Setting Up a Living Trust in 4 Easy Steps

Maybe you want to avoid probate. Or maybe you need a contingency plan for your family’s financial health. Or maybe, you are just a very cautious person and feel that a trust would be much more flexible than a simple will. But setting up a living trust and planning to create one are two different things. There are questions to answer and worries to address:

      • Do you need a lawyer?
      • When is a trust officially active?
      • How often should you revisit your trust?
      • Can trusts be written from modified templates?
      • How can you ensure your trustee will do as they should?
      • What level of control do you retain after a trust is in effect?

Setting up a living trust is no easy feat, and while you should certainly take advantage of the flexibility and efficacy of trust as your primary estate planning tool, understanding how it works, what is expected of you, and what is in store for you in the long-term, is crucial.

Understanding How Living Trusts Work

At its core, living trusts are an agreement between three parties. The grantor sets the terms and conditions of the trust entity through a trust document and gives a trustee limited administrative rights to oversee the trust, either immediately or after the grantor is no longer involved.

Finally, the beneficiary reaps the benefits of the trust, either through income and periodic distributions or through its eventual bequeathment and resolution. But the devil is in the details. Even a skilled estate planning professional would be wary of offering you a cookie-cutter trust solution.

In other words, there are no (good) templates. Another complicating trust is that a few distinct parameters can massively impact how the trust can be used. It starts with several basic decisions, such as deciding whether the trust should be revocable or irrevocable. Revocable trusts give you greater flexibility during your lifetime.

Still, the trust contents remain at least partially tied to you, which limits the degree to which they can be protected from taxes and creditors alike. On the other hand, irrevocable trusts greatly limit your access to whatever is funded into the trust, which is a matter to consider in and of itself.

Then there are carefully worded, finely structured exceptions where a trust may act as a grantor trust – maintaining some of your rights to the property therein – yet remain irrevocable otherwise. Trusts can be written plainly to avoid probate and minimize tax costs, or they can be structured to provide income to a loved one for decades after your death or to make the most of the family fortune and avoid the consequences of the generation-skipping transfer tax. Some trusts specialize in protecting overseas assets, while others allow you to make generous charitable contributions with your estate while ensuring that your loved ones receive a sizeable income from the same trust. With all that said, your first step in setting up a living trust is simple: finding the right partner.

Step 1: Setting Up a Living Trust Document

Because trusts are so flexible, the first thing you should do is think about what you need. Every estate is different, and your estate’s unique needs and problems will determine what kind of a trust you should draft or have drafted.

What are you worried about the most? What do you have to consider when leaving behind wealth for your loved ones? What would you want your next of kin to consider when using their inheritance? How do you plan to preserve and continue to grow the family’s fortune over generations – or do you intend to let your children decide that?

Finally, there are other practical considerations to keep in mind. Would your estate benefit from a life insurance policy – and if so, would the payout be enough to tip you over the estate tax exemption limit? Do you have a surviving spouse you can share the limit with, and if so, have you considered an AB trust?

Take your time with these questions and bring them to the attention of an estate planning professional. They will be able to further inquire into your estate needs and will have a much better idea of how your first trust document draft should be written.

Step 2: Choosing a Trustee

Once you have the beginnings of a trust, you will need someone to administrate it after you are gone. As an estate planning tool, trusts are only as effective as their trustee. The human element is important – without it, trusts are an intangible entity with a set of written rules and conditions no one is aware of. It is the trustee’s hard work that makes a trusted reality.

Trustees need to be someone you can rely on and competent enough to manage the trust’s funds, assets, and properties. Many people choose their lawyer, others choose a younger family member with accounting or business experience, and others yet rely on financial institutions, banks, and other businesses to manage their trust for them after death.

Whoever you end up choosing, know that you do have some recourse should things go badly. Trustees have a legal obligation to fulfill their responsibilities as trustees towards the grantor and the beneficiary. This is a fiduciary duty, and failure to uphold it can result in severe financial consequences for them.

Step 3: Funding the Trust

A trust document is just a piece of paper without the items it contains – and each of those will require its own piece of paper, dictating that they are now under the management of the trust. This is called funding the trust. It usually is not enough to add an asset list to a trust’s appendix, the same way you might fill out a will.

You need to amend the ownership documents of each item added to the trust to reflect its new ownership status. There are circumstances under which this may be done automatically after death – but it is a complication you can easily avoid by creating and notarizing a few simple amendments.

Step 4: Reviewing and Revisiting Your Plan

Once you have a trust you are happy with, you can forget about it and go on living your life, right? Yes, mostly. Ideally, you should revisit your estate plan as a whole every few years and consider what might have changed since the last time you have reviewed your plans. Maybe your relationships have completely changed, or you no longer think you should distribute your estate the way you planned to.

Setting up a living trust can be planned and drafted in a few hours with a skilled estate planning professional, especially if you have a concrete idea of what you need. But estate plans can take several years to refine and should change just as we change. The last thing you want is to pass away with an outdated estate plan enforcing distributions you might not have agreed on within your final months.

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