One of the primary purposes of a trust is to minimize estate taxes and avoid lengthy and expensive probate proceedings. When it is time to start establishing a trust, including the appropriate terms is important. These terms provide the required instructions for managing and distributing the trust assets. Here is what you need to know about establishing a trust.
The three basic steps involved in establishing a trust
First, a trust is essentially a fiduciary agreement between the person making the trust (the grantor) and the trustee. The term “fiduciary” simply means that the agreement is based on trust and confidence. The trust agreement, a legal document, authorizes the trustee to hold and manage the assets in the trust for the benefit of the beneficiaries named by the grantor. The three steps required for properly establishing a trust are:
- Creating a trust agreement.
- Funding the trust
- Settling the trust
More on the trust agreement
The trust agreement is the legal contract that sets forth your specific instructions regarding how you want the trust property to be managed on behalf of your beneficiaries. It basically provides the “who, what, and when” of the trust. Some of the basic terms that you should consider including in your trust are:
- If it is a living trust, the name of the trustee in charge of the trust before your death
- The name of the trustee who will take over if you become incapacitated
- The name of the trustee who will manage the trust after your death
- The names of your beneficiaries and what they are entitled to receive
- When each beneficiary will receive their assigned trust assets
- Specifically how you want the assets to be distributed
What does funding a trust mean?
After the trust agreement is created, it is time to fund the trust. Funding is basically transferring ownership of the trust assets you intend to include in the trust to the trust itself. For example, this is where you move bank accounts to a new account in the name of the trust, or add the trust as the beneficiary of life insurance policies and annuities. Funding a trust can also include creating a deed transferring certain real property to the trust.
You can fund the trust by changing title or ownership in certain property
Assets like bank accounts, non-IRA and non-401(k) investment and brokerage accounts; stocks and bonds in certificate form, and real estate, can all be funded into a Revocable Living Trust by basically changing the ownership of those assets from the name of the grantor to the name of the trust itself. Some institutions simply require that the name on the grantor’s account be changed. Others, though, may require the grantor to close the original accounts and open new ones in the name of the trust.
You can fund a trust by assigning ownership rights
In cases where the trust assets include personal property that does not require a certificate of legal title, such as jewelry, artwork, and antiques, the assets can be funded by simply assigning ownership of those items to the trust. This can also include personal loans, royalties, copyrights and patents; partnership and membership interests in limited liability companies.
The last step is settling the trust fund
Once the trust has been created and funded, the final step in establishing a trust is to settle the trust. The trust cannot be settled, though, until after the death of the grantor. Ultimately, once you pass away, it is time for your trustee to follow the provisions of the trust pertaining to managing the trust property after your death.
Why you should consider consulting an attorney
There can be some complicated issues that arise when establishing a trust, which an estate planning attorney would be much better equipped to deal with. Depending on the intricacy of the terms of the trust agreement, the amount and nature of the assets, and the potential complications with the family, it could be very helpful to obtain the advice of an attorney. Most potential issues can be addressed as a part of your trust agreement. Your trust can be created for you immediately, while you are still alive, or it can be created for distribution to your beneficiaries after you pass away.
Join us for a FREE workshop! If you have questions regarding trusts, or any other estate planning matters, contact Gaughan & Connealy for a consultation either online or by calling us at (913) 262-2000.