Set up trusts to minimize estate taxes, avoid probate, and seamlessly transfer your assets to your heirs.
Simply put: A trust is a legal arrangement in which a certain amount of property or assets is held by a person or entity (e.g. a bank) for the benefit of one or more other people.
Why Would You Create One?
- To maintain control of assets in the event of incompetence (if you become unable to manage your assets due to a decline in health or mental fitness)
- To save on estate taxes
- To avoid probate
- When significant amounts of assets are involved, trusts may also be established to maintain control over assets even after the original owner has died. For example, a trust may be set up with the sole purpose of paying college tuition for a grandchild. In this scenario, the money in the trust cannot be used for any purpose other than paying college tuition and cannot be used on behalf of anyone other than the grandchild.
Determine the Type of Trust That You Need
Trusts can accomplish a range of goals, including avoiding probate, minimizing estate taxes, and making sure your heirs receive as much of your money as possible as quickly as possible. The type of trust you set up depends on what your goals are.
Do It Online or with an Attorney
There are many online legal services that can help you create a trust. Since trusts are incredibly complicated, you may want to consider working with a trust and estate attorney. In addition, there are online services that offer personalized online legal advice from an attorney, which can be a more affordable option.
Online: Factors to take into consideration when choosing an online legal service include cost, completion and delivery time, and the services offered by the site. For example, some online legal services will submit your documents to review by a paralegal after completion, while others will not.
Attorney: Unless your estate planning needs are simple and straightforward, engaging with legal counsel may be the best option. The right trust and estate attorney will be someone with significant experience in handling the issues you’re dealing with. Their practice should be focused primarily on trusts and estates. Meet with the attorney you’re considering before hiring him or her to assure they are a good fit for your needs.
The Four Main Participants in a Trust
Grantor: the person who creates the trust (also known as “donor,” “settlor,” or “trustor”)
Trustee: the person, people, or entity (such as a bank) that agrees to hold the property or assets (the grantor may be the trustee)
Principal: the property or assets themselves, including money, which is held in the trust and managed by the trustee
Beneficiary: the person or people who ultimately receive the property or assets in the trust
The Main Types of Trusts
There are many different types of trust, and depending on the type of assets you’re trying to protect or your goals in setting up a trust, there may be some trusts that will better meet your needs than others.
When a trust is created and then immediately become effective, it is known as a “living trust.”
When a trust is created and then does not become effective until after your death, it is known as a “testamentary trusts.” In the case of testamentary trust, you, as the person creating the trust, are called the “testator.” Testamentary trusts are often created within wills.
How Do You Fund It?
Testamentary trusts are generally funded only after your death, and are often funded with the assets of your estate. In order to fund a testamentary trust, language in the Will must explicitly state that all estate assets should be moved into the trust upon your death. The estate assets can then be distributed and managed according to the terms of the trust.
Living Trusts vs. Testamentary Trusts
All trusts are set up by you, the grantor, during your life. However, not all trusts immediately go into effect. Depending on when the trust becomes effective, it is either a living trust or a testamentary trust.
You retain ownership and control of the property in the Trust and can change the terms of the trust, including the trustees and beneficiaries.
How Do You Fund It?
If you are setting up a revocable trust, you will likely be the sole trustee of your trust. As the sole trustee, you can move assets into the trust and out of the trust at will, without too much hassle. Because of this, many people with revocable living trusts put a large portion of their assets to be held in trust, including real estate, financial accounts (stocks, bonds, etc.), and even bank accounts, such as a savings account.
You give ownership and control of the property in the trust to others (trustees) and therefore no longer own or control the property, thus making you unable to enact changes to the trust.
How Do You Fund It?
By putting assets into an irrevocable trust, you are essentially giving up ownership and control of those assets, so choose these assets carefully. Which assets will be used to fund an Irrevocable trust are generally determined by the goals of the trust. Choosing a funding method that supports the goals of the Trust is something that you should decide with the help of a trust and estates attorney. Transferring property to an Irrevocable trust also requires that a formal transfer of property be completed, meaning that the property must be re-titled in the trustee’s name. An attorney can help you complete and manage a re-titling of property.
Fun Fact (that’s not really all that fun): All trusts are either revocable or irrevocable.
An Even Funner Tip: Living trusts must be funded during your lifetime; testamentary trusts are funded after your death.
Reasons for Choosing a Revocable Trust vs. an Irrevocable Trust
If the primary goal of the trust is to avoid excessive estate taxes, you'll likely want to set up an irrevocable trust, since you don't have to pay taxes on it. If the primary goal of the trust is to maintain control of assets in the event of incompetence, you'll likely want to set up a revocable trust, since you'll want to retain control over the assets in the trust and the beneficiaries. In addition, the rules of the particular trust you’re establishing may dictate whether a trust must be revocable or irrevocable. If you’re unsure whether you want to establish a revocable or irrevocable trust, you should consult a licensed trusts and estates attorney in your state.
How Do You Create One?
It can be done online or with the help of a trust and estate attorney.
