Setting Up a Trust

Estate Planning, Investing
Setting Up a Trust

You might hear the phrase “trust fund” and think wealth, but these arrangements aren’t reserved for the pedigreed. If you’re new to trusts or just need some guidance on whether one is appropriate for you, the Nerds have you covered. Here we’ll:

  • Discuss the many different types of trusts.
  • Help you determine if you need one.
  • Offer pointers on setting them up without breaking the bank.

As a new parent, a trust can put conditions on your assets and protect them from lengthy probate in the event of your death. They’re a smart way to ensure loved ones are taken care of in the future, with the added guarantee that the funds will be used wisely.

What exactly is a trust fund?

A trust is simply a relationship in which someone’s assets are held by a trustee for specified beneficiaries. Although assets no longer belong to the grantor after they’re transferred, you may put provisions in place regarding how the assets are distributed. For example, you can set up a trust fund for your 18-year-old child but restrict his access until he turns 21 or graduates from college.

Setting up a trust fund offers benefits such as asset protection, tax breaks and the avoidance of probate in court after a grantor’s death. But it’s up to you to determine whether the benefits are worth the cost.

What types of trusts are available?

Generally speaking, there are living trusts and after-death trusts, which can be deemed revocable or irrevocable. There are several subcategories, which help the grantor customize the trust for specific purposes.

Here’s a closer look at the different kinds of trusts available:

  • Revocable living trust: Set up while the donor is still alive and the assets are revocable — in other words, they can be changed at the donor’s discretion.
  • Irrevocable trust: A trust that can’t be changed after it’s created, but it comes with the added benefit of reducing one’s estate taxes. One kind of irrevocable trust is a testamentary trust, which becomes operational after the grantor has died.
  • Education trust: The funds in the trust may be used for only educational expenses.
  • Spendthrift trust: This type of trust is used when a beneficiary is unable to make sound financial decisions for himself or herself. The trustee decides the best way to spend the funds for the benefit of the beneficiary.
  • Gift trust: If you’re looking to transfer property as a gift, you can create a gift trust in which the trustee will distribute the assets to the beneficiary according to terms laid out in the trust agreement. This option is best for assets totaling at least $100,000 due to high setup and administrative costs.
  • Charitable trust: This type of irrevocable trust is established for charitable purposes in which assets are distributed to one or more charitable organizations.
  • Special-needs trust: These trusts are designed for families who have children with special needs. It is difficult, if not impossible, to leave money to a special-needs child without benefits being revoked. A special-needs trust lays out specific guidelines to allow a smooth transition of funds from grantor to beneficiary.

Should I set up a trust fund?

Two reasons to seriously consider creating a trust: estate planning and divorce. Whether you’re of high net worth or firmly in the middle class, most families with young children should have some sort of estate plan in place, including living or testamentary trusts.

Trusts also help in the event of a divorce. Tensions are bound to get high in the midst of divorce, so trusts ensure that money left to your child can’t be seized and misused by your former spouse. In the event of a nasty divorce, a trust allows you to protect your assets and make sure only your children will benefit from your life insurance proceeds.

Tips for keeping costs low

Trusts offer a number of benefits, but they come with a hefty price. With setup costs, lawyer fees and regular maintenance, trusts might cost more than they’re worth to you. To help reduce the expense:

  • Do your homework: Research, ask friends and family for recommendations and comparison shop. You can also check with state or local bar associations for referrals. As you might guess, lawyer fees can vary widely, so get a large sample.
  • Don’t DIY: Several websites offer “do-it-yourself” trusts, but going this route isn’t a good idea. It may be a low-cost option, but ultimately you’ll pay in time and effort.
  • Check with your employer: Some companies offer discounted estate planning services as part of their employee benefits packages.

It’s hard to put a price on future financial security. Yes, there are many considerations that go into financial management as a new parent, but the work you invest in securing your family’s future now can pay off significantly. A trust, if managed properly, is one tool that can save you and your family from headaches down the road.

Elizabeth Renter is a staff writer at NerdWallet, a personal finance website. Email: elizabeth@nerdwallet.com. Twitter: @ElizabethRenter.