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How to Start a Trust Fund in 4 Steps

How to Start a Trust Fund in 4 Steps

April 16, 2024

Most people want to leave some type of legacy for their loved ones, particularly a financial legacy that will set them up for success for decades to come. A trust fund is one of the most common ways to do just that, but establishing a trust can be a complex process. If you’ve ever wondered how to start a trust fund, we have broken it down into four easy steps.  

Here is what you need to know to get your trust fund started and funded with the assistance of a team of experts. 

1. Choose the Type of Trust 

Not all trusts are alike; in fact, there are many different types of trust, each with its own rules and benefits. Before you move ahead with starting a trust fund, the first step is to evaluate your goals and choose the right type. 

Think about what your trust fund beneficiaries might need or want the most: do you want it to include charitable giving, tax benefits, or something that can protect your family financially?

At this point, it’s also important to decide whether you want to start a revocable or irrevocable trust. Both have advantages and disadvantages. In short, revocable trusts offer flexibility while irrevocable trusts come with many tax benefits. 

Many people want to include charitable giving in their estate planning. The good news is that there are several types of charitable trusts you may set up to accomplish this generous goal. Your beneficiaries get a tax-sheltered source of income and the charity of your choosing gets a sizable donation via the 10 percent rule. It’s a win-win for everyone. 

Other types of trusts could include a family protection trust or asset protection trust. These trusts allow you to remove assets from a taxable estate so your beneficiaries can reap the tax benefits. Plus, they protect the money from creditors, lawsuits, or even financial irresponsibility if you worry about your beneficiary mismanaging their inheritance.

If you worry about how a spouse will handle your passing and the taxes associated with the new inheritance of your assets, an exemption trust could be a good option. It holds the assets of the deceased spouse for the surviving member of the couple and is very close to being entirely tax-exempt, if managed properly. 

This should give you some idea of the various goals you can consider when establishing a trust fund. Think about who you want to benefit from your generosity and what form might be best to protect those assets and opportunities.

If you’re overwhelmed by the options, don’t worry; just skip to the next step! A professional well-versed in trusts can help you weigh your options and decide.

2. Work with Professionals

Once you have a type of trust in mind, it’s time to gather a team of professionals who can assist you in the legal and financial aspects of starting a trust fund. 

First, find an attorney with experience in trusts. If they try to talk you into a will, chances are they don't do a lot of trust work. They’ll create the legal framework for your new trust and give you advice on what might best suit your beneficiaries and estate needs. 

In addition to an attorney, we also advise working with a CPA and a financial advisor to maximize the financial and tax benefits of your trust fund. If you intend to fund the trust with real estate, it may also be beneficial to add someone knowledgeable about real estate to your team. 

When starting a trust fund, it’s best to involve the entire team as early as possible. This ensures that everyone you involve is working in tandem toward a common goal.

Keep in mind that it can be challenging to coordinate multiple professionals from different firms – not to mention expensive as you juggle fees from everyone involved. Magellan offers a one-stop shop with all these services under one roof for your convenience.

3. Set Up the Trust 

You have narrowed down what type of trust you want to establish and gathered a team of skilled professionals. Now, it’s time to establish the groundwork for the trust fund. You will need to consider the logistics of how the trust fund will work: appointing a trustee, choosing the payout rate, and defining clear terms and conditions. 

You will also need to think through which assets you want to contribute to the trust fund, which we will cover in more detail in the next step. 

At this stage, we want to emphasize the importance of proper planning and considering all angles of the trust. Lack of planning is the most common mistake when setting up a trust fund. If you decide to set up an irrevocable trust, the terms and conditions cannot be changed down the road. It’s crucial to analyze each decision and write the trust terms in a way that offers as much future flexibility as possible. 

4. Fund the Trust 

The only way a trust fund benefits your beneficiaries is if you contribute something meaningful to the trust. While you can certainly fund it with cash, you can also bolster your contributions with high-value assets. Some trusts can remove those assets from your taxable estate, streamlining their transfer to a beneficiary and offering notable tax benefits. 

What can you use to fund your new trust? 

One popular option is to fund your trust with real estate. Rather than selling a property and adding the proceeds to the trust, certain trusts allow you to avoid capital gains taxes when you sell the property within the trust. This helps you make the most of your asset’s value and pass along more to your beneficiaries.

Of course, you can also fund a trust with a combination of personal property (like fine art or other valuable items that you don’t want to sell immediately), retirement savings accounts, stocks and investments, businesses, and any other valuable item. 

Chart Your Course with Magellan

On the surface, knowing how to start a trust fund may seem fairly straightforward. However, there are a lot of layers to consider if you want to future-proof your trust and ensure it offers the best value to you and your beneficiaries. 

If you want to start a trust fund for your loved ones, a team of experienced professionals can ensure every aspect of its formation is optimized to reduce your tax liability and maximize your potential value. Magellan provides comprehensive estate, financial, legal, and tax planning all under one roof. We aim to make it as convenient as possible for you to provide for your beneficiaries for years to come.  

Reach out to us today to see how we can help you with charitable remainder trust formation! 

 

For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.

This material provided by Kevin Meaders was written by Axle Eight, a non-affiliate of Magellan Planning Group and Cetera Advisor Networks LLC.