A Guide To Trust Fund Setup

If you are setting up a trust fund for the first time, you probably have many questions. The specific answers to some of these questions may depend on the type of trust involved, as certain types of trusts – such as children’s trust funds or educational trusts – will require terms tailored to address the particular goals for which those trusts are designed.

In this blog post, we’ll discuss the basics of trust fund creation. Because trust fund setup can be a complex undertaking, simply becoming familiar with the basic steps that apply to setting up a trust fund in most situations can provide a useful framework for understanding the available options and how to make the most of them.

What Is a Trust Fund?

A trust, also sometimes called a trust fund, is a legal entity created to hold and manage assets. Trusts are widely used in estate planning for their flexibility, customizability, and relative security compared to many other types of tools used in managing assets. Depending on the type of trust created, its assets may be used for long-term care and incapacity planning, to ensure that children’s or grandchildren’s college educations will be paid for, to establish the basis for ongoing financial support for friends or relatives who have special needs, to limit the taxable value of an individual’s estate, or for a variety of other purposes.

Each type of trust has its own set of advantages and disadvantages, so choosing the right type of trust to meet your estate planning goals is important. You may wish to visit with an estate planning attorney to review the various trust fund options and discuss which type of trust may be the right fit for your needs. In some cases, it may also make sense to form separate trusts to accomplish distinct estate planning goals.

Essential Vocabulary for Setting Up a Trust

If you are getting ready for the process of trust fund setup for the first time, there are several key terms that you should become familiar with, as understanding what each of these terms means in the context of estate planning trust fund setup will make navigating the process significantly easier and, for most people, less intimidating. Key terms for trust fund setup include:

• Trustor, grantor, settlor: All three terms are used interchangeably to refer to the individual who creates a trust and “funds” it by transferring assets to the trust’s control.
• Trust or  trust fund: The legal entity created to hold and manage assets is called the trust or trust fund. Depending on the type of trust created, the entity may or may not have its own federal tax identification number, according to guidance from the Special Needs Alliance designed to assist individuals setting up trust funds for the support of their children or other relatives (such as grandchildren) who have special needs.
• Trustee: A trustee is the party responsible for managing the trust account. Trustees can be individuals or legal entities (such as law firms or financial advisory firms). Some trust funds may have more than one trustee, in which case each person or entity named as trustee is a co-trustee. Depending on the type of trust, the trustor may or may not be a co-trustee; it is important to be aware, however, that the Ohio Trust Code does not allow for the creation of a trust for which the settlor is also both the sole beneficiary and the sole trustee.
• Trust instrument: Each trust will be created by a carefully drafted and attested document, known as the trust instrument. This “instrument” appoints the trustee (or co-trustees) and designates the parties for whose benefit the trust will be managed.
• Beneficiaries: These are the individuals or entities on whose behalf the trustee (or co-trustee) will manage all assets contained in the trust. Depending on the terms specified in the trust instrument, beneficiaries may receive a one-time transfer (after which the trustee’s obligations are fulfilled and the trust is dissolved), or on the other hand they may receive benefits periodically on an ongoing basis (such as quarterly disbursements of interest generated from the assets in the trust) or only under certain circumstances (such as when they register for college classes or make a down payment on their first home).

Trusts are highly customizable estate planning tools, and most types of trusts can be tightly tailored to address specific aims or concerns – but any trust will be configured via carefully orchestrated arrangements of the above elements.

Frequently Asked Questions About Trust Fund Setup

Estate planning attorneys receive a number of questions about trust fund setup regularly. The answers in many cases will depend in large part on the type of trust the individual is considering, but knowing basic answers to some of the most common questions about trust fund setup can nonetheless provide a foundation for more detailed research on your own, or for in-depth discussion with an attorney in your area who has experience in setting up trust funds tailored to clients’ needs. Some of the most common questions (and their answers) are:

Do You Need a Lawyer To Set Up a Trust Fund?

