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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Types of Beneficiaries in Irrevocable Trusts


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Amending a Living Trust in California

A revocable living trust establishes a plan for trust assets that provides payment to the trust's beneficiaries. A revocable trust can be terminated by the owner while he's still living. One advantage of having a revocable living trust is your ability to change the trust's terms at any time while you're still alive and competent. In California, you can change your revocable living trust by writing an amendment that complies with state law. California's trust amendment laws are found in Sections 15400-15414 of the probate code.

A Living Trust Explained

A living trust is a legal device that establishes how your property is to be transferred upon death, but goes into effect during your lifetime. The grantor, who puts his property into the trust, assigns a trustee to administer the trust on behalf of a beneficiary. There are several types of living trusts. In comparison, a testamentary trust is created by the terms of a will and does not go into effect until death. Living trusts avoid probate but testamentary trusts do not.

Roles of a Trustee

A trustee manages property for beneficiaries according to the terms of a trust. Generally, a trustee is appointed by a person, called a grantor or settlor, who establishes and funds the trust. The settlor transfers legal title of assets to the trustee so she may manage and distribute them for named beneficiaries. A trustee's role includes responsibly and honestly handling trust assets and ensuring the purpose of the trust is carried out.

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