costs such as trustee and tax preparation fees are recurring, and there is a strict legal framework to adhere to. Overall, trusts involve a lot of complexity and have high administrative costs.

What assets should not be in a trust?

You should not put retirement accounts, life insurance policies, uniform transfers to minors or gift accounts, vehicles, health savings accounts, medical savings accounts, cash, or assets held in other countries into a living trust.

What is the difference between a revocable trust and an irrevocable trust?

A revocable trust allows the grantor to make changes or terminate the trust. In contrast, an irrevocable trust is permanent and offers greater asset protection and potential tax benefits.

This article is for informational purposes. This content is not legal advice, it is the expression of the author and has not been evaluated by LegalZoom for accuracy or changes in the law.