Legally speaking, individuals are not required to work with an attorney in setting up a trust. How advisable it is for a non-professional to attempt setting up a trust on their own, however, will depend on a variety of factors, including the complexity of terms the individual wishes to include, the revocable vs. irrevocable nature of the trust, the nature and scope of assets involved, the extent of the individual’s own familiarity with trust funds and similar estate planning tools and arrangements, and of course the ultimate goals the trust fund is intended to serve. Generally speaking, the greater the complexity of the trust fund setup, the more advisable it is to work with an experienced estate planning attorney to ensure that all legal considerations have been properly accounted for.

What Are Trust Funds Used For?

Trust funds may be used for a wide range of purposes. Frequently the grantor will choose a specific type of trust based on the purpose they have in mind, from setting up children’s trust funds to provide financial support for a growing family to designing tightly-tailored charitable purpose trusts to advance their favorite causes. A few examples of common trust fund uses include:

• Special needs trust: A trust tailored to provide for the financial needs of an individual, often the grantor’s child or grandchild, who have special needs that can be expected to continue through adulthood (and thus may need long-term care and management)
• Educational trust: A trust fund established specifically to provide for educational expenses (sometimes these trusts are formed in conjunction with a nonprofit organization, but individuals who have the means to do so can also choose to set up educational trusts to provide specifically for their own children’s or grandchildren’s educations)
• Testamentary trust: A trust created by the terms set out in an individual’s Last Will and Testament, which will be written so as to automatically trigger the transfer of assets to fund the trust upon the death of the testator (the person who creates the will, in this case also the grantor of the trust)

There are many other types of trusts, most of which can be customized and adapted to address specific estate planning concerns.

What Are the Basic Steps in Setting Up a Trust?

Setting up a trust can be complicated, but following a step-by-step process can help first-time grantors to navigate that process effectively. Keep in mind that some trust fund setup scenarios may require additional steps, depending on the type of trust involved and the kinds of assets the trust will contain.

Identifying Goals and Choosing the Right Type of Trust

The first step to setting up a trust is determining what goals the trust is intended to serve. This step allows the grantor to make an informed decision about the next step, which is selecting a type of trust appropriate to address the established goals. First-time grantors, in particular, may benefit from conferring with a financial adviser or experienced estate planning lawyer at this step, to gain perspective on the available options and how they fit with the overall estate planning goals the individual hopes to accomplish by forming the trust.

Drafting the Trust Instrument and Ensuring Legal Validity

Once the type of trust has been selected, the next step is to draft the “trust instrument,” the document that legally creates the trust. This is a step at which grantors are usually advised to work with an attorney who has experience working with this type of document, which will need to meet all of the terms set out in O.R.C. § 5804.02; an attorney may also be of assistance in determining whether a nontestamentary trust meets the specific requirements for validity established under O.R.C. § 5804.03.

Funding the Trust and Preparing for Taxes

A testamentary trust will only be funded upon the death of the settlor or grantor. For most other types of trust, the next step after ensuring the legal validity of the trust instrument will be to transfer assets into the trust. Generally speaking, the grantor can achieve this step by opening an account in the trust’s name, and identifying the trustee or co-trustees as the parties authorized to access and manage the account. The settlor may wish to have the trustee (or trustees) present at the bank to sign the account documents.

How a trust fund is taxed will depend in large part on whether the trust is revocable or irrevocable. For the common types of revocable trusts, the Ohio Bar Association explains that the trust will be treated as a pass-through entity, and any income from the trust will be included on the grantor’s individual tax return filings. The Ohio Department of Taxation provides an information sheet to help guide Ohio trustors, with links to relevant forms for some of the most common trust tax scenarios.

Discuss Your Trust Fund Setup With an Ohio Estate Planning Attorney

Trust fund setup can involve a number of complex considerations. To get the maximum benefit from setting up a trust fund, it is important to select a type of trust that is designed to achieve the specific goals the settlor has in mind. Establishing an educational trust or children’s trust funds, for instance, may require a different approach from setting up a testamentary trust whose primary purpose is simply to transfer assets to beneficiaries without going through probate.

An Ohio estate planning attorney may be able to help you evaluate the various trust fund options and assist you in setting up a trust fund that will fit with your overall estate planning design. Schedule a consultation with Rhodium Law by calling (216) 699-8145 today.