Setting Up A Family Trust

Trusts Hold Assets for Family Members and Other Beneficiaries

Setting up a family trust requires several steps, but before you proceed you should know the answers to the frequently asked questions below. You should also make sure you understand the related laws of the state in which the trust is to be established.

What is a trust?

A trust is a legal entity that you (the Grantor) set up and fund to hold assets that you want someone else (the beneficiary) to have. A person or an institution (the Trustee) controls the assets that you have in the trust until it is time for your beneficiary to have or use them.

Why have a trust?

Some of the primary reasons to have a trust are:

  • Avoid probate court.
  • Potentially reduce some estate taxes.
  • Keep your affairs private.
  • Provide for your incapacity during your lifetime.
  • Encourage your heirs do use your money a certain way.
  • Protect a disabled dependent.

What is usually included in a trust?

A trust is typically written to handle your specific situation and so can have whatever you want. Usually however, the following parts are included:

  • Identity of the person making and funding the trust – the Grantor or Grantors
  • Identity of the person or entity who will manage the trust – the Trustee or Trustees (on certain trusts you can be the trustee and the grantor and the beneficiary)
  • Identity of the person or entity who will benefit from the trust (get the trust assets when conditions are met) – the Beneficiaries
  • Identity of the person who will take over trustee duties if the named trustee can’t or won’t serve – the Successor Trustee(s)</>
  • Identity of alternate person(s) or entities for the trustee and the successor trustee
  • Legal requirements for the federal and state government
  • Provisions – clauses in the trust agreement that explain what the trust is about.Provisions include things like what the property in the trust is, who gets which parts of the property, when and under what conditions they get it, what happens if the primary beneficiaries are not there, what the trustee can and cannot do (powers), etc.

    Provisions can also include creation of additional trusts when certain conditions are met (like when you die). This is commonly done to attempt to reduce estate taxes, or manage property for minor children.

What controls must be in a trust to make it legal?

The laws of the state which is your ‘primary domicile’ (used for determining the proper jurisdiction for matters such as taxation, voting – the place you have established things like a drivers license and a home where you spend most of your time) as well as some federal laws (including laws related to taxes) must be followed to ensure that your trust will work.

You do need to sign the document in front of a notary.

What types of trusts are there?

There are many different kinds of trusts. The four basic ones are:

  1. Testamentary – created on or after your death via a will, trust or other legal document
  2. Revocable – a trust that can be adjusted
  3. Irrevocable – a trust that cannot be amended
  4. Intervivos (aka Living) – set up and in effect while you are alive

There are as many types of trusts as there are reasons to have one. Here is an article that explains the Types of Trusts.

Do I have to have a trust?

No, but many people do.

Reasons to have a trust are multitude. Below are some examples:

  • Tax reduction
  • Make sure that all taxable exclusions from estate tax are used (AB Trust)
  • Get money out of your estate to lower overall estate taxes (Bypass Trust)
  • Get the assets to your grandchildren, let your children use them but keep them out of your child’s estate so they don’t have to pay estate taxes on them (Generation Skipping Trust)
  • Make sure that the marital deductions (spouse can pass assets to each other tax free) are used appropriately (Marital Deduction Trust)
  • Give assets now to your non-charitable beneficiaries but retain use of the property – gets it out of your estate for tax purposes (Grantor-retained trust types GRAT, GRIT, GRUT)
  • Keep life insurance death benefits out of your estate to avoid estate taxes on it (using Crummey Trust provisions in your life insurance trust)
  • Manage property of minor children
  • Minor children can’t legally own more than a few thousand dollars in most states. In a trust, you can specify someone to care for the property, when the child can get the property (this can be after legal age is reached and often is), under what conditions the money is to be used for or given to the child. (Child’s Trust, POT Trust)
  • Care for dependents with special or supplemental needs
  • Make sure that a sick child or adult has medical bills paid until death, then leave the remaining money to other beneficiaries (Special-needs Trust).
  • Help out someone who is on medicaid or other government assistance without jeopardizing the government assistance (Supplemental Trust).
  • Protect property from creditors
  • Property in an irrevocable is not considered to be yours, use this to protect assets from creditors (Protective Trust)
  • Give to charity while still using your property
  • Get income tax benefits now and move property out of your estate to reduce estate taxes later by making donations to charity but still receiving benefit from the assets while you live (Charitable Lead and Charitable Remainder Trusts
  • Establish a dynasty
  • Make a trust that lasts as long as the law allows to build or maintain assets across generations (Dynasty Trust)
  • Control property after you die
  • Make sure your spendthrift beneficiary won’t deplete assets too fast for their own good (Spendthrift trust)
  • Provide for education of future generations (Educational Trust)
  • Establish conditions in your trust to restrict when beneficiaries get the money based on doing or not doing certain things (Incentive Trust)
  • Let your current spouse use your money after you die, but keep control of who the final beneficiaries are (Qualified Terminable Interest Property Trust – QTIP)
  • Care for a pet after your death
  • Some states allow trusts to be set up specifically to care for your pets after your death

