Setting Up a Trust Fund: What You Need to Know

By Maurie

Trust funds used to be associated mostly with the wealthy, but these days, ordinary families can use trust funds as part of their estate-planning strategies. A trust fund is a legal arrangement where one person places assets in an account of sorts to benefit somebody else. There are different types of trusts you can choose from. You might, for example, set up a family trust to benefit a new baby. Trusts can be revocable or irrevocable, and they can also be living or testementary (based on a will). While you can technically set up a trust on your own, most people use an attorney when setting up a trust fund.

Continue Reading Below


Benefits of trust funds

Establishing a trust fund is a good way to ensure that your assets go to the right people, whether this happens during your lifetime or upon your death. You might, for instance, set up a trust to provide college money for your grandchildren while you're still alive, or establish a trust to make sure your grandchildren are taken care of financially after you pass. Some trusts also serve the very important function of helping you avoid probate and minimizing your estate taxes.

More From

Setting up a trust fund

Before we talk about how to set up a trust fund, let's review a few key terms:

  • A grantor is the person who establishes and puts assets into a trust fund.
  • A trustee is the person who oversees and manages the assets in a trust fund.
  • A beneficiary is the person who ultimately benefits from the trust fund.

While there are online tools that allow you to create your own trust, most people opt to enlist the help of an estate-planning attorney. The downside is that doing so costs money, but the upside is that you'll benefit from the guidance of a professional who knows how to navigate the complexities involved.

The exact process for setting up a trust will depend on the type you choose and the assets and beneficiaries at hand. But in a nutshell, you'll start by establishing the reason for the trust and deciding who your beneficiary or beneficiaries will be. For example, if your goal is to help a child or grandchild pay for college, your attorney might recommend an educational trust. If your objective is to pass on assets to your family in the most seamless, cost-effective fashion possible, you might choose a revocable living trust.

Next, you'll need to decide how you want the assets held in the trust to be handled and distributed. You might, for example, want your beneficiary to receive a set amount of money each year, or a lump sum at a certain point in time. You'll also need to designate a trustee to ensure that the purpose of the trust is upheld and that the assets are managed and distributed as per the terms of the trust. (This might even be you, as in the case of a revocable living trust.)

Once you get past these initial steps, then comes the fun part: funding your trust. You can typically hold a variety of assets in a trust fund, from stocks to bonds to real estate to cash. You also have the option to fund your trust with a lump sum payment or deposit assets into the trust over time.

Moving assets into a trust fund can be somewhat complicated. If you hold securities with a financial institution and open a trust at a separate institution, you may have to tackle a series of paperwork to get those assets transferred over. Once that happens, you can work with your lawyer and trustee to create an investment plan for your trust so that your assets can grow as long as they're being held in the trust.

A worthwhile investment

Though trust funds do cost money to set up, in many cases, what you spend on legal fees can be more than made up for in other ways -- namely, by avoiding probate and certain estate taxes that would otherwise limit the amount your beneficiaries ultimately receive. If you're interested in setting up a trust fund, it pays to consult with an attorney to review your options. Even if you aren't rich, you may come to find that a trust fund is the ideal solution for your estate-planning needs.

The $15,834 Social Security bonus most retirees completely overlook If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $15,834 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after.Simply click here to discover how to learn more about these strategies.

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.