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Setting up a trust: Everything you need to know

What is a trust? Do I need a trust?

A trust is a fiduciary relationship that is created by an agreement between two consenting parties. When a trust is created, the trustor gives the trustee the right to hold the legal title to the trust assets or property for the benefit one or more beneficiaries.

Creating a trust helps to ensure that assets will be distributed in the manner that the trustor wants. Trusts can also help to avoid or minimize estate or inheritance taxes.

Can I set up my own trust or do I need an attorney? How long would the process take?

You do not need to hire an attorney to create a trust though you should look into one. You can get help from an estate attorney to set up your trust. It can take a few days to several weeks to create a trust.

An estate attorney is a type of lawyer who practices in the area of estate and probate law who can help you. The time that it might take an estate lawyer to set up a trust will vary. You will need to meet with the attorney and gather the information that he or she needs. Some trusts may need to apply for a federal employer identification number or FEIN. The attorney will then create the trust agreement, and you will fund the trust. Attorney’s fees can range from several hundred to several thousand dollars, depending on the complexity of your situation.

You can also choose to create your own trust. The time it might take you to do so will depend on you and your knowledge. It varies because of the time to research it, create and fund your trusts. You can use resources such as estate planning books or online tutorials. There are also online services and investment advisors. You can also ask an attorney to review your trust document after you draft it to make certain that it is legally sound.

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Probate and lost money

In the U.S., only 42% of adults have estate planning documents in place, and just 36% of adults who have minor children have estate planning documents. Each year, Americans waste $2 billion on probate costs.

Estate planning is the process that people use to decide how their assets and property should be handled after they die. An estate plan might include multiple documents, including revocable trusts, wills, irrevocable trusts, powers of attorney, living wills and others.

What is a trust fund?

A trust fund is a legal entity that holds and manages trust assets or property for the benefit of the beneficiary. The beneficiary of a trust can be an individual or an entity.

There are many different types of trust funds. They are usually made up of a grantor, trustee and beneficiary. The types of trust funds that can be set up may vary from state to state, so you will want to check the laws in your state before setting up a trust. Once you learn how to properly set up a trust and establish a trust, you can then fund it.

You can use trust funds to make sure that your wishes are followed after you pass away. You can use certain types of trusts to protect your assets, to pay for educational expenses, to transfer large sums of money and to benefit from significant tax advantages.

A trust fund baby is a slang term for a person whose parents have created a trust account that contains enough assets that they can live off of them. The funds normally can be accessed once the trust fund baby reaches a specific age or milestone. The funds can be maintained by the trustor, a third party, or the child.

Collect the trust details

Before establishing a trust, you want to determine your objectives. A trust provides legal protection for the trustor’s assets and avoids probate. Probate is the legal process that your will goes through after you die to distribute the assets based on the will’s terms.

If you do not have a will or a trust, your estate will be considered to be intestate. The probate court will then appoint an administrator to distribute your assets under the state’s intestacy laws. The probate process can take months or years to complete, depending on your estate’s complexity or if any beneficiaries challenge the will. Fees are deducted from your estate before distribution, and the contents of your will become public record. Probate can cost hundreds or thousands of dollars in attorneys’ fees and court costs, eating away at your estate.

The grantor is the person who creates a trust. Assets that may be held in a trust include the following:

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  • Cash
  • Stocks
  • Bonds
  • Mutual funds
  • Real estate
  • Other property

The beneficiaries of a trust are people or entities who gain something from the trust in the form of a profit or distribution. Normally, they receive distributions from a trust. Recipients are either specifically named in the trust documents or meet requirements making them eligible for the distributions. You can be a beneficiary of a trust, will, or life insurance policy that has distribution requirements, which may qualify you as liable for taxes.

You can choose who will serve as the trustee when you are setting up a trust. During the trust setup, you will designate a person or organization to hold the legal titles of the assets and to administer the property or assets for the benefit of the beneficiaries. When you form a trust, you should make certain to appoint an alternate trustee in the event that the trustee becomes incapable of performing duties.

During the trust setup, you will also determine the terms under which the assets will be managed, invested, or distributed. You need to think about who will manage the assets in your trust account. Under the Uniform Transfers to Minors Act or UTMA, there must be an adult to manage the assets if minors will inherit the assets or property. The UTMA states that the person must be made a custodian. The purpose of the UTMA is to make certain that minors who inherit assets from a trust do not waste them and that others are unable to waste the funds as well, so the UTMA has a protective role.

You will also need to determine its time frame and the conditions under which it will be terminated. A trust will end when the trust property is exhausted. If the trust property was stocks or cash, this can happen when all of the money plus interest gets paid to the beneficiary. If the trust contains real estate, the trust may end if the real estate is destroyed or the trust itself comes to an end.

When creating a trust, you will specify an end date or a condition that will lead to its termination. If the end date is reached or the condition is met, the trust will end.

Types of trusts

When you are setting up a trust, you need to know about the different types of trusts. A revocable trust is a type of trust in which you can change, amend, or remove the terms as the grantor. During the trust’s life, income that is earned is distributed to the grantor. The property will only be transferred to the beneficiaries after the grantor’s death.

