A trust is a legal instrument that is useful for tax and estate planning. Under a trust arrangement, a trustee manages assets you transfer to the trust for the benefit of beneficiaries you select. You retain only indirect control over trust assets – the trustee must dispose of the assets as you direct in the trust deed that creates the trust. A trust is fairly simple to create, although it is prudent to have a lawyer look over the trust deed before you sign it.
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Appoint a trustee and an alternate trustee and obtain their consent to their appointments. The trustee need not be an individual – banks and trust companies often act as trustees for a small fee.
Select at least one beneficiary. The beneficiary might be a relative, a friend or a charitable organization. The beneficiary need not consent, and he doesn't even have to know he has been named a beneficiary of the trust.
Draft the trust deed in duplicate. The trust deed should name the trust (the “John Doe Trust Fund,” for example), name the trustee and his alternate, name the beneficiaries, state whether the trust is revocable or irrevocable and instruct the trustee on how to distribute the trust assets. You might also list the initial assets of the trust. You may have the trustee distribute trust assets to beneficiaries in a lump sum or in periodic installments. You may give the trustee the authority to invest trust assets and distribute only profits to the beneficiaries, or you may allow the trustee unfettered discretion to distribute trust assets for the benefit of the beneficiaries.
Sign the trust deeds, and have the trustee sign them, in the presence of a notary public. Keep one copy and deliver the other copy to the trustee.
Transfer assets to the trust. If you donate cash, open a bank account in the name of the trust and deposit the cash into it. If you donate titled assets such as real estate or automobiles, change the name on the title to the name of the trust. If you donate untitled assets, transfer them to the control of the trustee – place jewelry in a safe deposit box, for example, and deliver the key to the trustee.
- List of trust assets
- Title deeds to all titled trust assets
Tips & Warnings
- If the trust is irrevocable, the IRS will tax trust income (such as rental payments on trust real estate) as the income of a legally independent entity. This means that trust income will not be counted as a part of your income for tax purposes, which may put you into a lower tax bracket. When you die, the assets of the trust will not be counted as part of your estate for the purpose of imposing estate tax. Consult a tax attorney on how to maximize the tax benefits of an irrevocable trust
- If you create a revocable trust, you can revoke or amend it at any time. If you create an irrevocable trust, however, you probably cannot amend or revoke it without a court order and the consent of all beneficiaries. Check the law of your state for details. If the trust deed doesn’t state whether the trust is revocable or irrevocable, courts in most states will treat the trust as revocable. A revocable trust automatically becomes irrevocable as soon as you die.
References & Resources
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