Historically, trusts were used almost exclusively by wealthy families to guard and pass down the family wealth from one generation to the next. Over time, however, trusts evolved to become much more useful to the average person. Consequently, trusts are now among the most common additions to the average estate plan. Let’s look at five important steps to consider when creating a trust.
Trust Creation Steps
- Define your trust purpose. This is the critical first step in creating a trust. Because trusts have evolved so much, there is now a specialized trust to help meet almost any estate planning goal. Before you can begin to create your trust, therefore, you need to narrow down your goals. Every trust must have a trust purpose that can ultimately be referred to by the Trustee, or even a judge, if necessary, when making critical decisions relating to the trust. Is your trust purpose to protect assets? Guard your child’s inheritance? Gift to charity? Narrow down your trust purpose as much as possible and write it out.
- Identify your beneficiaries. Often, this is the easiest part if you are creating a trust specifically to gift assets to loved ones. Other times, however, deciding on the beneficiaries can be more complicated. For example, if you are creating a charitable trust, you may spend a significant amount of time deciding on your beneficiaries.
- Choose the type of trust you need. All trusts fit into one of two categories – testamentary or living (inter vivos) trusts. Testamentary trusts are typically activated by a provision in the Settlor’s Last Will and Testament and, therefore, do not become active during the lifetime of the Settlor. Conversely, a living trust, activates during the Settlor’s lifetime. Living trusts can be sub-divided into revocable and irrevocable living trusts. If the trust is a revocable living trust, as the name implies, the Settlor may modify or terminate the trust at any time and for any reason. An irrevocable living trust, on the other hand, cannot be modified or revoked by the Settlor at any time nor for any reason once active. Testamentary trusts are always revocable because the Will that triggers activation is always revocable until the Testator’s death. To a large extent, your trust purpose, determined in step one, will dictate which type of trust you need to create.
- Pick your Trustee. Your Trustee is responsible for managing and investing trust assets as well as administering the trust. The duties and responsibilities of a Trustee are numerous and diverse, requiring you to spend a considerable amount of time deciding who to appoint as your Trustee. Ideally, your Trustee should have a legal and/or financial background to ensure that he/she can administer the trust successfully. Depending on the size and complexity of your trust, choosing a professional Trustee may be your best option.
- Draft the trust agreement and fund your trust. Your estate planning attorney will draft the trust; however, as the Settlor of the trust you will decide on the terms to be used to administer the trust. You will use those terms to decide when assets can be distributed, how assets should be invested, and how much discretion you want your Trustee to have, among other things. As the Settlor, you can include any terms you wish as long as they are not illegal, impossible, or unconscionable. Finally, you need to fund your trust. This can be as simple as transferring cash into the trust or as complex as re-titling real property into the name of the trust.
Please download our FREE estate planning checklist. If you have additional questions or concerns about creating a trust, contact us at the Northern California Center for Estate Planning & Elder Law by calling (916)-437-3500 or by filling out our online contact form.