A trust fund is one of the most common ways to transfer money, property, or other valuable assets to your children or loved ones after your passing. Some even set up trust funds for worthwhile causes such as for charity. But unlike a will, a trust fund is an estate planning tool that reads out how one's assets should be handled and offers more control and privacy. A trust fund also helps minimize estate taxes and saves the beneficiary time and bureaucracy over paperwork.
The creator of the trust fund, whose assets are funding it is known as the grantor, and the trust fund is holding the assets on their behalf while still alive. Once the grantor dies or becomes incapacitated, the trust fund’s control will go to the beneficiary of those assets. Until the grantor's passing, the trustee manages the trust. Trusts can have stipulations such as the beneficiary must reach a certain age before that obtain rights over the grantor’s assets.
Generally, these are the steps to follow when setting up a trust fund.
1) Choose the correct type of trust
What purpose will the fund serve? Broadly speaking, there are revocable trusts and irrevocable trusts, living trusts and testamentary trusts. The more common types of trust funds are Education Trust (funds only to cover academic expenses of the trustee) and Charity Trust (grantor wishes to donate to charitable organizations)
2) Specify the details of the trust
The outline of the trust fund must specify who the grantor(s) are, the beneficiaries, name the trustee and in detail, mention all the property and assets which will make up the contents of the trust that will eventually go to beneficiaries.
The grantor must also specify how the assets will be managed and distributed, and to whom. A trust fund can also have an expiration period and on what conditions the trust will cease to operate.
3) Hire a Financial Advisor
Setting up a trust can get complicated based on the nature of the assets or type of fund — and taxation. There are many trust management firms that can guide the grantor set up the trust fund. Grantors often enlist the help of a professional estate or trust attorney.
4) Fund the trust
Once the planning is done, the grantor can now fund the trust. Banks or wealth management firms can open a trust fund bank account under the same name as the trust. At this stage, one will need to provide the names and contact information of the trustees. The grantor can either deposit a lump sum amount of cash or fund the trust periodically.
5) Register the trust fund with the IRS
Once the trust fund is established, each trust fund will usually require a taxpayer identification number (TIN) for tax returns and financial accounts. The IRS website makes it easy to file online, but if you are hiring a trust attorney or third-party service, they will do all this on behalf of the grantor.
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