How to Set Up a Trust: The Who, Why, When and How

Do you need a trust as part of your estate plan? You may assume that trusts are just for the super rich, but having a lot of wealth is just one of many reasons why setting up a trust is a smart financial strategy.

Follow these four steps when setting up your estate plan:

• Determine whether a trust is needed
• Consideration for time
• Choose a trustee
• Find a CFP® Professional and get started

Determining Whether a Trust is Needed

A simple exercise will demonstrate when a trust makes sense for you:

Think of absolutely everything you own—real estate, retirement and brokerage accounts, life insurance, personal property. Now think of every person or entity to which you would give each of these assets, either during your lifetime or at your death. Imagine yourself picking up each asset, and handing it to the chosen beneficiary as you say: “I give this to you…”

Are you able to complete that transfer without any reservations whatsoever, without any “if, ands, or buts” coming to mind? Or do you find yourself putting some stipulations around your gifts, such as:

• To my wife, but not to her children from her first marriage
• To my husband, then my kids, but not if it means more estate taxes
• To my daughter, but not to her creditors or my son-in-law
• To my grandson with special needs, but not if it disqualifies him from receiving federal support for his disability
• To my alma mater, as long as it remains an all-women’s college
• To my children, in equal shares after all higher education costs are paid for my youngest son

Or it may be simply that you wish to keep your bequests private, without leaving any public record of how your assets are distributed.

All these are examples of situations indicating that you should be talking to your CFP® professional and your attorney about creating a trust. Generally speaking, if your giving intentions would take more space than is provided by the blank line for a beneficiary designation, then you need a trust. Same is true for assets, which pass directly by title, such as a home held jointly with right of survivorship to a sibling. You probably need a trust, if you want to do something more complicated than an outright transfer.

Time Considerations

So how do you go about setting up a trust? First of all, you must decide if you want the trust to go into effect now, or at your death. Similarly, you can make the trust revocable, which allows you to change the provisions of the trust anytime, or irrevocable, which means its terms cannot be subsequently altered once it has been established.

Many people create revocable living trusts to hold assets while they’re alive. These trusts then become irrevocable upon their death. The purpose for doing this is to avoid the time and expense of probate, as well as to provide instructions for the management of their assets in the event they become incapacitated. Others less concerned with probate costs may decide to simply create a trust in their wills, to go into effect once they die.

It’s possible, too, to create an irrevocable trust during your lifetime, perhaps in the form of an education trust for children or to benefit a charity. This is generally done by benefactors who wish to get assets out of their estate, usually to reduce estate taxes, or because they will not need these assets during their own lives and want others to get the benefit of this wealth now. Making a trust irrevocable also transfers the tax responsibility for the income generated by the bequested assets away from the benefactor to the trust.

You also need to decide how long you wish assets to be held in trust before they are finally distributed. There is a complicated common law provision preventing trusts from lasting indefinitely. However, many states have made it possible to get around this provision, allowing the creation of “dynasty trusts.” As the name suggests, these trusts allow family wealth to grow for very long periods without subjecting it to further gift or estate taxation.

You should consider your reason for establishing a trust in the first place in order to determine how long the trust should last before assets are transferred to their ultimate beneficiaries. For example, if you believe that it is best that your children be in their 40s, with careers and marriages well established, before they receive a sizable sum of money, then you would create trust distribution dates accordingly. If, however, you have a “Peter Pan” beneficiary whom you believe will never grow up, then you’ll will want to extend the terms of the trust for as long as legally possible.

Choosing a Trustee

By far your most important decision is your choice of a trustee: the individual or institution with the fiduciary responsibility to manage the trust’s assets and to honor all the trust’s provisions. This person can be yourself, as in the case of a revocable living trust, or a stand-in for yourself, when you’re no longer able to manage your assets. This generally implies choosing a trustee who is:

• familiar with you, your financial situation, and your chosen beneficiaries;
• has a good grasp of financial management, including taxes and investments; and
• is able and willing to devote the time and effort to overseeing the trust, making distributions as required, and meeting all tax deadlines.

It may sound like a job for Superman, so make your decision carefully. You may be fortunate in having a trusted relative or friend who understands money management and is also close to your beneficiaries. Be sure to designate a secondary or co-trustee to assist your trustee, or step in when he or she is no longer available.

You may prefer a corporate trustee. The advantage here is that, unlike your CPA brother-in-law, a corporate trustee doesn’t have an expiration date, but can serve for generations to come. Furthermore, a corporate trustee, by definition, has the required trust management expertise. The downside may be that your beneficiaries won’t like working with an unknown trust officer who may be a stickler for the rules, rather than being open to their needs and requests. One work-around is to allow your beneficiaries to hire another corporate trustee, if they are not satisfied with the original.

Getting Started

Clearly, trusts can be complicated, and thereby expensive to set up. But when crafted to reflect your intentions and anticipate future life contingencies, they can provide tremendous peace-of-mind that the legacy you want to leave is firmly in place.

Many people have found that the best place to consider the terms and structure of a trust they wish to establish is with a CFP® professional who can both educate and advise on how various trust provisions work. The trust plan created with a CFP® professional can then be taken to a licensed attorney who can render it into legal language relatively efficiently and cost-effectively.