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Setting Up a Trust Fund: What You Need to Know

For more on estate planning and trusts, read our free “Guide to Legacy & Estate Planning.”

Read the Guide.

Imagine: you’ve worked hard over the years to grow and manage your assets so you can leave a lasting legacy to your family and ensure they are taken care of when you are gone. Now imagine that your family, unfortunately, is irresponsible with your assets and within two years, they’re pretty much depleted. It’s not the prettiest picture.

One of the best ways to ensure that doesn’t happen – and to preserve and protect your family’s legacy – is to set up a trust account.

What is a Trust Account?

A trust account, often called a “trust fund” colloquially, is essentially governed by a trust agreement specifying how assets are to be managed for the benefit of another person or persons. These assets can be in the form of money, real estate, stocks and bonds, and even a life insurance policy. Trusts are at the heart of any estate planning.

A trustee is responsible for managing the trust for the beneficiary, or recipient. You, as the grantor or trustor, can set up a trust for multiple beneficiaries, such as siblings. Future heirs also can be provided for if specified in the language of a trust. When you’re not here anymore and can no longer provide for your family, the trustee you appoint is your replacement. A trustee can be a person, a professional trustee service, or even a combination of both a person and a professional trustee service.

Trust Account Benefits

Trust accounts have several key benefits over using a will to distribute your assets. Some of them include:

  • Privacy – trust accounts can help retain a level of privacy. For example, if you have an estate with a will that gives $5 million to each of your children and it requires settling through probate, then it might be listed in public paperwork. A trustee is typically designated as your estate’s executor and could go to probate court to settle any disputes between creditors or beneficiaries of your estate. If no such disputes occur, a trust can keep family affairs away from the probate court.
  • Control – trust accounts allow you to call the shots in terms of when and how the money is distributed. So instead of your heir receiving the assets of your estate in a lump sum in his or her early 20s, for example, your trust can specify how and when your beneficiary would receive the inheritance. Many people will let beneficiaries have most or all of a trust by age 35, but some financial advisors suggest stretching disbursement out even longer to make sure there’s still money for your children as they near retirement age.

Why Set Up a Trust Account

Families set up trust accounts for different reasons. Distribution requirements can be an especially good idea if recipients haven’t shown an impressive degree of financial responsibility. Trusts can be specifically set up for educational expenses or charitable giving, as well. You can also set up a trust account for a special needs child that would continue to fund his or her care after you’re gone.

One major benefit of trusts is avoiding probate, which is the often lengthy legal process to authenticate a will. Depending on your state’s laws and how long it might take to verify details, pay off debts, and distribute assets to the designated beneficiaries, probate can be expensive.

Many people often figure out how long the probate process is in their state, and if there’s some reason it’ll be involved, a trust account might be better route to go.

How to Set Up a Trust Account

It’s not absolutely necessary to hire a trust attorney to draft your trust agreement. There are some online solutions to create an estate plan, which can typically introduce a local attorney if your situation becomes complex. But many estate planning strategists say that it’s often safer and smarter to hire a trust attorney because drafting a solid trust agreement is complicated and exacting. Trust attorneys can help ensure that the assets in the trust account are handled as tax advantageously as possible for your beneficiaries. This expertise doesn’t come cheap, naturally – the more tax-efficient the trust is, the more detailed the language in it may need to be, possibly resulting in higher attorney fees.

But the expense can be worth it. An experienced attorney can also walk you through picking the type of trust you want. The two main types of trust accounts include:

  • Revocable – A revocable trust is modifiable until you pass away. Afterward, the trust becomes irrevocable and is under the control of the trustee.
  • Irrevocable – An irrevocable trust gives your beneficiary control; you can’t modify this type of trust without his or her permission.

Unanticipated life changes can sometimes make grantors regret establishing unalterable trusts. For example, one client did not expect to remarry, so he locked the bulk of his assets into an irrevocable trust for his children. He later had to ask his children if they would share some of the sizable assets in the trust with his new wife after he passed.

A trust attorney can create an agreement that makes clear the purpose of the trust, which might be more elusive than you’d think.

Altering the Unalterable

To avoid conflicts and confusion, it’s also better to specify how much discretion trustees have in making any changes about how and when the assets of a trust are managed and distributed. If instructions are not put in place by an attorney, there is usually a default to typical rules about when the trustee can invade the principal of a trust for a beneficiary. This can include expenses for health care, education, maintenance, and support of the beneficiary.

It’s also possible to make changes to an irrevocable trust if circumstances have changed so much that the grantor would probably agree with the change. For example, many years ago, beneficiaries could be taxed on assets in excess of $650,000, but now you can give more than $11 million to your heirs without having to worry about estate taxes. Another common impetus for change to an irrevocable trust is the arrival of a new grandchild who didn’t exist when the trust agreement was written.

Choose Trustees Wisely

One of the most important aspects of establishing a trust is picking your trustee or co-trustees. You obviously want someone you can trust, so your spouse or one of your children might seem like an obvious choice. But you might want to consider a third-party entity such as a bank, attorney or professional fiduciary to act as trustee.

A family member or friend might do this for free, and sometimes people pick a family member and a professional as co-trustees.

However, keep in mind that family dynamics can be complicated during an emotional time. If one sister is named a trustee and has control of a trust for her and her siblings, she might have to deal with resentment or haranguing from brothers and sisters unhappy about how she’s handling their shares. You don’t want to put a child in a position where they’re pressured or that could damage family dynamics. You want someone who can keep emotions out of it.

Personal Capital can work with trust companies to help you establish a trust. To learn more, contact a financial advisor.

Contact a Financial Advisor`

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

As Personal Capital’s senior estate planning strategist, Jason applies his estate planning experience that he gained from his legal career as an Air Force JAG Attorney, through civilian law practice helping families and business owners with their estate plans, and as a wealth and estate strategist in the financial services industry. Jason collaborates with Personal Capital clients to identify their current intentions and long-term goals, empowering them to make informed decisions when meeting with an estate attorney to create or revise their estate plans.
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