Understanding the Laws
There are many state and federal laws that must be carefully followed when setting up a trust. While some states will allow you to set up a trust on your own or set up a trust using an online legal service, other states require that an attorney work with you to establish a trust. Even in states where residents are able to establish trusts on their own or online, it’s always a good idea to consult with an attorney before finalizing the documents.
Setting Up Trusts Online
Many legal websites offer tools for setting up trusts online. The trusts you can set up online are generally simple trusts that achieve the basic goals of naming trustees and beneficiaries. If you choose to set up a trust online, you should consult a trust and estate attorney before finalizing any documents. Whether you go directly to an attorney or use an online service that offers the ability to get advice from real attorneys, having a lawyer look over your documents can help you make sure that they're legally binding, and that they achieve all your legal goals.
The cost of establishing a trust can vary based on the type and complexity of the trust, and the method of establishment. Online legal services can charge anywhere from $30-$300 to set up a trust, while consulting with a lawyer can cost anywhere from $1000 and up, depending on your needs and planning complexity. While the cost of consulting with a lawyer may seem very high, a lawyer can make sure that the trust you’re setting up is completely valid and legally sound, which can potentially save you or your heirs money later.
Tax Implications During Your Life
With a revocable trust you are still treated as the owner of the property in the trust, and can therefore be taxed on that property during your life. With an irrevocable trust, you give up ownership of the property in the trust and are therefore no longer liable for that property and cannot be taxed on that property.
All You Need to Know About Trustees
Trustees are responsible for managing, investing, and distributing the property in the trust. This includes administration and accounting, paying any taxes on behalf of the trust, working with beneficiaries to determine their goals for the trust, and working fairly and with transparency around issues of management, investments, and distributions.
Managing Trust Assets
The trustee is responsible for the accounting and administration of the trust. This includes preparing and filing income tax returns for the trust, paying those income taxes from the trust, and adhering to any and all applicable state and federal laws around trust administration. The trustee must also keep accurate records of all transactions.
Investing Trust Assets
The trustee is responsible for investing the trust assets so that those assets earn income for the beneficiaries. Depending on the needs of the beneficiaries, the trustee is responsible for determining whether to invest the principal to earn income, to grow the principal in the trust, or other goals that the beneficiaries might have.
Distributing Trust Assets
The trustee must follow the instructions of the trust in distributing income or property to the trust's beneficiaries. The trustee must make these distributions in a timely and responsible manner.
Who Can Serve as a Trustee?
The trustees of your trust can be yourself, your family members or friends, professionals (accountants, attorneys, etc.), a bank or a trust company, or any combination of these people.
If you are naming only a single trustee, you will want to be sure to name at least one successor trustee. In case the primary trustee that you name is not able to serve, the successor trustee can serve. If you are the sole trustee, you'll also want to name a successor trustee so that the trust can continue to be managed after your death.
If you’re establishing a revocable trust, you will likely name yourself as the sole trustee.
How to Choose Trustees
These are the qualities you want in your trustee...
- Attention to detail
- An understanding of his or her duties, and a commitment to taking those duties seriously
- An understanding of finances and perhaps investing, accounting, or law
- Good communication skills
- Aligned with your morals and values
When choosing trustees, it's important to think about the structure and goals of the trust and the specific requirements of the trustees of that trust. While some trusts may require trustees with extensive experience in investing or accounting, other trusts may benefit from trustees who have close personal relationships with the beneficiaries or the grantor.
In some cases, the person best suited to be a trustee may not be your closest friend or family member, but instead may be a friend or colleague who you believe to be competent, honest, and intelligent. You may also appoint someone close to you to act as a trustee and specify to that person that you would like him or her to hire professionals to advise on certain aspects of the process.
Appointing a Professional as a Trustee
If you don’t feel like you have anyone in your personal life who you would like to entrust with the role of Trustee, you may appoint a professional that you have a relationship with, such as an attorney or an accountant. These people may require a fee for their services as a trustee.
The End Result: Beneficiaries
Beneficiaries of a trust are the people or organization(s) who are named as the recipients of any benefits of the trust. The beneficiaries can be anyone you like, but will usually depend on the goals of the trust.
Choosing Beneficiaries of a Trust
If you're setting up a trust that is intended to avoid Probate and seamlessly transfer assets to your family, you'll likely want to name your family members as the beneficiaries. If you're setting up a trust that is intended to hold assets for your grandchildren, you will likely name those grandchildren as the beneficiaries. A trust that is intended to provide support for a charitable organization will likely name the charity as the beneficiary.
Based on the goals of your trust and the number of beneficiaries you name; you can decide how you would like those beneficiaries to receive distributions. For example, if you have three children you may name all three of your children as equal beneficiaries or you may name them as unequal beneficiaries, with each child receiving different distributions from the trust.
You may also decide whether or not the beneficiary designation applies to linear descendants—that is, whether or not your children’s children would become beneficiaries in the event that one of your children should die before the assets in the trust are fully depleted.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.
This article was prepared by Beyondly, Inc.
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