If you are looking for guides on how to set up a trust fund, then you’ve come to the right place. Ensuring that our loved ones are well taken care of financially is often our priority. Well, you can easily achieve that with the help of a Trust fund.
Setting up a Trust fund is a part of estate planning and it will ensure that your assets are properly shared between your loved ones after your demise.
How to Set Up a Trust Fund
Most times, people feel that only the rich can set up a Trust fund. However, you can set it up irrespective of your financial status. If you’re concerned about leaving your legacy behind and taking care of the people that matter most to you, then you should set up a Trust. It is one of the best things you can do for your loved ones.
What is a Trust Fund?
Well, before going to how to set it up, let’s know what it is all about and how it works. A trust fund is a legal account that allows people to keep their assets on behalf of someone else. When you set up a Trust, you’ll transfer assets to it. These assets will be held by a legal entity and will only be distributed when the terms of the agreement are met.
You could keep any type of asset in your Trust on behalf of your loved ones. From real cash, jewellery, cars, investment accounts, businesses, and heirlooms to properties. As long as it’s something your loved ones can inherit, it’s fine.
Trust funds are just like wills. However, they are more specific, private, and can be controlled well by the grantor while he or she is alive. They also don’t have the same requirement to set up.
How Does a Trust Fund Work?
A Trust fund requires three entities. The grantor-that’s the person setting up the Trust, the Grantee- the beneficiaries. And the Trustee- the individual or institution managing the Trust.
The grantor can choose to set up the Trust in whichever way he/she wants. And while the grantor is alive, the trustee will manage the account. The assets will be held in the account till the grantor passes away or is incapacitated.
Moreover, the grantor can also set up the Trust and state that it should be paid out when the beneficiaries reach a certain age. Or even direct the Trust toward paying the beneficiary’s school fees. And as earlier stated, the assets won’t be paid out till the terms of the agreement are met.
Steps to Setting Up a Trust Fund
It’s very easy to set up a Trust fund. However, as it is a part of estate planning, there are several important steps you need to take.
Specify the Purpose of the Trust Fund
Before you set up your Trust, you have to know why you want to open it. It’s very important that you are clear about the purpose of the trust. So, you have to decide whom you want the beneficiaries to be, what you want them to inherit, and when you want them to get your assets.
Knowing your goals for the Trust will help you with other key decisions to make.
Determine the Type of Trust You Want to Set Up
There is a variety of trusts including revocable, irrevocable, blind, education, spendthrift, special needs trusts, and more. Each has a specific purpose it serves. However, you have to choose one based on your goals for setting it up.
Moreover, you can consult your financial advisor to decide which one’s best for you to set up.
Define the Terms of the Trust
After you’ve decided on the type of trust you want to set up, you have to define the terms of the trust. This simply means that you are to choose your trustee and the assets your trust should hold.
You are also to clarify how the assets will be managed and distributed. Also, determine how long the trust should last and o what conditions it should stop operating.
Legally Create the Trust Documents
When you’ve defined the terms of your trust, you can then go ahead to make it legally binding. This is done by completing and executing them based on the laws of your state. You can do this with the services of your attorney.
Your attorney will create a declaration of trust, deed of trust, and other instruments to formalize it.
Fund the Trust with Assets
Once the trust is official, your next action should be to fund it. You are to take your trust documents to a financial institution. And open an account for the trust with the same name you used to legalize it.
Moreover, you’d also need to provide the details of the trustee. To fund the trust, you can make the deposit immediately or transfer it over time.
Register Your Trust Fund with the IRS
When you’ve set up your trust fund, you’d have to register it with IRS for tax purposes. You’ll then get a tax ID number for it. This number is necessary when you file your tax returns.
How Much Does it Cost to Set Up a Trust Fund?
The amount required to set up a Trust fund varies. If you are setting it up yourself, as little as $100 might be enough for you. However, with the help of an estate planning attorney, you’d pay more for both legal fees and for preparing the documents needed.
What are Some Common Mistakes People Make When Setting Up a Trust Fund?
Some common mistakes people make when setting up a trust fund
- Releasing funds too early.
- Choosing the wrong trustee.
- Not regularly monitoring the trust.
- Adding provisions that are too restrictive to the trust.
- Not being clear about the goals of the trust.
Do Trust Funds Get Taxed?
Money taken from a Trust is taxed. Beneficiaries are to pay taxes on the income and other distributions they receive from the Trust. Although they won’t pay taxes on the returned principal from the Trust’s assets. However, the funds in a Trust are taxed differently from that in ordinary investment accounts.
Is Trust Fund a Good Idea?
Trust funds can provide you with control over how your assets are to be distributed. Also, they are more private and specific. They ensure that your loved ones get your assets when you pass away or are too sick to work anymore.
Does Trust Fund Pay Monthly?
How trust funds pay depends on the terms of the agreement. Beneficiaries of a Trust fund could receive money in small lumps monthly, quarterly, or annually.
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