If you grew up equating trust funds with only wealthy folks, it's time to realign your thinking. Trust funds are versatile financial tools for anyone with a desire to make sure heirs receive funds per their specific wishes. Some financial experts say setting up a trust isn’t worth the effort if your estate totals less than $100,000, but it’s your money and your game. The beauty of a tax-free trust fund is evident -- draw one up and voila: You have a tax shelter that allows you to call yourself a benefactor -- as well as your heirs’ new favorite relative.
1. Explore the role of the trustee so you understand how the job of the trust’s administrator works before naming yourself, a relative, banker, money manager or friend to handle the responsibility. Appoint someone who is willing to stay objective while managing trust assets so transactions remain above board. Importantly, ask your designee to assume the responsibility before the trust is executed so there are no surprises down the road.
2. Choose the type of trust that maximizes the yield of your assets. Opt for a simple or mandatory trust that calls for simple income distribution after your death or request a discretionary trust that affords you or your agent more latitude over both the principal and the fund’s distribution. Settle the matter of trustee payment for managing the trust when you conceive the trust. Draw up a will, a living will and a healthcare proxy to accompany your trust document.
3. Decide whether you want your trust to be revocable -- meaning you can continue to make changes to it as long as you live – or irrevocable. Choose the latter and name yourself as trustee of your estate and you could lose tax benefits if federal or state laws so stipulate, so proceed with caution when making this decision.
4. When your trust is drawn up, place conditions on fund distribution to reduce estate and gift tax burdens on heirs, asset protection from creditors/lawsuits and be specific about how and under what conditions your assets are to be disbursed to the heirs listed as beneficiaries of your largesse. Name successor beneficiaries in case primary heirs are not around to claim their legacy.
5. Pay a fee to set up your tax-free trust fund and earmark funds to administer the trust after you die once all of the paperwork necessary to launch your tax-free trust fund is completed. Re-title all of the assets that fall under the umbrella of your trust so they legally belong to the trust – not to you – to avoid probate issues or cause your estate to wind up in the hands of people other than your intended heirs.
6. Be particularly cautious when setting up a trust that leaves assets to a child or grandchild, since gift tax laws related to offspring change often. Get the scoop on special transfer taxes that may be levied under a “skipped generation” law – all the more reason to think twice before setting up a trust on your own and without legal or fiscal oversight to catch errors that could be costly once you're out of the picture.
- It bears repeating: If your estate is large enough to warrant a trust, it's wise to put the job into the hands of your estate planner or attorney rather than attempting to draw it up yourself.
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