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Establishing a Trust Fund

Savvy Consumer: Establishing a Trust Fund
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ESTABLISHING A TRUST FUND

This Life Advice® Program pamphlet about Establishing a Trust Fund was produced by the MetLife Consumer Education Center and reviewed by the Division for Public Education of the American Bar Association and the Legal Services Corporation.

Table of Contents

Benefits of Establishing a Trust
Types of Trusts
Specific-Use Trusts
Establishing a Trust
The Role of the Trustee
Providing Peace of Mind
References & Special Offers

People often associate trust funds only with the wealthy. But a trust fund ("trust") actually can be an effective financial tool for many people in many circumstances.

A trust is a separate legal entity that holds property or assets of some kind for the benefit of a specific person, group of people or organization known as the beneficiary (beneficiaries). The person creating a trust is called the grantor, donor or settlor. When a trust is established, an individual or corporate entity is designated to oversee or manage the assets in the trust. This individual or entity is called a trustee. A trustee can be a professional with financial knowledge, a relative or loyal friend or a corporation. There are pluses and minuses to each type of trustee. An individual trustee may provide a more personal touch, but may die or move away. A corporate trustee may be less personal but provides experience, investment skills, permanence and impartiality. More than one trustee can be named by the grantor if he or she wishes.

Did You Know?

Grandparents can establish a trust to help pay for a grandchild's college education, and $10,000 per grandparent can be placed gift-tax-free in each grandchild's trust per year.*

* Source: The Bottom Line Money Book, 2000

Benefits of Establishing a Trust

Whether it makes sense to establish a trust depends on your individual circumstances. Some common reasons for setting up a trust include:

  • To provide for minor children or family members who lack financial experience or who are unable to manage their assets
  • To provide for management of your assets should you become unable to oversee them yourself
  • To avoid probate and transfer your assets immediately to your beneficiaries upon death
  • To reduce estate taxes or provide liquid assets to help pay for them.

Keep in mind that you may not need to establish a trust to accomplish these and other financial goals. A well-written will may distribute your assets appropriately. Check with a lawyer before deciding if a trust is right for you.

Types of Trusts

There are two basic forms of trusts: after-death (or testamentary) and living (or inter vivos).

An after-death trust will come into existence, usually by virtue of a will, after a person's death. The assets to fund these trusts must usually go through the probate process. In certain states they may be court-supervised even after the estate is closed. An example of an after-death trust would be a mother leaving land to a trust benefiting a young son in her will. The will establishes the trust to which the land is transferred, to be administered by a trustee until the boy reaches a stated age, at which point the land is transferred to the son outright.

A living trust, on the other hand, is a trust made while the person establishing the trust is still alive. In this case, a mother could establish a trust for her son during her lifetime, designating herself as trustee and her son as beneficiary. As the beneficiary, her son does not own the property but can receive income derived from it.

Living trusts can be revocable or irrevocable. The most popular type of trust is the revocable living trust, which allows the individual to make changes to the trust during his or her life. Revocable living trusts avoid the often lengthy probate process but, by themselves, don't provide shelter for assets from federal or state estate taxes.

When an irrevocable living trust is set up, ownership of the assets is turned over to the trustee. The trust becomes, for tax purposes, a separate entity, and the assets cannot be removed, nor can changes be made by the grantor. This type of trust often is used by individuals with large estates to reduce estate taxes and avoid probate. However, if the grantor names himself or herself as trustee or is entitled to trust income, the tax benefits would generally be lost.

Specific-Use Trusts

Before you set up a trust, ask yourself what you are trying to accomplish. Here are just a few of the many special uses for trusts:

  • A charitable trust is used to make donations and realize tax savings for an estate. Typically, there is a transfer of property such as art or real estate to a trust which continues to hold the asset until it is transferred to the charity, usually after your death. The donor can continue to enjoy the use of the property, then the charitable gift may be deductible for estate tax purposes.
  • A bypass trust allows a married couple, in certain cases, to shelter more of their estate from estate taxes. The first spouse to die can leave assets in a trust which can provide income to the surviving spouse for the rest of his or her life, taking advantage of the unified credit provided under Federal Gift and Estate Tax law. Upon the death of the second spouse, the assets in the trust pass directly to the children or other beneficiaries, without being taxed at the second spouse's death.
  • A spendthrift trust can be a good idea if your beneficiary is too young or does not have the mental capacity to handle money. The trust can be established so that the beneficiary receives small amounts of money at specified intervals. It is designed to prevent that person from squandering money or losing the principal in a bad investment.
  • A life insurance trust is often used to give your estate liquidity. In this case, the proceeds are payable to the trust and the trustee is empowered to lend money to or purchase assets from the estate.

