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A trust is a helpful estate planning tool that works alongside your last will and testament to manage your assets. Beyond mere asset distribution, a trust offers flexibility, discretion, and potentially favorable tax implications.
This guide aims to shed light on the importance of trusts, the setup process, associated costs, and the measures to undertake once established. Equip yourself with the knowledge to make informed decisions for your financial legacy.
A trust is a legal arrangement created by the grantor that allows a third party, known as the trustee, to hold and manage assets on behalf of a beneficiary. The types of assets that can be placed in a trust range extensively from money and stocks to real estate properties.
Anyone who wants to ensure their assets are well-managed and distributed according to their wishes can benefit from setting up a trust. More specifically, benefits of a trust can include:
Setting up a trust is fairly straightforward, but carrying out the steps will take some time. You should also plan to review your assets and create a plan for how you want your assets distributed.
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The steps in this article to setting up a living trust. Other types of trusts may have different requirements for establishment.
The purpose of your trust sets the foundation for everything that follows. To ensure that your trust aligns with your objectives and values, begin by asking yourself these three pivotal questions:
A trust can serve many purposes, and identifying its primary goal is crucial. Some commonly seen purposes include:
When deciding what assets to include, think about whether it will otherwise go through probate.
In addition, consider including instructions for how assets will be distributed when the time comes. For example, you could set up your trust so that your child receives funds from your trust after they reach a certain age or receives monthly payments of a certain amount rather than a lump sum.
Common trust assets include:
Some assets, such as your retirement funds, can’t be placed in a trust. Other assets, like healthcare savings plans, already bypass probate and don’t need to be included in a trust.
If you need guidance on which assets to transfer to your trust, be sure to seek legal advice.
Everyday vehicles may not be an ideal trust asset due to potential retitling taxes. They either bypass probate or are transferred directily by designating transfer-on-death beneficiaries. However, a high-value collectible car might benefit from being placed in a trust. Always check your state’s regulations regarding vehicle transfers after death.
Depending on the type of trust you set up, a trust can take effect:
These choices can determine how fluid or rigid your trust is, ensuring it aligns with your broader estate and life goals.
After you have clear answers to the three questions above, you should have no problem picking the type of trust that satisfies your exact needs.
Once you’ve determined the purpose of your trust, the next step involves selecting the key players — trustees and beneficiaries. These decisions are vital as they determine who manages the assets and who benefits from them.
A trustee is a person who manages the assets and trust funds on behalf of the grantor and beneficiary of the trust.
For a living trust, it’s commonplace for grantors to appoint themselves as the trustee, thereby retaining complete control over the trust assets. However, it’s perfectly acceptable to appoint another individual as a trustee or even co-trustee to administer the trust alongside you.
Whoever you choose as a trustee, they are bound by a fiduciary duty, which mandates them to act in your best interest and strictly follow your stipulated wishes.
In addition to selecting a primary trustee, it’s a good idea to designate a successor trustee. The successor trustee steps into the role if the primary trustee passes, resigns, or is unable to serve.
When choosing a trustee or successor trustee, various candidates could fit the bill:
Keep in mind that some third-party trustees may be eligible to receive trustee fees (compensation for managing your trust). The exact amount you should pay your trustee varies depending on the trust’s complexity and the trustee’s tasks, but the compensation is typically paid from the trust assets.
While family members or friends often serve without compensation for simpler trusts, professional trustees typically charge between 1% to 2% of the trust’s assets annually or the estate value. On the other hand, non-professional trustees might charge around 0.5% to 1% or even hourly rates.
State law typically requires trustee compensation to be “reasonable,” but check your local area for the most accurate information.
The beneficiaries are the individuals or entities who will receive the assets or benefits from the trust. When selecting beneficiaries, consider:
Always ensure your choices align with your broader estate planning goals and reflect your desires.
The trust document serves as the backbone of your trust, laying out its structure and governing its operation.
Although trust laws vary from one state to another, here are the general key provisions of a trust:
Once you have all these provisions laid out in your trust document, notarize your trust. Not all jurisdictions require notarization, but acknowledging the trust document before a notary public adds a layer of authenticity, credibility, and protection against potential disputes or challenges in the future.
Familiarize yourself with your state’s specific trust laws while you draft the document. Consult with an estate planning attorney if necessary.
Depending on the type of trust, the trust may need an Employer Identification Number (EIN), a number assigned by the IRS to identify an entity for tax-related purposes.
The grantor’s Social Security Number (SSN) can typically be used for tax purposes for revocable living trusts where the grantor is the trustee. However, in cases where the trust is irrevocable or the grantor is not the trustee, or if the grantor passes away, an EIN becomes essential.
There are three common ways to obtain an EIN for your trust:
Once your trust has its EIN, it’s imperative to file any necessary tax returns and maintain compliance with all tax obligations. Doing so ensures the trust remains in good standing and avoids potential legal or financial complications.
You can now start transferring your assets into the trust. Doing so ensures that the trust holds legal ownership of these assets, which is essential for it to function as intended. The process varies depending on the type of asset you’re transferring.
Modify the registration of stocks, bonds, or other similar investments to indicate the trust as the holder. Depending on your broker or investment firm, this might be an online process or necessitate an in-person visit.
Adjust your life insurance policy to pay out to your trust upon the triggering event.
Setting up a trust through an estate planning attorney typically costs at least $1,500-$2,500, depending on the complexity of your estate. Larger estates, more beneficiaries, and complex business arrangements will drive up the cost even more.
Alternatively, you can create a trust yourself for much less if you’re willing to put in the extra time. If you decide to set up a trust yourself, you should plan to spend at least $150 as any trust will have setup costs, filing fees, fees for name and title changes, as well as ongoing administrative costs.
Once you’ve created your trust, the work doesn’t end there. Here’s what to keep in mind after your trust is established:
Trusts — especially living trusts — require regular attention and management to ensure your current needs and wishes are properly addressed.
Trusts are a key element in a comprehensive estate plan, allowing you to manage and distribute assets according to your wishes. While the process might seem daunting, with careful planning and regular oversight, a trust can be an invaluable tool in securing your legacy and providing peace of mind for you and your beneficiaries.
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The cost of maintaining a trust can vary widely depending on its complexity, the assets involved, and the fees of the professionals employed to manage it. Here’s a breakdown of some of the common maintenance costs:
Remember, the actual costs will depend on many factors, including the complexity of the trust, the types of assets it holds, and the professionals you choose to work with.
After someone dies, the trust operates as per the instructions laid out in its documents. The trustee steps in to manage and distribute the assets to the beneficiaries as specified.
The process is typically more streamlined and private compared to the probate process that a will goes through, thus ensuring a quicker and smoother transition of assets to the beneficiaries.
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