How to Set Up a Living Trust Fund

By River Braun, J.D.

How to Set Up a Living Trust Fund

By River Braun, J.D.

A living trust fund is a trust agreement that is in effect during the grantor's (the person who created the trust) lifetime. They can provide income for themselves and/or beneficiaries by transferring assets into the trust. However, upon the grantor's death, the trust becomes an irrevocable trust agreement. A trustee will then assume the duties of administering the trust according to its terms. During this time, the assets will pass directly to the beneficiaries outside of the grantor's probate estate. Therefore, the trust assets are not subject to estate taxes and are also protected from creditors.

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Four Simple Steps to Set Up Your Trust

Setting up a living trust fund is relatively easy. There are four basic steps for doing so. However, keep in mind that more complex trusts may require additional steps, thus taking more time to complete the process.

Step 1. Draft the written trust agreement.

The first step in creating a living trust is to create a written trust agreement. It should include basic information such as:

  • Name of the grantor
  • Beneficiary names
  • Terms of the trust
  • Name of the trustee
  • Modification of the trust terms
  • Management of the trust assets
  • Disbursement of trust income and/or assets to beneficiaries
  • Whether the trust is revocable or irrevocable
  • Standard clauses such as a residual clause, no contest clause, and property protection clause

State laws vary regarding the creation of living trust funds. Standardized forms are available online. However, many people retain a lawyer, accountant, financial planner, or other professional to assist in creating and funding the trust.

Step 2. Register the trust with the Internal Revenue Services (IRS).

The trust fund requires a unique Taxpayer Identification Number (TIN) for tax purposes. With a TIN, the trust can open bank accounts, investment accounts, file tax returns, and conduct other financial transactions. The IRS issues a TIN when a trust files Form SS-4 with the IRS either online or by mail.

Step 3. Put assets into the fund.

The grantor must transfer property that is in their personal name to the living trust. The trust holds title to the property for the benefit of the trust's beneficiaries. Examples of this include stocks, bonds, real estate, motor vehicles, boats, financial accounts, life insurance policies, and brokerage accounts. Funding the trust is an essential step in creating a living trust fund. If a grantor signs the trust documents but fails to transfer title to the trust, the trust fund is worthless.

Step 4. Set up an accounting process for trust administration.

The trustee owes a fiduciary duty to the trust beneficiaries. Therefore, administering the trust requires a detailed accounting process. A process for keeping detailed records of the trust administration can help if someone files a lawsuit alleging fraud or other wrongdoing. Detailed record keeping and accounting can also ease the transition when a successor trustee assumes the responsibilities of administering the trust assets.

A living trust serves many purposes. A goal of estate planning for many individuals is to avoid probate while providing for their loved ones. Other estate planning goals include asset protection and reducing estate taxes. You can use a living trust to protect your assets during your lifetime, but you can also use a living trust to provide income to individuals , pets, and even charities during and after your lifetime.

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