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 how to create one. Others think that it's unbearably complex and only for the ultra-rich. 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

First, you should think about why you want to restrict access to a specific group of assets. It will help if you're very clear and upfront about what you're trying to achieve. 

Before you set up a trust, answer these questions:

  • Who will be the grantor (the person moving assets to the trust)?
  • What assets will be placed into the trust fund? Will it include cash, stocksbondsmutual fundsreal estate, or other assets?
  • Who are the people receiving the benefits of the trust?
  • Who will serve as the person who will manage the trust and its assets (the trustee)?
  • How will the assets be managed, invested, or treated? Make sure you include the types, levels, and timing of distributions.
  • How long will the trust last before ending, and what will cause it to cease to exist?
  • Is the trust revocable (can be changed) or irrevocable (cannot be changed)?

Find a Reputable Attorney

The next step in setting up a trust is going to a good estate planning lawyer in the state where you want the trust fund domiciled. This legal advisor is of vital importance because the state laws used to craft the trust will greatly affect the way the courts oversee it.

Though trust law differs between states, it has been standardized to some degree over the years. Still, it helps to make sure you choose wisely from the start by talking it over with trusted advisors. 

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

The document might be short and simple, or it could be long and complex. It will depend on the size of the trust, the number of beneficiaries, and the purpose you have for it. 

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 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 used if there is income that requires the trustee to file tax returns on the trust's behalf. The TIN is also used to open financial accounts at banks, brokerage firms, or other institutions. The trustee will also need it for a variety of other actions to conduct day-to-day trust 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 assets 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]."

If you're setting up the trust to protect property from creditors or only want some privacy, it is not a good practice to use a real name in the trust as they will be better able to locate it. There is no rule that says a person needs to use their real name when setting up a trust.

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 stocks are rare these days). Then, you would re-register them with the transfer agent. Finally, you'd change the ownership title listed in Exxon Mobil's registration records from your name to: "Ada Smith as Trustee for The John Smith Energy Trust, July 30th, 2021."

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, 2021."

If the trust will be funded with cash, you'll need to open the bank or brokerage account to which you plan to make the deposit. For example, say you went to Charles Schwab, a discount broker. Once you do that, the trust account acts as if it were a brokerage account in the sense that you can buy and sell assets according to the 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. Detailed records must be kept that include accounting records. This keeps everything in order so that there is a record if there is ever a lawsuit or issue. At some point in your lifetime, or at the time of your death, you'll need to turn over these responsibilities to someone else.

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