How to Set Up a Living Trust: Steps in Setting Up a Living Trust

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Living trusts are set up to ensure that assets are distributed to people chosen by the grantor, when a grantor wishes the assets to be distributed and the amounts he or she wishes to distribute. The main benefit of a living trust is that it eliminates the cost and trouble of probate court which can slow down or lessen the distribution of one’s estate. A living trust does not completely eliminate the need to pay taxes on assets or the overall estate during settlement.

Planning the Living Trust

As with any type of financial process, planning the living trust is one of the most important steps when it is time to set up a living trust. This portion goes beyond beneficiaries; it also covers trust administration both during and after the life of the grantor (the person who sets up the living trust). This initial section will ensure that not only are the grantors wishes carried out, but also that the assets in trust are still accessible and have held value.

Clarifying the objectives of the living trust is the first step in planning. Determining objectives includes asking questions:

  • Who will receive which asset and to what extent?
  • When will certain assets to be distributed and are they to be distributed whole or in part?
  • Who will be managing the financial issues of the trust?
  • Who will handle medical decision-making if the grantor cannot make medical decisions for him or herself?
  • What assets will be placed in the trust?

Updating a living trust during the lifetime of the grantor is the last step in planning. Setting up a living trust is similar to setting up an investment. Once it has been funded it will need to be looked after to make sure portions are still intact and can be kept in the trusteeship. Portions may need replacement, such as stocks or bonds; beneficiaries may change; other assets may need to be added. A yearly follow-up with the trust administrator will assure this happens.

Getting Information for a Living Trust

To create an all-inclusive living trust a great deal of information is needed. The full name of each person involved in the trust, including the grantor, spouse or partner, and all of the beneficiaries are necessary. If there are beneficiaries with special needs, they will need an appointed guardianship written in the documentation; list at least two persons, in order of preference, who will take this role. Should the grantor become incapacitated, at least two persons should be listed in order of preference for handling affairs and decisions; this should be done for both medial and financial issues. Full names, ages and locations will be needed for everyone involved.

The Forms

Fill out the forms and draft the living trust. Have a legal professional look over the documentation or create the final draft. This step, which can be done by the grantor is worth the money saved on possible legal costs during execution of the living trust later.

The forms to complete a Living Trust can be found at any bookstore or through legal or financial professionals. Here is a sample of information that will be needed:

-Legal Guardianship Assignment (for assets going to minor children or special needs beneficiaries)

-Conservator Clause (nominates a conservator)

-Mental Capacity and Competency Clause (stipulations in case of mental incapacity of the grantor)

-Durable Power of Attorney for financial issues (gives a person authority to handle financial decisions should the grantor be unable)

-Durable Power of Attorney for health issues (gives a person authority to handle medical decisions should the grantor be unable)

Funding a Living Trust

The next step to set up a living trust is to take a complete inventory of all assets you want to be included in the living trust. Make a list of everything no matter how seemingly minimal it may be. Assign a dollar value to each item on the list. This part will not only be important to the beneficiaries but also to the IRS later. Planning the funding will help minimize estate taxes when assets are distributed so there is no need to liquidate assets to pay taxes.

At the top of the list should be the liquid assets such as cash, bank accounts, and precious metals. Next comes items which can be dispersed or sold quickly such as stocks, mutual funds, bonds, automobiles and jewelry. Antiques, art and collectibles can also go here. Then list all tangible property such as deeds, copyrights, business holdings, partnership interests or rights of ownership. Create a full description of each item placed on the list.

The last step to set up the trust is to calculate the amount of taxes the estate may need and plan this into the funding of the living trust. This is done by adding up all of the assets listed above. Then, add up all liabilities such as mortgages, credit cards, bank loans and other personal loans payable by the grantor. Subtract the liabilities from the assets to create the net worth. Calculate at least 20 percent for estate taxes and set this money aside in an interest-baring account in the name of the trust. This guarantees that the beneficiaries won’t need to pay probate or taxes when it comes time to disperse the trust.

References: Robert G. Allen; Living Trust Pro

This post is part of the series: How to Manage Living Trusts From Beginning to End

This series provides information about managing a living trust from beginning to end. Topics range from setting up the trust to settling or terminating the trust.

  1. How to Set Up a Living Trust
  2. How to Settle a Living Trust
  3. How to Terminate a Living Trust