What is a Trust, and How Does It Work?

Adrianna Adams, CFP®
Aug 25
 min read · 
Financial planning
Learn how to set up a trust.

Learn how to set up a trust.

Setting up a trust for estate planning and protection of your property can help ensure that your wishes are carried out during and after your lifetime. This guide will outline the steps involved in setting up a trust and provide you with an understanding of the benefits a trust can bring to you and your family. We are here to advise you every step of the way.

What is a Trust?

A trust is a legal entity created with the purpose of managing assets for a specific beneficiary or group of beneficiaries. It is controlled by a trustee, a designated individual responsible for managing and administering the trust in line with the provisions stated in the trust document. There are many different types of trusts, and laws vary significantly depending on your state. 

Benefits of a Trust 

Protection of your Legacy: Trusts can provide protection of your property and investments for your beneficiaries, during and after your lifetime. This way, you can ensure that life events such as divorce, death, and bankruptcy will not prevent your assets from being inherited by your loved ones. 

Care of a dependant: Setting up a Trust is an effective way to ensure your dependents will receive an inheritance specific to your wishes. Certain types of Trusts can even provide financial support for a disabled child, without impacting government benefits they may receive.

Avoidance of Probate and Estate Taxes: Utilizing a Trust maximizes what you leave behind. Assets left in a Trust avoid probate, a court supervised process that executes your will. This can be a lengthy and expensive process, which should be avoided if possible. In certain situations, trusts can help minimize taxes by transferring assets out of your estate before your death. 

Control of your Wealth: A Trust allows you to set specific parameters for how and when your assets should be distributed. For example, a spendthrift trust allows the trustee to determine exactly how a beneficiary can spend trust income. Another example is a charitable trust, which can be used to bequeath assets to one or more charities. 

Setting up a Trust

If you are thinking about setting up a trust, here are some important things you’ll need to consider with an estate-planning attorney:

1. Determine the Purpose of the Trust

It is important to enlist the help of an estate planning attorney or financial professional to determine if a Trust is right for you. There are many different types of trusts, all which serve a different purpose. Is your goal to safeguard property for your heirs? Do you have significant assets that you wish to avoid the probate process? There are many factors to consider when deciding how to utilize a trust.

2. Choose a Trustee

The trustee(s) may be one or more individuals responsible for managing the trust assets on your behalf. Consider someone you trust, and who is qualified to make important monetary decisions. You may even consider appointing a professional trustee if necessary, such as a bank or attorney. In some situations, you may appoint yourself as trustee while you are living, and specify that someone else becomes trustee upon your death.

Example: John and Sarah want to set up a trust to protect their assets for the benefit of their children. They choose John's brother, David, to act as the trustee due to his financial expertise and trustworthiness.

3. Choose Beneficiaries

Next, identify who the trust is intended to benefit. Consider any restrictions that should be placed on the beneficiaries, and how and when they will receive their benefits from the trust.

Example: In John and Sarah's case, they want their children to be the beneficiaries of the trust. They decide to restrict access to the trust assets until their children reach a certain age or achieve specific milestones, such as completing their education.

4. Draft the Trust Agreement

The trust agreement is a legal document that outlines the terms and conditions of the trust. It should clearly specify the purpose of the trust, the powers and duties of the trustee, and the rights and responsibilities of the beneficiaries. Ensure all legal requirements are met and that all parties involved understand the trust agreement.

Example: John and Sarah work closely with their attorney to draft a comprehensive trust agreement. They specify the purpose of the trust as providing for their children's financial needs and education. They outline David's responsibilities as the trustee and define the conditions under which their children can access the trust assets.

5. Fund the Trust

To make the trust operational, transfer assets to the trust. This involves changing ownership of assets from your personal name, into the name of the trust. Many types of assets may be retitled into the name of a trust, including real estate, bank accounts, and stock portfolios. Ensure all necessary documents are properly executed and consult with professionals to address any tax implications.

Example: John and Sarah transfer their investment portfolio and a rental property into the trust. They work with their attorney and financial advisor to complete the necessary paperwork and ensure the transfers are properly executed.

Is a Trust right for you?

Setting up a trust requires careful consideration and proper legal documentation. By understanding the benefits and obligations of creating a trust, thoroughly documenting the terms of the trust, and seeking professional guidance, you can ensure the trust is legally valid and serves its intended purpose. A dedicated advisor at Domain Money can help you understand whether a trust may be an effective estate planning tool for you and your loved ones.

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