How to Set up a Trust

Written by: Chuck Mattiucci | Financial Advisor

Planning for the future financially means thinking ahead to how you’ll live in retirement and how much money you’ll need to support yourself. It also means considering what will become of your assets after your death. You might have heirs you’d like to leave a significant portion of your estate to. Estate planning helps you minimize the amount of estate taxes you need to pay while ensuring your loved ones get as much as possible.

One way to direct where your assets go, skip the probate process after your death and potentially minimize estate taxes is to set up a trust. Learn more about what a trust is, the benefits of establishing one and how to go about setting it up.

What Is a Trust?

A trust involves three parties — you (the trustor), a third party (the trustee) and your beneficiary or beneficiaries. It’s an arrangement where the trustee holds your assets on behalf of the person or people you name as beneficiaries. When you set up a trust, you specify how and when you want the trustee to distribute your assets to the beneficiaries.

Several types of trusts exist. The type that works for you depends on who you plan on naming as beneficiary and how flexible you want the trust to be.

Generally speaking, trusts fall into two main categories — revocable or irrevocable. A revocable trust, or living trust, is one you can change while you are still alive. You can name yourself as the trustee of a revocable trust, as well, only passing on trustee duties to a third party after your death. The assets in a revocable trust bypass probate but might be subject to an estate tax.

An irrevocable trust is one you can’t change after you’ve set it up. When you establish an irrevocable trust, you’re transferring certain assets from your estate to a third party. An irrevocable trust lets you avoid probate and eliminates any potential estate tax. It also minimizes your tax responsibility on any earnings the assets make. If you are sued, the assets in an irrevocable trust are protected.

In addition to being revocable or irrevocable, a trust can fall into any of the following categories:

• Marital trust: A marital trust benefits your spouse.
• Testamentary trust: You can set up your will to establish a trust following your death.
• Charitable trusts: A charitable trust can provide a variety of benefits.  It provides a potential tax deduction, avoids taxation on assets held in the trust, and directs a portion of your assets to charity and a portion to beneficiaries of your choice.
• Generation-skipping trust: A generation-skipping trust allows you to leave a limited amount of assets to your grandchildren or great-grandchildren without triggering excessive estate taxes.

Why Set up a Trust?

Although many people think of trusts as something exclusively for the ultra-wealthy, the reality is you don’t have to be a billionaire or multi-millionaire to benefit from a trust. If you’d like to retain as much control over your assets as possible while avoiding certain taxes and probate, a trust can make sense for you.

Here are a few reasons you might consider setting up a trust:

• To control who gets access to your assets after your death: When you establish a trust, you clearly define the beneficiary and set up the terms under which the beneficiary receives the money in the trust. For example, if you want to leave money to a certain charitable organization on the condition that organization continues to have the same mission, you can state that in the trust. If you are concerned about your children’s spouses or your spouse’s children from a previous marriage getting access to your assets, a trust helps protect your money.
• To financially support a disabled family member: When you establish a trust, the assets in it can be used to support a family member who might otherwise not be able to support themselves. Properly structured, the assets in the trust won’t count against that person’s income or savings, so they can continue to receive disability benefits from the government.
• To avoid probate: The probate process is the process of administering a will after your death or, if you don’t have a will, of dividing up your assets. In some states, this can be an expensive process.  A trust helps your heirs skip that process, ensuring they get their inheritance sooner.
• To keep your assets private: Wills become part of the public record following your death, meaning anyone can access them and see who got what. A trust remains private.
• To allow you to access Medicare: When you set up a trust, you transfer your assets to the trustee. If necessary, establishing a trust can allow you to have access to government programs such as Medicare that you might not otherwise qualify for.
• To minimize taxes: Since setting up an irrevocable trust transfers assets out of your estate, it reduces your estate’s size and your tax obligation.

How to Set up a Trust

You can set up a trust on your own, but getting professional help is a good idea. A professional can help you choose the most appropriate type of trust for your needs and ensure that everything is in order.

This is especially important when establishing a trust that takes effect after you die; such a trust can be very difficult and expensive to “fix” . . .  if it can be fixed.  As you go through the process of establishing a trust, there are several steps to take:

1. Choose a Type of Trust

The first thing to do is decide the type of trust you need. You can choose a living trust that converts to an irrevocable trust after your death, for instance. Having a living trust means you can make changes as necessary during your lifetime. If you choose a charitable organization as the beneficiary then want to change the organization later, you can do so with a revocable or living trust.

You will also be able to choose how long a trust lasts. With trusts for your minor grandchildren, you might set them up so the trusts begin distributing some or all of the assets once they reach the age of majority, a particular milestone, or a specified age – such as age 25. You might also set up a trust fund to only distribute assets after the beneficiary has achieved something, such as graduating college, buying a home, or having their first child.

2. Select a Trustee and Beneficiaries

You’ll need to decide who the trust beneficiary or beneficiaries will be. In some cases, the type of trust you choose will, in effect, determine the beneficiary. If you set up a martial trust, your spouse is the beneficiary. If you set up a charitable trust, a qualified charitable organization (that is, a 501(c)3 organization) of your choice is the beneficiary.

