How to Set Up a Living Trust Fund

By Tom Streissguth

A trust can be a solid, safe way to send your assets where you want them to go. The grantor -- the individual who creates the trust -- places cash, investments and property under the control of a trustee, who manages the assets for the benefit of another individual or an organization. A "spendthrift" trust, for example, grants money or other assets to a minor, with the grantor setting the terms of disbursement. A "living trust" means simply that the grantor is still alive.

Living Trust Basics

A living or "inter vivos" trust is one that goes into effect while the grantor is still alive. The grantor has one or more purposes in mind: to protect assets from estate taxes, to allow the assets to pass to heirs without going through probate court, or to grant money to another person or organization on his own terms. A trust must name a trustee, who is the individual responsible for managing the assets and disbursing them to the beneficiaries, according to the terms of the trust document.

Setting Up a Trust

A grantor sets up a trust by signing a document that establishes it. State laws govern trusts and spell out the rights of the grantor, as well as trustees, beneficiaries, and creditors. In Arizona, for example, the law gives creditors of a grantor the right to access the trust for the repayment of debts, as long as the trust is "revocable" -- meaning the grantor can change its terms, or simply revoke it. In addition, Arizona allows the grantor to set up a trust without notice to beneficiaries. However, the law does require the trustee to respond to a beneficiary's request for information about the trust.

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Stipulations and Conditions

While drawing up a trust, the grantor names his trustee; a trustee can be an attorney, a bank, a trust management firm or a responsible relative or friend. It is also possible for a grantor to also act as his own trustee. The trust document may include stipulations, which are conditions and instructions to the trustee on how the cash, investments, property are to be invested and disbursed. A trust may have the sole purpose of paying medical bills for a beneficiary, for example, or for meeting operating costs of a charity. A trust may allow a younger beneficiary to meet educational expenses, or dole out money slowly and regularly to that same beneficiary to avoid careless overspending.

Revocable and Irrevocable

The grantor also must decide whether to make a trust revocable or irrevocable. A revocable trust can be changed or revoked by the grantor at any time; that means he can name a new trustee, add or remove beneficiaries or add new stipulations. The law places much tighter restrictions on irrevocable trusts; once they are created, the grantor may not change their terms. This allows an important tax advantage: earnings in a revocable trust are taxable to the grantor, while an irrevocable trust pays no taxes on money it disburses, and taxes on retained earnings are paid by the trust, not the grantor or trustee.

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Requirements in Illinois for Revocable Living Trusts

A revocable living trust transfers property from a living grantor, or creator, to a trustee through a written agreement. The trustee manages the property and distributes it to individuals, known as beneficiaries, subject to specific terms. A revocable trust allows the grantor to change the terms whenever he wants; an irrevocable trust does not. Illinois does not require that you file any documents with a state agency to create a valid revocable living trust, but you must meet several other requirements.

California Irrevocable Trust Laws

An irrevocable trust is an estate-planning tool designed for the long-term management of assets, which are permanently transferred into the trust. There are several types of irrevocable trusts, but the common denominator is that the settlor – the person who creates the trust -- gives up control and ownership of his property; however, California law does provide for modification of an irrevocable trust under certain circumstances.

How to Get Notified if You're an Heir to a Trust

A trust is a legal and financial structure that holds assets, and pays beneficiaries, according to the instructions of a grantor. The grantor appoints a trustee to manage the trust. By the terms of a will, a trustee may be responsible for paying the grantor's heirs out of trust assets. A trust may also benefit a group, business or charity. State laws and guidelines determine how a trustee or grantor notifies the beneficiaries. If you believe you may be the beneficiary of a trust but have not received notice required by law, your best course may be to seek professional legal advice.

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