What You Need to Know About Establishing a Trust Fund

People often associate trusts with the wealthy. But a trust can be an effective financial tool for many people for many reasons. Generally speaking, a trust holds assets for the benefit of a person, group of people or organization (beneficiaries). The individual that puts the money in the trust is the grantor and the individual or corporation that manages the assets is the trustee.

Living Trusts

Most trusts are living trusts. They are created by the grantor during his or her lifetime.

The majority of living trusts are living revocable trusts. This is when the trust can be revoked (ended) during the grantor’s lifetime.

For example, a mother may create a living revocable trust and make herself both the grantor and the trustee. This way, she can manage her own assets and can close the trust at any time while she’s alive. If she becomes ill or can’t manage the trust any longer, she can ask a secondary trustee, like her son, to manage the trust for her, with no need for a court to become involved.

A trust is considered to be a funded living trust once assets have been actually put into the trust and the trust is active.

Irrevocable living trusts are less common and often created by individuals that are concerned about federal estate taxes (generally individuals with more than $5 million in assets) or to help protect the assets added to the irrevocable trust from future creditors and lawsuits. Generally, these trusts, once created, cannot be changed by the grantor during the grantor’s lifetime.

Specific Types of Trusts

Spendthrift trusts are one of the most common types of trusts. Instead of a lump sum, money is distributed to the beneficiary in smaller amounts over time and often under the supervision of an independent trustee. They are generally designed to protect the beneficiary from his/her own poor spending habits and to protect the assets from the beneficiary’s potential creditors.

Testamentary trusts, or after-death trusts, are made through a will, and funded after the grantor dies. These are less common in recent years, because today living trusts can be set up in the same way but avoid the need for probate (when a will is proved valid and its terms are enforced by a court.)

Bypass trusts are used by spouses and are generally designed for estate tax purposes. When the 1st spouse dies, some assets (up to $5.25 million in 2013) may be passed to the by-pass trust and held for the benefit of the surviving spouse without being subject to the federal estate tax. When the surviving spouse dies, these assets may go to the beneficiaries, usually their children, again without the need to pay this tax.

Charitable trusts are a method for making donations to a charity in a tax efficient manner that may also let the donor continue to receive some benefit (e.g. income) from the gifted property.

Trusts versus wills

Wills and funded living trusts both allow the grantor to spell out:

  • What conditions beneficiaries must meet (like graduating college)
  • When and how to distribute assets
  • How conservatively or aggressively to invest assets

The primary difference between assets in a will and in a living trust is that assets in a living trust typically avoid the need for probate court; the assets are already in the trust, so they can be transferred to your beneficiaries without waiting for a will to be carried out. Also, the terms of a funded living trust are generally more private than a will.

However, a will has benefits a living trust does not. In a will, it’s possible to name guardians for children, and leave specific instructions for how to deal with taxes and debts, for example. It’s important to talk to a financial advisor to determine what best fits your needs.

Designating a trustee

Trustees have a legal responsibility to manage the trust in the way the grantor requested and for the benefit of the beneficiaries. A trustee’s responsibilities must be made clear ahead of time—they can be very simple, such as distributing income, or more complex, like making decisions on investing assets. The trustee should understand the trust’s terms before accepting the position of trustee.

Establishing a trust

A trust is a legal document that should only be prepared by a qualified attorney after carefully considering all options and facts. The trust should specifically outline:

  • The trustee and the beneficiaries
  • How the assets in the trust should be handled and distributed
  • When the trust should end

Finally, the trust needs to be funded. How this is done, and legal and tax issues regarding the trust should be addressed with your attorney and tax advisors.

MetLife does not provide tax or legal advice. Please consult your tax advisor or attorney for such guidance.

Metropolitan Life Insurance Company (MLIC), New York, NY 10166. Securities products offered by MetLife Securities, Inc. (MSI) (member FINRA/SIPC), 1095 Avenue of the Americas, New York, NY 10036. MLIC and MSI are MetLife companies