Establishing A Trust Fund

Introduction

People OFTEN associate trust funds only with the wealthy. But a trust fund ("trust") actually can be an effective financial tool for many people in many circumstances.

A trust is a separate legal entity that holds property or assets of some kind for the benefit of a specific person, group of people or organization known as the beneficiary (beneficiaries). The person creating a trust is called the grantor, donor or settlor. When a trust is established, someone is designated to oversee or manage the assets in the trust. This person is called a trustee. He or she can be a professional with financial knowledge or a relative or loyal friend.

Benefits of Establishing a Trust Whether it makes sense to establish a trust depends on your individual circumstances. Some common reasons for setting up a trust include:

* To provide for minor children or family members who lack financial experience or who are unable to manage their assets

* To provide for management of your assets should you become unable to oversee them yourself

* To avoid probate and transfer your assets immediately to your beneficiaries

* To reduce or otherwise provide for payment of estate taxes

Keep in mind that you may not need to establish a trust to accomplish these and other financial goals. A well-written will may distribute your assets appropriately. Check with a lawyer before deciding if a trust is right for you.

Types of Trusts

There are two basic forms of trusts: after-death (or testamentary) and living (or inter vivos).

An after-death trust will come into existence either by virtue of a will or a living trust, after a person's death. Such trusts must go through the probate process if assets are not transferred to the trustee during the life of the grantor. In certain states they may be court supervised even after the estate is closed. An example of an after-death trust would be a mother leaving land to a young son in her will. The land is left in a trust to be administered by a trustee until the boy reaches a stated age.

A living trust, on the other hand, is a trust made while the person establishing the trust is still alive. In this case, a mother could establish a trust for her son during her lifetime, designating herself as trustee and her son as beneficiary. As the beneficiary, her son does not own the property but can receive profits from it.

Living trusts can be revocable or irrevocable. The most popular type of trust is the revocable living trust, which allows the individual to make changes to the trust during his or her life. Revocable living trusts avoid the often lengthy probate process, but they don't provide shelter from federal or state estate taxes.

When an irrevocable living trust is set up, ownership of the assets is turned over to the trustee. The trust becomes, for tax purposes, a separate entity, and the assets cannot be removed, nor can changes be made by the grantor. This type of trust often is used by individuals with large estates to reduce estate taxes and avoid probate.

Specific-Use Trusts Before you set up a trust, ask yourself what you are trying to accomplish. Here are just a few of the many special uses for trusts:

* A charitable trust is used to make donations and realize tax savings for an estate. Typically, you and your family will enjoy the use of your property, such as art or real estate, until it is transferred to the charity, usually after your death. Then the charitable bequest may be deductible for estate tax purposes.

* A bypass trust allows a married couple to shelter more of their estate from estate taxes. The first spouse to die can leave assets in a trust to be used by the surviving spouse for the rest of his or her life. Upon the death of the second spouse, the assets in the trust pass to the children or other beneficiaries, subject to estate taxes on the part in excess of the amount exempted.

* A spendthrift trust can be a good idea if your beneficiary is too young or does not have the mental capacity to handle money. The trust can be established so that the beneficiary receives small amounts of money at specified intervals. It prevents that person from squandering money or losing the principal in a bad investment.

* A life insurance trust is used to give your estate liquidity. Proceeds from a life insurance trust pass directly to your beneficiaries without probate.

The proceeds are administered by a trustee for your beneficiaries.

Establishing a Trust

Establishing a trust is somewhat similar to preparing a will without witnesses. It requires a document that specifies your wishes, lists beneficiaries and names a trustee or trustees to manage the assets. For a living trust, you can name yourself as trustee, but you should also name a successor trustee to take over if you should become disabled or die.

Some states require you to file a trust document with the state. To find out your state's laws regarding trusts, talk to an attorney who specializes in estate planning.

The Role of the Trustee

The person who manages a trust, the trustee, has a legal duty to manage the trust's assets in the best interests of the beneficiary. This might include managing rental properties, investing funds or paying income to the beneficiary.

How much a trustee is required to do and how much access he or she has to the funds should be specified in the trust. A mandatory trust requires the trustee to distribute any income to the beneficiary. A discretionary trust, as the name suggests, affords the trustee discretion over the principal and income to be distributed.

Generally, trustees are paid for their services because of the amount of work involved in managing a trust and the threat of potential liability if assets are mismanaged. How much a trustee is to be paid should be agreed upon in advance.

If you want to name someone as a trustee, talk with that person about the details of your trust. Be sure he or she agrees with your plans and can comply with the terms of the trust. Because there is such a high standard of duty and liability imposed on trustees, a person cannot be forced into becoming a trustee just because he or she is named in a will. If your designated trustee is unable or unwilling to perform, the court will appoint a trustee for you, unless a successor trustee is designated in the trust document.

Providing Peace of Mind

It's possible that a trust may be the answer to your estate planning needs. Take the time to evaluate carefully what you are trying to accomplish, then consult an estate-planning attorney. A well-written trust can help to provide peace of mind for you and your beneficiaries.