To create a trust, you must surrender ownership of your assets to a trustee. The trustee manages and distributes that property to beneficiaries you choose based on criteria you provide. A living trust is created while the owner is still alive while a testamentary trust is created by a decedent’s will. A living trust’s property is not probated and is immediately available to the beneficiaries before and after the trust creator’s death. In contrast, a testamentary trust’s property must go through probate before the beneficiaries have access to it.
Assess the value of all your property. When measuring your property include all real estate, life insurance plans, investments and vehicles you own. Do not include property you own subject to a right of survivorship -- meaning someone else immediately gains ownership when you die -- or any property you get to use as a beneficiary.
Read More: Can I Have Both a Living Trust & a Testamentary Trust?
Consider estate tax implications. If your property is valued at more than $5.12 million as of 2012, your estate may have to pay federal taxes when you pass away. Using an irrevocable living trust can help you minimize your taxable estate.
Identify which beneficiaries you want for each trust. Possible beneficiaries include your spouse, children, surviving relatives and charitable organizations. For living trusts, you can name yourself as a beneficiary.
Select the property to be placed in the irrevocable living trust. Property in an irrevocable living trust will be excluded from your taxable estate and immediately available to beneficiaries when you pass away. Property you might want to place in the living trust includes your home and car. The value of property not placed into the trust should be less than the $5.12 million threshold for estate taxes.
Draft the trust agreement and define how the property will be distributed to the beneficiaries of the irrevocable living trust. A popular phrase used in these agreements is the trustee should distribute assets to support the beneficiaries' “health, education, maintenance and support.” This gives the trustee the discretion necessary to ensure the beneficiaries’ needs are taken care of, regardless of most circumstances.
Transfer the living trust assets to the trustee. This will create the trust. For many living trusts, the trust creator will be the first trustee. If you choose yourself as trustee, be sure the trust agreement has a successor trustee who takes over when you pass away. To transfer trust assets to yourself as trustee, write “from [your name] to [your name] as trustee of the irrevocable living trust” on the related paperwork regarding ownership. The act of transferring assets into the trust may be subject to gift tax.
Identify which of your remaining property should be placed into a testamentary trust when you die. Such property might include securities, developmental real estate and cash. Testamentary trusts might be considered for individuals who are unprepared to manage or use trust property appropriately, such as children.
Include a provision in your will that creates a testamentary trust. The will should identify who the trustee of the trust will be, who the beneficiaries of that trust are, what property is to be included in the trust and how that property is to be distributed. With regard to distribution, you may want to leave that up to the discretion of the trustee by requiring that he distribute the property for the “health, education, maintenance and support” of the beneficiaries.
Consider seeking professional help to aid you in creating your trusts.
John Cromwell specializes in financial, legal and small business issues. Cromwell holds a bachelor's and master's degree in accounting, as well as a Juris Doctor. He is currently a co-founder of two businesses.