Steps to Setting up a Trust Fund

Establishing a Trust Fund Isn't as Difficult as You Think

Financial planner explaining trust fund matters to a client
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Many people have heard of trust funds, but don't understand the process of establishing one, or think that's it's unbearably complex. This overview will give you an idea of the broad process of how a trust fund is set up and the kind of information you'll need.

Key Takeaways

  • The first step to creating a trust fund is collecting key details and asking yourself questions about what you are attempting to achieve.
  • Then, you should go to an experienced and reputable estate-planning attorney in the state in which you want the trust fund domiciled.
  • Next, the trust fund entity will generally need to request a taxpayer identification number (TIN).
  • Then, retitle the property you want to transfer into your trust fund; finally, administer it following the trust's legal guidelines by keeping detailed records.

Collect Key Details

Consider why you want to create a new legal arrangement to restrict a specific group of property or assets. It will benefit you to be very clear and specific upfront about what it is you are attempting to achieve. 

Before you set up a trust, answer the following questions for yourself:

  • Who will be the grantor (the person transferring assets to the trust)?
  • What assets will be placed into the trust fund? Will it include cash, stocksbondsmutual fundsreal estate, or other property?
  • Who are the beneficiaries (people receiving the benefit of the trust)?
  • Who will serve as the trustee, or person who will oversee the trust and manage the trust's assets?
  • How will the assets be managed, invested, or treated, including the types, level, and timing of distributions?
  • How long will the trust last before terminating, and under what conditions will it cease to operate?
  • Is the trust revocable—can be changed—or irrevocable—can not be changed?

Find a Reputable Attorney

The next step in setting up a trust is going to an experienced and reputable estate-planning attorney in the state in which you want the trust fund domiciled. This legal advisor is an important decision because the state laws used to craft the trust will have a profound influence on the way the courts oversee it.

Though trust law differs from state to state, it has standardized to some degree over the years. Nevertheless, make sure you're choosing intelligently from the outset by talking it over with your qualified advisors. 

Have your attorney create a declaration of trust or the full trust instrument. The trust instrument is the legal document that establishes the family trust fund, and that codifies all of the things discussed in the previous step.

It can be short and simple or long and complex depending on the size of the trust, the number of beneficiaries, and the purpose it is attempting to fulfill. 

When everything is written to your liking, sign the paperwork to create the trust. Some of the forms will include your trust declaration and documents to put the trust instrument into effect. Then, you should move on to the next step.

Register the Trust With the IRS

Usually, the trust fund entity will need to request a taxpayer identification number (TIN). Just as a business needs an Employer Identification Number (EIN), a trust needs an EIN. It is needed if there is income that will require the trust to file its own—stand-alone—tax returns. It is also necessary to open financial accounts at banks, brokerage firms, as well as other institutions, and a variety of other actions necessary to conduct day-to-day business.

To receive your trust's EIN, you can complete the process online at the IRS website, or you can download IRS Form SS-4, fill it out, and submit it by mail.

Transfer in Assets

The next step in setting up your trust fund is retitling the property you want to transfer into it. This retitling might be done as "[Name of Trustee] as Trustee for [Name of the Family Trust Fund] on [Date]."

For example, imagine you had 10,000 shares of Exxon Mobil worth $830,000 that you wanted to put in trust for your children. You would set up the family trust and call it "The John Smith Energy Trust." You then decide to name your sister, Ada Smith, as trustee. 

To transfer your Exxon stock into the trust, you would get the stock certificates out of the vault (or go online since physical stock certificates are rare these days). You would re-register them with the transfer agent, changing the ownership title listed in Exxon Mobil's corporate registration records from your name to: "Ada Smith as Trustee for The John Smith Energy Trust, July 30th, 2019" or something comparable.

If you are going to transfer real estate to the trust, you'd visit the county recorder of deeds and sign over the trust the same way: "Ada Smith as Trustee for The John Smith Energy Trust, July 30th, 2019."

If the trust is going to be funded with cash, you'll need to open the bank or brokerage account to which you plan on making the deposit. For example, say you went to Charles Schwab, a popular discount broker. Once you do that, the trust account behaves—for all intents and purposes—as if it were a brokerage account in the sense that you can buy and sell assets according to whatever rules were laid out. 

Trust Administration and Accounting Records

Finally, the last step in setting up your trust is administering it following the trust's legal guidelines by keeping detailed records, including accounting records, so if there is ever a lawsuit or discrepancy, the paperwork is in order. At some point in your lifetime, or at the time of your death, you'll need to turn over these responsibilities to someone else.

While you can separate the tasks into specific functions and source them with different people or institutions, many financial service firms offer all-in-one fee packages, combining corporate trustee services with administration, accounting, and investment management.