How to Set Up a Trust

A trust might sound like it’s only for wealthy families, but a well-documented trust can make life easier for a lot of families. It’s an important step in planning for how things will work after you’re gone—or incapacitated. A trust can help ensure your preferences during incapacity are clear and a smoother inheritance experience for your loved ones, strategically minimize tax liabilities, or safeguard your wealth from potential creditors. Trusts can be an effective way to translate your wishes clearly and simply, making next steps clear for your loved ones in the event of your incapacity or passing.

Here, you’ll learn how to set up a trust so that everything you own is handled the way you want.

Establish Your Financial Goals

Before you start the paperwork to set up a trust, it's wise to define your financial goals. Trusts can serve a variety of purposes, so understanding your specific objectives will help you choose the right type of trust. Here are some common goals.

• Estate planning: Help ensure your assets are distributed according to your wishes after your death. As part of careful estate planning, a trust complements your will, powers of attorney and advanced directives or living will.
• Incapacity planning: Provide instructions and delegate financial decisions to trusted people in the event of your incapacity.
• Tax planning: Minimize estate and income taxes.
• Asset protection: Shield your assets from creditors or lawsuits.
• Managing money for a child/minor: Provide financial support and management for minors or young adults. In other words, trusts can house instructions and restrictions for leaving an inheritance to children or grandchildren.

Once you’re clear on your goals, think about the beneficiary you’re helping. This could be a family member, a friend, a charity or institution—or even yourself in certain cases. Clearly identifying your goal and beneficiary will guide the rest of the trust setup process. Go ahead and write out a few sentences and consider talking them over with your advisor. If you don’t have a lawyer, your advisor may be able to put you in touch with someone who works in your area and has experience with trusts.

Choose a Type of Trust That Meets Your Needs

There are a few different types of trusts, and each serves different financial and legal goals. Here are some key points about the two major types, revocable and irrevocable trusts.

Revocable Living Trusts

• Manageable/changeable during your lifetime: A revocable living trust allows you to modify or even revoke the trust. This flexibility can be a significant advantage if your financial situation or goals change.
• Control over asset distribution: When you leave an inheritance, the trust can manage how your assets are distributed to your beneficiaries. This can help ensure that your wishes are followed without having to go through the probate process.

Benefits of revocable trusts include the following.

• Estate planning: Ideal for ensuring a smooth transfer of assets and avoiding the time and costs associated with probate
• Inheritance: Allows you to leave an inheritance to your loved ones in a controlled and flexible manner, with the ability to make changes as needed

For example, a revocable spendthrift trust can be set up so that your heirs will be less likely to deplete their inheritances too quickly. It can also protect your assets from creditors.

Irrevocable Trusts

• You can’t change assets within the trust: Once assets are placed in an irrevocable trust, they are owned by the trustee and can’t be altered by you as the “grantor.” This lack of flexibility is balanced by significant legal and financial benefits.
• Asset protection and tax advantages: This type of trust provides robust protection against creditors and lawsuits and can offer substantial tax advantages, including reducing estate and income taxes.

Benefits of irrevocable trusts include the following.

• Asset protection: Shields your assets from potential claims by creditors or legal actions
• Tax advantages: Can help minimize estate and income taxes, making it a valuable tool for high-net-worth families
• Charitable giving: Useful for making donations to charities while enjoying tax benefits and potentially leaving a lasting legacy

One example of an irrevocable trust is the irrevocable life insurance trust. It holds one or more life insurance policies, which fund the trust during your lifetime. Like other irrevocable trusts, it generally can’t be changed or revoked—but it provides other useful benefits for some families.

Choose a Trustee

The right trustee is very important to the success of your trust. If you are no longer able to make decisions for yourself or you pass away, the trustee will manage the trust and ensure that it operates according to your wishes. Here are your options as you think through choosing a trustee.

• Friend or family member: A friend or family member can be beneficial because they know you and can make decisions that align with your values. But emotions or conflicts of interest could complicate the management of the trust.
• Professional trustee: A lawyer, financial institution or other professional can manage the trust with objectivity and expertise. They may charge fees for their services, but they can provide valuable knowledge about trust law, tax implications and other legal considerations.
• Multiple trustees: Appointing more than one trustee can help ensure responsibilities are shared and provide checks and balances, ensuring that the trust is managed fairly and effectively. On the other hand, it makes things more complex.

Draft the Trust Document

Creating a trust document is a legal process that requires careful attention to detail. Here are the main steps.

1. Hire a lawyer or attorney: A legal professional can help you draft the trust document to ensure it meets all legal requirements and your specific needs. They can also provide guidance on the best practices for trust management and any potential legal pitfalls.
2. Decide where to establish the trust: Your lawyer or attorney may recommend that you consider establishing your trust in one of the states known for favorable trust laws. Alaska, Delaware, South Dakota and Nevada often offer advantages like asset protection, privacy and tax benefits. If you have real estate or other tangible assets, the jurisdiction where they are situated might influence where you set up your trust.
3. Clearly outline all relevant information: The document should clearly specify these areas.
   • Trustee and their powers: Define the trustee's responsibilities and the extent of their authority. This includes how they can manage and distribute the trust assets.
   • Beneficiaries: List the people or entities who will benefit from the trust. Be specific about who will receive what and under what conditions.
   • Special stipulations: Include any specific conditions or instructions you want to enforce, such as age requirements for beneficiaries or how assets should be used. This can help prevent future disputes and ensure that your wishes are carried out.
4. Store the trust carefully: When it’s signed and completed, consider both paper and digital copies. Store them carefully, and help make sure your loved ones can find them if you’re incapacitated or have passed away. Your estate planning attorney might offer to store the trust document in their office. Your trustee may also get a copy. Whatever you choose, tell your trustees, beneficiaries and legal advisors about the location and any access requirements (like passwords). Give everyone new copies when you make updates.

Fund the Trust

Eventually, you’ll transfer your assets into the trust. It may be a little unnerving to make these moves, but they fulfill the purpose of the trust. Here are the types of assets that can be included:

• Bank accounts and investments: These can be transferred electronically. Make sure to update the account titles and beneficiary designations to reflect the trust.
• Physical assets: This includes items like car titles, home deeds and other valuable property. You’ll need to retitle these assets in the name of the trust.
• Life insurance policies: You can assign the trust as the beneficiary of your life insurance policies. This can help ensure that the proceeds are managed according to your wishes.
• Retirement accounts: Some retirement accounts can be transferred to a trust, but this may have tax implications. Consult with a financial advisor or attorney first.

To avoid legal issues and disputes, ensure that all transfers are properly documented. Keeping detailed records and following the correct procedures will help protect your assets and ensure that the trust operates smoothly.

Setting up a trust is a great time to work closely with a lawyer and your Northwestern Mutual advisor.

This publication is not intended as legal or tax advice. Financial Representatives do not render tax advice. You may also need help from other types of estate planning and tax professionals for tax advice that is specific to your situation. They can all help you leave the legacy you want and feel good today because you know tomorrow is taken care of.