You’ll also need to choose a person or corporation to serve as the trustee. The trustee takes on fiduciary duty, meaning they are responsible for overseeing the trust and ensuring all the stipulations of the trust are met. Depending on the type of trust you choose, you may be able to name yourself the trustee. You can also choose a relative or close friend as the trustee. Some people choose to have a professional, such as a financial advisor or a corporation, fulfill this role.

Choose the trustee wisely, as they play a critical role in ensuring the trust does what you want it to do. When choosing your trustee, consider their experience with financial matters, their schedule and other commitments, and their familiarity with your situation, particularly if you’re choosing a relative or friend.

If something should happen to the person you name as the trustee, you might want to play it safe and identify another party – a “contingent” – to act as the co-trustee. You might select a corporate trustee to act as the secondary trustee. That way, you’ll benefit from their professional experience and knowledge while having someone you know well and trust as the primary trustee.

3. Fund the Trust

You may need to transfer assets into the trust to make it work the way you want it to.  (Otherwise, you just have a piece of paper.)  To do that, decide what type of assets you want to include in the trust. You might transfer real estate property, personal property or investments, or savings accounts to the trust.

To transfer property, you need to assign the title or deed to the trust, transferring ownership of it from yourself to the trust. If you’re transferring a savings account to the trust, contact the bank and add the name of the trust to the account. You can also transfer personal property that doesn’t have a title or deed to the trust. For example, if you have antique furniture or valuable artwork, you can write a description of the item on a document and include it with the trust file.

4. Register the Trust

When you make an irrevocable trust, you’re creating a separate entity for legal and tax purposes. As a separate entity, your trust will need its own tax identification number, which you can get from the IRS. By contrast, you don’t need to get a separate tax number if you create a living or revocable trust; this type of trust uses your existing social security number.

How to Assign a Trustee

The trustee takes on a lot of responsibility when managing the trust, so you must choose the right person or corporation for the role. They need to follow the directives of the trust and act in the trust’s best interest when making decisions that affect it. Being a trustee requires someone to have a fair amount of legal and financial know-how. While you can name pretty much anyone as the trustee, there are some exclusions. For example, the trustee can’t be:

• A minor (under age 18)
• A non-citizen of the U.S.
• A convicted felon

To be on the safe side, it’s a good idea to assign someone or several people to act as the successor trustee. Then, if the original trustee can’t fulfill their obligations for whatever reason, the successor can step in. If you’re concerned your relationship with a trustee will change or that you’ll want to remove them as the trustee at some point, it’s best to leave room in the trust to allow for changes.

FAQs About a Trust

Have lingering questions about the process of setting up a trust or why you might want to do so? Here are a few answers to some commonly asked questions.

1. How Is a Trust Different From a Will?

A trust differs from a will in several ways. The purpose of a will is to divide up your assets after your death. The purpose of a trust is to transfer assets away from your estate and into the trust so you can avoid probate and potentially estate taxes. A will goes into effect after your death, while a trust can go into effect right away.

2. How Much Money Do You Need to Set up a Trust?

While you need to have some assets, you don’t have to be extremely wealthy to start a trust. You can benefit from a trust if you have assets you want to pass on to someone. A trust is also useful if you want to protect assets for a beneficiary you want to support.  This can include a child in a struggling marriage, someone with special needs, or anyone you fear might spend all of their inheritance.

Generally speaking, establishing a trust makes sense if you have real estate to transfer or have a net worth of at least $100,000.

3. How Long Does It Take to Set up a Trust?

It doesn’t take very long to set up a trust once you have decided who you want to be the beneficiary, what assets you want to transfer and who will serve as the trustee. The entire process can take just a few weeks.

Even though it doesn’t take long to establish a trust, it might be something you prefer to do sooner rather than later. Setting up a trust, even when you’re young and healthy, helps ensure you protect your heirs and that your assets work for you, even if the unexpected happens.

4. How Much Does It Cost to Set up a Trust?

The cost to open a trust can vary based on the approach you take. It might cost a few hundred dollars or a few thousand. Since setting up a trust can help minimize your estate taxes and income taxes, or protect your heirs, it can be cost-effective in the long run, no matter how much you end up paying upfront.  Doing it right is critical, since it may not be possible to fix it after you die.  Ultimately, a well-designed trust can be money well-spent.

Talk With an Advisor at Fort Pitt Capital Group Today

Is a trust right for you? The financial advisors at Fort Pitt Capital Group can help you plan for the future and provide personalized financial services that make sense for you. We’ll help you determine whether or not setting up a trust is right for your situation and can walk you through choosing a trustee and the type of trust. To learn more, contact us today to talk one-on-one with a financial advisor.

About the Author:

Chuck Mattiucci
Financial Advisor
Fort Pitt Capital Group, LLC
680 Andersen Drive, Pittsburgh, PA 15220
(412) 921-1822 | cmattiucci@fortpittcapital.com