As stated above, trusts are written to handle your unique situation, you can have trusts where the trustee is very tightly restricted by the provisions or where the trustee has wide powers and a lot of discretion over which beneficiaries get how much of what assets.

You can set up a trust that pays only for support (health, education and etc).

You can have a trust where one set of beneficiaries benefits for awhile and then others start getting the benefits.

You can have a trust set up to just provide funds for your funeral.

You can set up a trust with yourself as beneficiary or others as beneficiaries.

How does a trust work when I die?

As Bonnie Baker (a well known speaker on relational databases) says: “It depends!”

It depends on the provisions of your trust. However, in general, the steps will be as follows:

The co-trustee or successor trustee takes control of the assets under trust

Typically the successor trustee should be the same person as the executor in your will. The successor trustee will work with the institutions holding the assets under trust to satisfy their requirements to get the assets transferred to the beneficiaries according to the provisions of the trust. This includes providing death certificates, getting new titles on assets with title documents (securities, real estate and etc)

The successor trustee will continue to manage and control assets under trust if the provisions of the trust so specify (as when the beneficiary is a minor child and cannot own the assets yet)

The successor trustee will oversee distribution of non-titled assets under trust (if you have your tangible assets like furniture, art work and etc, they will get them distributed).

Provisions of the trust that kick in at your death happen

Some trusts specify that at death, new trusts are established and property is moved into the new trusts – for example an AB trust is a revocable living trust that splits to 2 trusts on death. One trust is typically a marital-dedication trust which the spouse owns and controls and the other is typically a bypass trust, which the spouse may be trustee on and have use of the assets – but the assets are actually in trust for the children.

No court proceedings are needed to distribute

The trust ends automatically with no action when all provisions and assets are completed and distributed

Case Studies: Structures for Success

View Periodic TableThe key to successful tax reduction is converting your assets into investment programs that meet your business and personal goals, while also meeting the strict rules that apply to each tool and instrument available. We use this Estate Planning Periodic Table in our discussions, with you and your planning team members, about which tools should be considered from among the wide universe of available strategies and programs.

The strategic formulas we create depend entirely on serving specific and legitimate business or personal purposes and goals, as illustrated in our case studies, to avoid raising red flags at the IRS. Therefore, it is only when all of your goals have been established and prioritized — business and personal — that we can successfully develop a complete set of fully-integrated and transparent investment accounts, trusts, foundations and other programs to meet all of your needs for the present and future.



Sources include:

Estate Planning Basics by attorney Denis Clifford copyright 2009 published by Nolo

The Everything Will & Estate Planning Book by Kimberly A. Colgate copyright 2003

Quicken WillMaker Plus – Estate Planning Essentials copyright 2010 published by Nolo

The Executors Guide by Mary Randolf copyright 2010 published by Nolo

Your Wills, Trusts and Estates Explained Simply by Margo Pierce copyright 2008.