Introduction
It’s a myth that trusts are only useful for wealthy individuals with large estates. In reality, a trust is a valuable estate planning tool that can serve a variety of purposes as part of a comprehensive estate plan. With proper use and planning, they can benefit a wealthy estate just as well as they can serve someone with nominal assets and simple needs. If you believe a trust may be an appropriate solution for your estate planning needs, here are ten simple steps to set one up.
1. Hire an Attorney
Trusts are complicated legal instruments, and drafting one usually requires the assistance of an attorney with expertise in estate planning. Take some time to compile a short list of well-recommended estate attorneys in your area, and interview a couple candidates to see who you like best.
Look for an experienced professional who has been around long enough to see some of their estate plans come to conclusion beyond a client’s death. Attorneys with this type of firsthand experience will better understand the process, and be able to offer additional advice and services based on personal experience. Also, look for an attorney who you feel comfortable working with. You need to work with a professional who you feel comfortable sharing private and sensitive information with, as discussing your death and your family’s future can be an emotional process.
2. Discuss Your Needs
Once you have selected an attorney, discuss why you need a trust. Who do you need to provide for if you pass away tomorrow? What are your financial goals? What kind of a legacy do you want to leave when you die? How will a trust best serve those needs?
3. Decide if Your Trust Will Be Revocable or Irrevocable
As the name implies, a revocable trust can be amended or dissolved at any time by the individual who is forming and funding the trust (known as the trustor or grantor). In contrast, an irrevocable trust can only be amended by the beneficiary in limited situations. Because of that distinction, assets transferred to an irrevocable trust are completely removed from the trustor’s estate. The assets in the trust will not count towards the trustor’s final estate value (thereby lowering the amount subject to estate taxes), and the trust will file its own income tax returns each year. With a revocable trust, the assets will be in the trust’s name but they will still count towards the value of the trustor’s estate, and the trustor will report income from the trust on his or her personal tax returns.
4. Gather Your Assets
After you’ve decided on what kind of trust best fulfills your needs, take a moment to catalog your assets. You’ll need to know which assets should be transferred to the trust, and which assets (if any) you wish to retain in your name. During this process, it’s important to distinguish between assets that are subject to probate, and assets that are exempt from probate. Assets subject to probate such as individual banking or brokerage accounts and individually-titled property should probably be transferred to the trust so that these assets can avoid probate. Assets that are exempt from probate—such as retirement accounts, accounts with a 3rd party or transfer-on-death beneficiary, and property held in joint tenancy—do not necessarily need to be transferred to the trust. If you do, it should be for convenience or another strategy, as these assets automatically bypass probate.
5. Select the Trustee
The trustee is the individual charged with managing the assets held in trust. The trustee will have a fiduciary responsibility to prudently manage the assets, and they will be charged with distributing income and or principal as the trust document dictates. If you are establishing a testamentary trust, you’ll need to select a third-party trustee. If you are establishing a living trust, you will be the primary trustee, and you’ll need to appoint a third-party successor trustee to take over managing the trust when you die. Depending on the size and complexity of trust, you may want to consider hiring a professional trust management firm to serve as trustee or successor trustee.
6. Name the Beneficiaries
The individuals who are to receive principal and/or income from the trust are called beneficiaries. With a living trust, you and your spouse will be the primary beneficiaries, and the individuals who are to receive the remaining assets after your death are the secondary beneficiaries. With a testamentary trust, the beneficiary will need to be a third party, such as a spouse, a child, or a charity. You can also name a secondary beneficiary in case the primary beneficiary dies before the trustor.
7. Create the Trust
Now that you have all of the pieces in place, your attorney will draft the trust document. Depending on the trust laws in your state, you will need to sign the trust in the presence of 2 – 3 disinterested witnesses (disinterested means they are not party to the trust). You and your witnesses may need to sign in the presence of a notary public.
8. Transfer Assets to the Trust
Transferring assets to a trust can be tricky business. You’ll need to open new financial accounts, rename existing accounts, issue deeds for your real estate, and assign personal property to the trust. If you’re lucky, your attorney will have a designated secretary to assist with the transfer; larger law firms sometimes even have an entire department to handle it for you. At the very least, your attorney should provide you with detailed, written instructions to transfer the assets to your newly formed trust.
9. Update Your Will
If your new trust is a living trust, it may completely replace your last will and testament. If the new trust is meant to supplement the will as part of a larger estate plan, then you may need to amend your will to account for the changes. Make sure the instructions regarding your assets in your will don’t contradict the trust document, as that can lead to complications if any interested parties contest your will in probate court.
10. Regularly Review Your Trust
Your trustee should hold an annual review each year to discuss the progress and status of the assets in your trust. Depending on the size of the trust, you may wish to receive monthly or quarterly updates, too. You should also meet with your estate planning attorney regularly to discuss your situation and assess if any aspects of your estate plan need to be amended. Complex estates should be reviewed annually, but simple estates may only need a review every 3 – 5 years, or when you have a major life event.
For long-term peace of mind, contact us to set up a consultation today. We look forward to helping with your will and other estate planning needs.
Call our Estate team at (480)467-4325 to discuss your case today.
