Establishing a trust fund is one way to transfer assets between
generations. With the right type of trust, you can distribute assets to
your child both before and after you die, without subjecting your child
to the expenses and delays of the probate process. Depending on how you
set it up, you may also enjoy significant tax benefits.
Parties
The creation of a trust requires at least three parties -- the
grantor, the trustee and the beneficiary. If you own trust assets
jointly with your spouse, you should name both yourself and your spouse
as grantors -- the property owners who are transferring assets to the
beneficiary, your child. The trustee is the person who manages the
property for the beneficiary. If you prefer, you can name yourself as
trustee. If you name yourself as trustee and you want the trust to
continue after you die, however, you need to name a successor trustee.
Alternatively, you can name another individual or even a trust company
as your trustee. If you plan to distribute assets to your child before
he reaches the age of majority, you might appoint someone to manage his
distributions from the trust until he becomes an adult.
Documentation
A living trust is established by creating a declaration of trust, a
document that takes trust assets out of the jurisdiction of the probate
court. The declaration of trust should name all parties to the trust as
well as any successors. Most importantly, it should set out specific
instructions that tell that trustee what to do with trust assets. Trusts
are quite flexible instruments -- you might have your trustee
distribute assets all at once, distribute them gradually both before and
after you die, or even invest trust assets and distribute only
investment profits to your child. You should also state whether the
trust is revocable or irrevocable during your lifetime.
Assets
Transfer the titles to titled trust assets such as real estate,
automobiles and bank accounts into the name of the trustee in a form
such as "John Doe, Trustee of the Smith Family Living Trust." This
format makes it clear that the trustee is holding trust assets for the
beneficiary rather than for himself. You might also make a list of
untitled trust assets, such as household furnishings, to attach to the
declaration of trust as an appendix.
The Testamentary Trust
A testamentary trust differs from a living trust in two ways -- it
doesn't take effect until you die, and it is created by the terms of
your will. Testamentary trusts contain the same terms as living trusts,
but can be quite complex in some cases. The probate court will have
jurisdiction over your trustee until the trust terminates. Because the
trust doesn't take effect until you die, it is necessarily irrevocable.
In many cases, the grantor will provide that the remaining assets of a
testamentary trust are to be distributed to the beneficiary as soon as
he reaches the age of majority.
Getting Help
Creating a trust can be tricky. For this reason, you might hire a
local lawyer to set up a trust for you if you will contribute
substantial assets to it. Alternatively, you might take advantage of
online resources (please see Resources section) that offer templates, or
software that allows you to create a declaration of trust. Since every
trust is different, be sure to individualize your declaration of trust
to fit your needs and your state's laws.
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