How Do You Set Up a Trust?
Trusts are an important estate planning tool that can achieve a wide range of goals. But before you decide to include one in your estate plan, you should talk with your estate planning lawyer about whether (and how) a trust can achieve your estate planning goals.
As part of that discussion, your lawyer will explain how a trust works and what’s involved in setting up a trust. Attempting to establish a trust without assistance from an estate planning attorney is a serious mistake that could have significant adverse financial consequences.
How Does a Trust Work?
A trust is a legal arrangement in which a chosen trustee manages trust property and distributes it to the named beneficiaries according to the terms of the trust. A complex legal document establishes the terms for the management and distribution of trust assets. The trust document also designates the trustee — and often a successor trustee — as well as the beneficiaries of the trust. Arizona law imposes significant fiduciary responsibilities on trustees.
There are many different types of trusts. A trust may be revocable or irrevocable. As the terms imply, a revocable trust can be changed by the grantor (person creating the trust) at any time, and an irrevocable trust can only be changed under very limited circumstances. A revocable living trust is a specific type of trust that may be beneficial for some estate plans. Irrevocable trusts typically accomplish specialized goals and are often subject to complex federal and state laws and regulations.
The Trust Document
Regardless of the type of trust, the trust document governs all the details relating to the operation of the trust and the distribution of assets and property placed in the trust. It also designates the trustee and beneficiaries of the trust. If you decide to set up a trust, it is essential to get help from an estate planning lawyer in creating the legal document to establish your trust, just as you should get professional assistance in creating an estate plan that doesn’t include a trust.
Your attorney drafts the trust document based on your specific estate planning goals and your wishes concerning the management and distribution of the trust. The provisions of the document are tailored to the type of trust that you create. In the document, you provide directions to the trustee about how you want the assets to be managed, as well as how they should be distributed.
For example, if your trust ultimately benefits your children and grandchildren, you can specify exactly what types of expenditures the trust should cover. You may want to allow the trust to cover items such as education, travel, and other life-enriching experiences, or you can limit distribution to only certain purposes, such as medical expenses and education. If you set up an irrevocable trust, applicable laws and regulations may limit the allowable expenditures of the trust, and those provisions must be included in the trust document.
When you discuss the trust with your lawyer, you also determine who will serve as the trustee and appoint the trustee in the trust document. Often, there is also a successor trustee named, who serves when the original trustee can no longer serve or no longer wishes to serve in the position. The trust document also designates the beneficiaries of the trust, who receive trust distributions from the trustee in accordance with the terms of the trust.
Trusts are governed by complex state and federal laws. In drafting your trust document, your lawyer makes certain that the document meets the Arizona requirements for a valid trust. Federal legal requirements also may apply, particularly in the case of an irrevocable trust. This aspect of establishing a trust is an important reason for getting assistance from a knowledgeable attorney when you set up a trust.
Your lawyer also ensures that you execute the trust document in compliance with Arizona legal requirements and that your other estate planning documents are consistent with the trust document.
Funding a Trust
Putting the trust document in place is only the first step in setting up a trust. For a trust to be effective, it also must be properly funded. Funding a trust involves transferring specific property into the trust, so the assets are available for the trustee to manage and distribute.
The type of trust determines how a trust is funded. A living trust is funded during the grantor’s lifetime. You must take specific actions to fund a revocable living trust after you execute the trust document. If you create a testamentary trust, which takes effect on your death, your lawyer includes provisions in your estate plan to transfer property into the trust on your death.
For additional information and details about funding a trust, please read our separate article, What Does It Mean to Fund a Trust?
Schedule a Free Consultation With an East Valley Estate Planning Attorney
At Peterson Law Offices, our estate planning practice includes helping clients create and fund all types of trusts. We welcome inquiries from clients throughout the East Valley, including Queen Creek, San Tan Valley, Gilbert, Mesa, and Chandler. Schedule your free initial consultation by calling 480-878-5998 or using our online contact form.