A revocable trust avoids probate if it includes all of your assets, but it can still be reached by creditors during your lifetime. A revocable trust does not offer any tax advantages to the grantor.

An irrevocable trust is a type of trust in which the grantor cannot modify, add to, or delete the terms without the permission of the named beneficiary. The property is owned by the irrevocable trust for the beneficiaries’ benefit. The grantor legally removes his or her ownership of the assets and transfers ownership to the trust.

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The purposes of an irrevocable trust include estate, legal, and tax reasons. They are safe from legal judgments and creditors. The tax liability is removed on the income that the assets generate. They can be living trusts or testamentary trusts.

Living trusts are created and funded by an individual during his or her lifetime. Testamentary trusts are irrevocable and are created after the death of the creator by the provisions of his or her will. To make changes to a testamentary trust, the changes must be made to the creator’s will before his or her death.

How to create a trust

There are several document requirements that must be met for setting up a trust. The trust documents must include the name of the trust, the name of the trustee and the alternate, the names of the beneficiaries and whether the trust is a revocable trust or is irrevocable. You must also include instructions to the trustee on how he or she should distribute the trust assets.

You will also need to include a list of the assets of the trust in the document. It should include the distribution terms of the trust assets to the beneficiaries such as whether they will be made in periodic installments or in lump sums. When you are creating a trust, you will also need to include the scope of the management of the trust assets, which is whether the trustee will have limited or complete discretion.

After forming a trust, you must sign it in front of a notary public. You should make copies of the document after setting up a trust. Keep one copy for yourself and give the other copy to the trustee.

Filing with the IRS

Depending upon the type of trust, you may need to register it with the IRS. Revocable trusts do not need to file for a tax identification number or TIN since the grantor maintains control of the trust and is the main beneficiary. This means that the income of the trust is reported using the grantor’s Social Security number.

If you are setting up a trust that is irrevocable, you will need to apply for a federal employer identification number or FEIN. The FEIN is the same as a TIN for irrevocable trusts and for trusts that are created by two or more people.

A FEIN allows the trust to file its tax returns, open financial accounts and conduct a variety of other business transactions. When you register a trust with the IRS, you need to provide information about it. The information that is needed is the following data:

  • Name of the trust
  • Trustee’s name
  • Grantor’s Social Security number
  • Type of trust
  • The date the trust was funded
  • Mailing address for the trust

You will need to complete Form SS-4, which can be done online, by phone, fax, or mail. If you apply for a FEIN online or over the phone, the FEIN number will be issued immediately.

You will need to file Form 1041, which is the U.S. income tax return for estates and trusts, if your irrevocable trust has more than $600 in annual taxable income. You will also be required to file Schedule K-1.

Transfer assets to the trust

An aspect of how to set up a trust is funding it. You can open a bank account in the name of your trust and deposit cash into it. For real estate or automobiles, you will need to change the name on the title to the name of the trust. If you donate untitled assets, you will need to transfer them to the control of the trustee.

Store your trust document safely

After setting up a trust, you do not need to file the trust documents with a court or with a government agency. You need to choose a safe place to store your trust documents where they will not be destroyed. You might store them in a fireproof home safe or a safety deposit box. Tell your successor trustee the location of your trust documents and how they can access them.

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Records and tax accounting

It is important for you to keep detailed records, including the accounting records for your trust. Many trusts require that you file Form 1041. Keeping good records can help you with your trust tax returns.

What happens after a trust ends?

If any property remains in the trust after it ends, the trustee has the power to distribute what is left. As a grantor, you should include instructions in the trust instrument that detail how the remaining assets should be distributed at the end of the trust. If you do not leave instructions, the trustee and the beneficiaries must decide a fair resolution.

Your beneficiaries and the trustee can seek the advice of an attorney for an equitable method of coming to a resolution. If there is a potential conflict with the beneficiaries, bringing in an attorney for mediation may help to avoid the possibility of litigation.

Setting up a trust account can offer you multiple benefits and tax advantages. M1 Finance supports both irrevocable and revocable trusts. You can select trusts when you open an account, and M1 Finance will send you the documents that you need to complete and send back to the company.

Take control of your assets with M1

Investors trust M1 Finance because it empowers them to manage their money and to earn more. The company charges no commissions or management fees, which allows your money to potentially grow faster for you.

You are able to move your tax-deferred or tax-free IRA account to M1 Finance and pay nothing in fees. M1 offers investment tools that are award-winning and that enable your money to automatically grow while your tax burden is minimized. M1 uses built-in tax efficiency to help reduce the amount owed on taxes automatically.

When you open your account today, you can pick your own securities or choose an expert portfolio that has been designed to meet your particular risk tolerance, time to invest, and financial goals. We offer more than 80 portfolios from which you can choose.

With the M1 Finance platform, you will easily be able to access its powerful automation from anywhere, making investing more accessible. The platform can also save you time because M1 Finance uses features such as automatic reinvestment and dynamic rebalancing. These features automatically help to keep your portfolio aligned with your financial goals.

Get started today by completing our online form or to learn more, call us today at 888.714.6674.