Establishing a Trust

Establishing a trust requires a document that specifies your wishes, lists beneficiaries, names a trustee or trustees to manage the assets and describes what the trustee or trustees may do. For a living trust, you can name yourself as trustee but, if you do, you should also name a successor trustee to take over if you should become disabled or when you die. Once the document is completed, you must transfer the assets to the trust. Keep in mind that, in the case of certain assets, such as real estate, you may incur fees and transfer taxes.

Some states require you to file a trust document with the state. To find out about your state's laws regarding trusts, talk with an attorney who specializes in estate planning.

The Role of the Trustee

The person who manages a trust, the trustee, has a legal duty to manage the trust's assets in the best interests of the beneficiary or beneficiaries. This might include managing rental properties, investing funds or paying income to the beneficiary.

How much a trustee is required to do and how much access he or she has to the funds should be specified in the trust. A simple or mandatory trust requires the trustee to distribute income to the beneficiary. A complex or discretionary trust may afford the trustee discretion over the principal and income to be distributed.

Generally, trustees are paid for their services because of the amount of work involved in managing a trust and the threat of potential liability if assets are mismanaged. Institutions such as banks or trust companies usually charge a percentage of the trustís value to handle the management (accounting, investing, distributions, etc.) of the trust. The percentage will vary depending upon the size and complexity of the trust. Individual trustees often receive a flat fee or hourly rate. No matter how a trustee is to be paid, it should be agreed upon in advance.

If you want to name someone as a trustee, talk with that individual or entity about the trust. Be sure they agree to serve as trustee and can comply with the terms of the trust. Because there is generally such a high standard of duty and liability imposed on trustees, an individual or entity cannot be forced into becoming a trustee just because he or she is named in a trust document or will. If your designated trustee is unable or unwilling to perform, the court will appoint a trustee for you, unless a successor trustee, such as a corporate trustee, is designated.

Providing Peace of Mind

It's possible that a trust may be the answer to your estate planning needs. Take the time to evaluate carefully what you are trying to accomplish, then consult an attorney experienced in estate planning. A well-written trust can help to provide peace of mind for you and your beneficiaries.

References & Special Offers

Plan Your Estate
Denis Clifford and Cora Jordan, Nolo Press
Life Advice® readers save up to 40% on the purchase of Nolo products by calling 1-800/728-3555 and mentioning DMET or visit www.nolo.com.

The American Bar Association Guide to Wills and Estates
Times Books $13

Baby Boomer Retirement: 65 Simple Ways to Protect Your Future (second edition)
Don Silver, Adams-Hall Publishing $14.95
Life Advice(r) price $10
Price includes shipping and handling. To order call 1-800/888-4452 and mention Life Advice® or send a check payable to Adams-Hall Publishing, P.O. Box 491002, Dept. LA, Los Angeles, CA 90049.

Pamphlets From the Federal Government

The quarterly Consumer Information Center Catalog lists more than 200 helpful federal publications. For your free copy, write: Consumer Information Catalog, Pueblo, CO 81009, call 1-888/8-PUEBLO, or find the catalog on the Net (www.pueblo.gsa.gov).

Helpful Links

www.nolo.com
Online legal information and advice

www.freeadvice.com
Easy to use site for legal information

www.aaepa.com
Academy of Estate Planning Attorneys, 1-800/846-1555

www.actec.org
American College of Trust and Estate Counsel, 310/398-1888

www.netplanning.com
National Network of Estate Planning Attorneys, 1-800/638-8681

Updated: February 2005

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