Trusts funds used to be the realm of the wealthy, providing a tool to pass money to heirs and charities. Nowadays, though, they are becoming a means for more people to engage in smart estate planning.

Trusts are legal arrangements allowing you to put assets into accounts that benefit another person or an organization, like a charity or college. They are often complicated and require a lawyer to put together — although there are online alternatives if you want to attempt to do it yourself.

The basic idea is to control who gets your assets, either when you’re alive or afterward. A trust can help you lower estate taxes and avoid probate, a procedure that proves a will is valid. Depending on your state of residence, this can be an arduous task. But for many, probate is not something to lose sleep over.

Important disclaimer: Different states have different laws that might make a Trust or a Will more (or less) desirable. Be sure to consult a local attorney to make sure your estate plan is set up in a way that works for you and your family.

First Steps.

As you set up a trust, you need to settle a few key questions:

  1. What assets go into the trust: stocks, bonds, mutual funds, cash or property?
  2. Who are the beneficiaries, meaning the people who receive the trust’s benefits?
  3. Who will be the trustee, the person who manages the assets and oversees the trust? The best thing is to appoint someone you know, who also is familiar with your financial situation and your beneficiaries. Plus, this person should be financially astute, and knowledgeable about taxes and investing.
  4. How will be assets be invested and managed, and when will they be paid out? For instance, you might not want your children to receive the benefits until they’re 35, as an established adult.
  5. What is the duration of the trust, and under what conditions will it end operations? Is it paid out over time, or all at once?
  6. Can its conditions be changed? Some trusts are irrevocable, meaning they are chiseled in stone. Others are revocable, meaning for instance you can shift the beneficiary to be your daughter instead of your younger brother.
  7. What stipulations do you want? Maybe the money will go to your son for everything except paying off his creditors. Or your daughter, but not your son-in-law if she should die.

Beyond these considerations, it’s wise to find a good, experienced estate attorney. The lawyer will craft a document called a declaration of trust, which will set up the trust fund and establish its conditions.


Next, the trust fund is registered with the IRS, allowing it to file its own tax returns and legally open financial accounts at banks or other institutions. Then, you transfer the assets into the trust, a process called retitling.

Do you want the trust to take effect now or at your death? And should it be revocable or irrevocable? The argument for revocable is that your beneficiary, perhaps a young person, may not grow into someone who deserves your generosity. The case for irrevocable is if you want to earmark the assets to support an activity whose necessity won’t likely change, such as educating a child or supporting a charity.

The question of how long the trust will stay around, before its last assets are paid out, is a tricky one. Common law is structured against letting trusts persist indefinitely. But many states let you get around that by setting up a so-called dynasty trust, which permits the wealth to grow for a long time without being taxed.

Types of Trusts.

Aside from whether the trust is revocable or not, its structure can be very complex and carry advantages and disadvantages. Some examples:

  • Generation-skipping trust, aka a dynasty trust. This lets you transfer money tax-free to beneficiaries who are two generations younger than you. The goal is to avoid the assets being taxed twice: once when they go to your grown children, and again when that generation passes the assets along to their own kids — namely, your grandchildren.
  • Bypass trust. Here, you bequeath an amount up to the estate tax exemption (in 2023, that’s up to $12.9 million from a single giver or double that from a couple). The rest goes to your spouse tax-free. After your spouse dies, you can stipulate that what’s left goes to the kids.
  • Qualified terminal interest property (QTIP) trust. This is best at singling out which particular relatives to direct your largesse to. A QTIP is often helpful in families where there are divorces, remarriages and stepchildren. Your surviving spouse can receive income from it, and once that spouse dies, the remaining principal goes to specific younger relatives.

For you, the donor, creating a trust fund could give you peace of mind that the legacy you want to leave is well-constructed and wisely directed.

This article is not intended as personal advice, but rather as an educational resource about planning techniques available when working with a financial professional.




Securities & Advisory Services offered through Geneos Wealth Management. Member FINRA/SIPC. This article was written by a professional financial journalist for Advisor Products and is not intended as legal or investment advice.