Steps to Set up and Manage an Irrevocable TrustThank you for reading this post, don't forget to subscribe!
A trust is a legal agreement between two or more parties that grants one party, or trustee, specified assets while the beneficiary, or the person for whom the trust is established, retains ownership of said assets. If you’ve ever wondered how to set up a trust or how they work, we explain below in general how to set up a trust, from creation to distribution.
The steps in creating a trust are:
· Identifying the person who establishes the trust, usually called the “Grantor.”
· Identifying an appropriate trustee. A Trustee is the person who holds, invests, manages and distributes the money to the “Beneficiary” (“Beneficiary” = the person for whom the trust is established.)
· Drafting it to meet any specifics of the trust that the law requires to avoid the trust assets being counted as a resource to the trust beneficiary.
· If a court must establish the trust, petitioning the court for an appropriate order “establishing” the trust.
2. Tax Recognition
Irrevocable Trust funds are invested under a federal employee’s identification number (a tax ID number). The trust is or could be a taxpaying entity. In practice, however, any income the trust earns will be distributed to the beneficiary, who would pay the taxes on the income earned. The trust would file a federal income tax return but usually would not have to pay any income taxes. Once the trust has been created, a tax ID number is obtained from the Internal Revenue Service. The easiest way to get one is by going online to the IRS website and filling out an application.
Needless to say, if there is no money, there is nothing to manage or distribute. After the trust has been created, the trust is funded. All this means for most trustees is that they go to the bank or brokerage company with a copy of the trust agreement and the federal tax ID number and open up an account in the name of the trust. Instead of a social security number, the tax ID number is used.
Understanding Fiduciary Obligations
The trustee is a fiduciary. A fiduciary is someone who acts solely for the benefit of trust beneficiaries. Unless the trust agreement says otherwise, local law limits the kinds of investments that a trustee may make. When you set up a trust, it is wise for a trustee to discuss trust investments with an investment adviser to help the trustee determine what investments of the trust assets should be made that further the intent of the trust.
A fiduciary is any person who:
· Offers investment advice regarding plan assets and derives compensation for it, either direct or indirect; or
· Has any discretionary authority or responsibility regarding trust administration.
The fiduciaries involved in a trust are, therefore, at least these persons: the trustee, the trust administrator, and the investment adviser.
How to Stay Compliant
The trustee should monitor investments closely when they set up a trust. Look for a financial services firm that not only can relieve the burdens of recordkeeping, compliance, and administration but one that can assist with investment advisory services, too. Choose an investment adviser who understands the conservative approach that must be taken toward the trust funds. Document the file as to the investment advice given to the trustee.
Establish a regular schedule for accounting to the beneficiary or the beneficiary’s representative of investments and distributions from the trust sub-account.
Trustees must have a thorough understanding of their own fiduciary responsibility-and potential liability. It is not a privilege or an honor to be a trustee, it is a job.
Some trusts are set up specifically for beneficiaries who receive public benefits such as Medicaid or Supplemental Security Income. For these beneficiaries, care should be taken to make sure that distributions from the trust do not result in a reduction or elimination of these public benefits. In most instances, distributions for the beneficiary’s “special needs” are ok. Special needs may be defined in the trust, and would usually include:
· Out of pocket medical and dental expenses
· Annual independent check-ups
· Transportation (including vehicle purchase) and maintenance of a vehicle
· Insurance (including payment of premiums)
· Essential dietary needs
· Materials for a hobby or recreational activity, computer or electronic equipment
· Trips or vacations
· Entertainment like going to a movie, a ballgame, concert, etc.
· Goods and services that add pleasure and quality to life: videos, furniture, television, stereo, or entertainment center
· Personal care attendant, escort, or nursing home resident advocate
The trustee should never give money directly to the beneficiary.
Occasionally, the trustee will be requested by the beneficiary or their representative for permission to use trust fund to make gifts on behalf of the beneficiary. These gifts are not special needs solely for the benefit of the beneficiary, and such requests should be refused.
If you are faced with trust administration, or want to consider setting up a trust, call Burzynski Elder Law at 239-434-8557. There is no charge for a telephone intake call. The call will help us and you decide if there is a good fit for your legal needs and our services and advocacy.