Three Essential Steps in Creating a Trust

January 6, 2016

steps in creating a trustA trust is meant to work as a part of your estate plan as a means to avoid probate, minimize estate tax liability, and protect the inheritance for your beneficiaries.  To put it in simple terms, a trust is basically a fiduciary agreement between the Trustor (the person or persons that create the trust) and a Trustee.  The nature of a trust agreement is to authorize the Trustee to hold and manage the trust assets on behalf of the named beneficiaries.  The trust's terms will provide the necessary instructions for managing and distributing the assets upon the incapacity or death of the Trustor.  There are several different types of trusts, each with its own specific purpose.  Nevertheless, there are three essential steps in creating any trust.

The three essential steps

  • Creating a trust agreement.
  • Funding the trust
  • Settling the trust

What is a trust agreement?

The trust agreement is the document that provides the Trustee with instructions as to how you want the property held in trust to be handled for your beneficiaries.  It is the "who, what, and when" of the trust.  The trust agreement is a contract, which is binding on the Trustee that you have chosen to manage the trust property.  There is a reason this agreement is called a "trust" - it is an agreement based on confidence and reliance.  Some of the basic provisions that should be included in any trust are:

  • The identity of the Trustee(s) in charge before your death (if it is a living trust)
  • The identity of the Trustee(s) in charge if you become incapacitated
  • The identity of the Trustee(s) in charge after your death
  • The names of your beneficiaries and what they will receive
  • When the beneficiaries will receive their trust assets
  • How the assets will be distributed

What does it mean to fund a trust?

Once the trust agreement has been created, the next step is to "fund" the trust.  Funding is the process of transferring ownership of the assets that you intend to include in the trust.  This involves changing the title on bank accounts to the name of the trust, re-titling vehicles in the name of the trust, recording a deed transferring real property to the trust, and/or naming the trust as the beneficiary of life insurance policies.
Under Nevada law, a trust only exists to the extent it owns assets - thus a trust agreement isn't worth the paper it's printed on unless the trust has been properly funded.  This is the also the key aspect of avoiding probate upon your death; if a trust is not properly funded, a probate judge is required to transfer legal title of assets to your beneficiaries.
There are generally four ways in a trust is funded:

Funding a trust by changing title or ownership

Assets such as bank accounts, non-retirement investment and brokerage accounts, stocks and bonds held in certificate form, vehicles, and real estate can be funded into a trust by simply changing the owner of the asset from the name of the Trustor to the name of the trust itself.

Funding a trust through assignment of ownership rights

When the trust assets include personal property of the type that does not require a certificate of legal title (e.g., jewelry, artwork, antiques), the assets can be funded by simply assigning ownership to the trust.  This would also include things like personal loans, royalties, copyrights and patents, partnership interests, and membership interests in limited liability companies.

Funding a trust by changing the beneficiary

For those assets that require a beneficiary, you can fund your trust by naming the trust as the beneficiary of those accounts or policies.  Note, however, that it might be recommended to leave certain outside outside of the trust and to name your beneficiaries directly.  This is most common the case with qualified retirement accounts in order to minimize the income tax of your beneficiaries and to allow for greater flexibility in managing those assets.  You should consult with an attorney as to whether it is better to name the trust as the beneficiary.

Funding a trust through probate

If a Trustor does not transfer assets to a trust during their lifetime,a trust may be funded through probate.  In this situation, a Testator transfers assets to a trust through their Last Will and Testament (also called a "Pour Over Will") by instructing a probate judge to transfer those assets into the trust.  This is generally not recommended since it requires both a probate proceeding and trust administration.

Settling the trust fund

After the trust is created and funded, then the final step is to settle the trust.  This only occurs after the death of the Trustor.  Once you pass away, your Trustee has an obligation to follow the terms of the trust that pertain to handling your property after your death.  Since a properly drafted trust does not require any court involvement, the administration of a trust can be kept completely confidential.

Why you should consult an attorney when creating a trust

Many companies and advisers are more than willing to "sell" you a trust as a means to promote some other goal.  There can be many complex issues involved in creating a trust, which an estate planning attorney would be much better equipped at handling.  Depending on the complexity of the terms of the trust agreement, the extent and nature of the assets, and the potential complexities of the family, an attorney can address these concerns and can assist with all three essential steps of creating a trust.  Here are some special considerations that you should make when creating your trust:

  • Do any of your beneficiaries have special needs?
  • Are you trying to reduce your estate tax liability?
  • Is there a risk a spendthrift beneficiary will needlessly waste their inheritance?
  • Do you have concerns that your beneficiary's spouse may take half of the inheritance in a divorce?

All of these issues can be addressed as a part of your trust agreement. Your trust can be created for your benefit immediately and for your beneficiaries to receive after you pass away.
If you have questions regarding creating a trust, or any other estate planning needs, please contact Anderson, Dorn & Rader, Ltd., either online or by calling us at (775) 823-9455.

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