How to set up a trust fund in 5 steps

Providing for your loved ones today is often top of mind. But how can you ensure they’re taken care of in the future?

Setting up a trust fund can help.

People often assume you need to be wealthy to create a trust fund, but that isn’t true. Anyone who wants to provide for the future of their loved ones or causes they care about can establish a trust.

Trust funds let you provide for your loved ones if you pass away or become incapacitated (meaning you can’t make important decisions for yourself). This is especially important if you have minor children: with a trust, funds can be released to them when they reach certain ages or achieve certain milestones. This makes creating a trust fund a powerful way to care for your children far beyond the present and lay the foundation for their future.

What is a trust fund?

A trust fund is a legal entity that houses (or “holds”) assets for the benefit of a third party (called a beneficiary). Trusts are created by a grantor, and they’re responsible for transferring property and other assets to the trust. The grantor also appoints a trustee who will manage the trust and distribute these assets to beneficiaries according to the trust terms.

Trusts provide many benefits, like helping your assets avoid probate and protecting your and your loved ones’ privacy. Setting up a trust fund ensures your assets are managed according to your wishes until your beneficiaries can receive them. Trust funds also allow you to set certain provisions, or “rules,” so you can control how, when, and why trust assets are distributed.

For example, if your children are your beneficiaries, you might want the trust funds to be used for a specific purpose or occasion, like when they reach a certain age or if they go to college. This is helpful for making sure they don’t spend the funds irresponsibly or all at once.

Trust vs trust fund: What’s the difference?

The terms “trust” and “trust fund” are often used interchangeably, but they do have some subtle differences.

The term “trust” defines the legal relationship between the trustee and the trust’s beneficiaries.  

A trust fund, on the other hand, is the actual legal entity that holds the trust assets.  

How to create a trust: 5 steps to setting up a trust fund

There are several key steps to take — and many important details to consider — when establishing a trust fund.

1. Set your goals for the trust

It’s important to be clear about why you’re setting up a trust fund. Being intentional about your goals will help you decide what terms and assets to include in the trust fund to provide for your loved ones and their futures.

Maybe you want to make sure that each of your children receives certain assets: For example, Beth should get your collection of antique jewelry, and John should receive your grandfather’s stamp collection. Or you want the funds used for a specific purpose, such as paying for Beth’s college tuition or helping John buy a home. Or perhaps you want to ensure your children can’t access their share of the trust fund until they reach a certain age.

Knowing your goals for the trust will help inform the key decisions you'll need to make.

2. Choose the type of trust you want to establish

There are many different types of trusts, and each serves a different purpose. You’ll need to determine which will best match your goals.

Trusts can be classified in one of two categories: revocable trusts and irrevocable trusts.

Revocable living trusts (RLTs) are the most common type of trust. They’re flexible and allow you (as the grantor) to make changes at any time, like adding or removing beneficiaries or changing the trust’s provisions. You can even revoke or “cancel” an RLT if it no longer meets your needs.  

Irrevocable trusts are more rigid. Once an irrevocable trust is created, it’s not simple to make changes, and the trust can’t easily be undone or canceled. One benefit of setting up an irrevocable trust is that the assets in it may not be subject to estate taxes when the grantor passes away. However, estate taxes generally only affect the most wealthy of the U.S. population.

For most Americans, a revocable living trust provides a perfect mix of flexibility and control.

3. Determine the terms of the trust

Once you know what your goals are and the type of trust that will help you reach them, you’ll need to decide on the terms of your trust. This includes:

• Choosing a trustee: A trustee will manage the trust and oversee the distribution of assets to your beneficiaries. It’s important to pick someone that you trust and who’s willing and able to serve. Depending on the type of trust you create, you can choose to name yourself as trustee. This lets you manage and control trust assets during your lifetime. However, doing this means you’ll need to appoint a successor trustee to take over the role after you die or can no longer serve.
• Determining distributions: If you have multiple beneficiaries, you’ll have to decide how to distribute your assets among them. Make a list of all the assets you plan to transfer to the trust and decide which beneficiary should receive each asset. You should clearly outline these distribution instructions in your trust documents.
• Setting provisions: Depending on the goals you’ve set, you may need to include certain provisions in your trust documents. This can include instructions for how assets are to be distributed or when your beneficiaries should receive them. For example, you can instruct that Beth and John each receive an equal share of the family home when you pass away, or that Beth receives $10,000 in cash from the trust when she starts college.

Other decisions you'll need to make will depend on the type of trust you create and your state's requirements. For instance, some states have limitations on the types of terms you can include.

4. Create your trust documents

Now that you’ve made decisions about the trust and the goals you want to achieve with it, you’ll need to make your trust legally binding. This means completing your trust documents and executing them according to the laws in your state. In most states, this involves signing your trust document in the presence of two witnesses, who should also sign.

Depending on your state’s requirements, you may also need to have your trust notarized and registered with your county.

5. Fund the trust with assets

Finally, it’s time to fund the trust. This is an important step — your trust can’t function the way you intend until you fill it with assets. Depending on the trust type, these assets may include:

• Real estate property (like your home)
• Brokerage and bank accounts
• Life insurance policies
• Non-cash assets (like stocks, bonds, and mutual funds)
• Digital assets (including cryptocurrency)
• Any personal items that are valuable or important to you (like family heirlooms or artwork)

Transferring assets into a trust can take time and effort, but it’s a necessary process. You should start by contacting the institutions that manage your assets. For example, to transfer your house to a trust, you’ll need to execute a new deed with the trust listed as the owner. To transfer ownership of a bank account, you can contact your financial institution to begin the process.

You may also choose to work with an estate planning attorney who can manage the process for you.

Common mistakes to avoid when setting up a trust fund

There’s a lot to consider when setting up a trust fund. Here are some common mistakes that you’ll want to avoid:  

• Choosing the wrong trustee: Being a trustee is a huge responsibility. You should choose someone who’s organized, responsible, financially savvy, and ideally lives geographically close to you or your beneficiaries.
• Releasing funds too soon: Many factors can help you decide when to give your beneficiaries access to the funds. You'll want to consider their age, maturity, and level of financial responsibility. For instance, trust assets are often meant to provide for your minor or young adult children and set them up for success. If they’re given access before they’re ready, they might spend the funds irresponsibly or possibly all at once.
• Adding provisions that are too restrictive: While putting provisions in place is important, you don’t want to add too many restrictions. For instance, say Beth chooses not to get married (or gets married later in life), but the trust won’t release funds to her until after she weds. This prevents Beth from benefiting from these funds when she may need them.
• Not regularly reviewing the trust: Things change — including your circumstances, goals, and even the people in your life. If you have a revocable trust, it’s a good idea to review your trust every three to five years to make sure it’s up to date and reflects your current situation.

Is a trust fund right for you?

Setting up a trust fund is a personal decision based on your personal situation, the assets you want to pass on, and the goals you want to achieve.

A revocable living trust is often the most popular trust fund option. It offers the flexibility you need to make changes and adapt the terms of your trust over time. This is great for adding new assets, changing provisions, adding a new beneficiary, or changing your trustee.

If you're interested in creating a trust, you can use FreeWill’s revocable living trust tool to create your legally-binding trust documents quickly and securely.

If you have questions or want more information, an estate planning attorney can help. They can discuss your options and recommend what type of trust might work best for you.