By setting up a trust for your elderly parent, you can ensure proper, reliable management and handling of your parent’s assets.
You might be wondering how to set up a trust for an elderly parent. That’s exactly what you’ll learn. This article details trusts and the best way to set one up.
Key Takeaways
Setting up a trust has several benefits, including reducing taxes on procured assets, eliminating probate costs, and protecting against scams.
There are several types of trusts to consider, such as revocable, irrevocable, living, testamentary, and special-needs trusts. In most cases, an irrevocable trust is the best choice.
Although you can, we would not recommend setting up a trust on your own. Hiring professional guidance to help you with your trust ensures legal compliance and correctness, and will save you from complications in the future.
What Is a Trust, and Why Set One Up for a Parent?
A trust is an arrangement to organize and distribute the assets of a living grantor.
A trust involves three parties:
The sole grantor is the legal owner of the assets listed in the trust. In your case, your elderly parent will be the sole grantor.
A division of assets is determined and set to be distributed to the beneficiaries. The beneficiaries can be you, your siblings, family friends, or anybody with a relationship with your parent.
The final role is the trustee. The trustee is responsible for allocating and distributing the assets per the trust after your parent passes away.
There are several benefits to setting up a trust. These benefits include:
Protection from scams, self-management mistakes, and fraud: As your parents get older, they are more likely to be targets of scam and fraud schemes. They also might lose their ability to manage their finances properly. A trust can protect them by giving control to a more knowledgeable and careful trustee.
Heavily reduced taxes on procured assets: Taxes on assets gained in a trust, like property tax, are much less than those given away during somebody’s lifetime.
No probate costs and no court proceedings: Through a will, the assets and finances of your parent will be distributed through court proceedings. The costs of these proceedings are known as probate costs, which are not applicable or necessary for trusts.
Trustworthy Certified Experts™: Get Extra Help With Your Parents' Estate Organization
Step #1: Understanding the Different Types of Trusts
Before getting started, it is essential to understand the different types of trusts.
Each type has its specific use and implications.
After you understand each type of trust, you can decide which type will benefit you, your parent, and other beneficiaries the most.
Revocable Trusts
Revocable trusts appoint the grantor as the trustee until they can no longer manage the assets.
This could be through passing away or incapacitation. The grantor designates a successor appointed as the trustee upon the passing or incapacitation.
This type of trust protects your parent by still allowing them a degree of control over their assets. They can edit and adjust the trust as they please. This protects your parent from other beneficiaries or non-trustees from changing the trust in unfavorable ways.
Irrevocable Trusts
Irrevocable trusts involve your parent, the grantor, giving up control to the trustee and other beneficiaries. Unlike revocable trusts, only beneficiaries can edit the trust, not your parent. Your parent will hold ownership of the assets listed on the trust until their transfer to the beneficiaries.
The significant benefit of an irrevocable trust is that it may not affect your parent’s ability to qualify for Medicaid.
This protects your parent from selling or relinquishing any assets to qualify. If their assets produce any income, they will not be subject to taxation for that income. It can also ensure your parent’s spouse does not lose their home upon passing away.
Testamentary Trusts
A testamentary trust protects your parent if their spouse passes away. When this happens, your parent’s assets are transferred into a testamentary trust, where they will have no control over them.
This type of trust is supposed to protect your parent from fraud and scams and allow them to live without worrying about finances.
Special-Needs Trusts
A special-needs trust ensures your parent remains eligible for disability benefits while still allowing them to receive income from their assets. Your parent can appoint you or a trusted third party as the trustee where you are responsible for the assets listed.
Special needs trusts are divided into two categories: first-party and third-party trusts. Your parent will be listed as a trust beneficiary. They will receive their own income from any assets, but this income will not affect their eligibility for government benefits.
A third-party trust is where the income is provided by a third party, not from your parent’s assets. The third party can be you and your assets or any other funding source your parents receive.
Step #2: Choosing a Trustee for Your Parent's Trust
Choosing a trustee is one of the most critical decisions when drafting a trust. There are a few factors you must consider before making your decision.
The first factor to consider is the expertise of the trustee.
The trustee will be responsible for all of your parent’s assets. Any errors can mean hefty fines or complications for those involved with the trust. Choosing a family member or individual trustee may cost less, but corporate trustees are safer and ensure compliance and correctness.
The next factor to consider is cost.
To hire a corporate trustee, you will likely pay 1-2% per year for their services. All of the insurance and compliance regulations are included. Compared to hiring a family member or individual trustee, it will likely cost more. However, individuals may hire outside sources, such as accountants or attorneys, to assist in their management.
The other factor is objectivity.
If you choose a family member as the trustee, their decisions may be biased or emotionally charged.
Complex relationships between family members and personal feelings can influence their decision. Corporate trustees are more objective-based but do not have insight into the family.
Step #3: Drafting the Trust Agreement
Drafting a trust agreement may be more straightforward than you think.
The first step is listing all assets your parent wants to include on the trust. This could be property, stocks, bank accounts, physical objects, or anything your parent “owns” and wants to pass on.
The next step is to secure the necessary paperwork associated with the assets to prove ownership. This includes deeds, certificates, titles, and other proof of ownership.
That’s where Trustworthy can help you. We secure and organize important family information, from IDs to money and property information.
After that, you must assign the roles of a trust.
Your parent, alone (not including their spouse), is the sole grantor. Next, your assigned trustee to manage the assets, and finally, the beneficiaries who will receive them.
Once you have the roles assigned and the necessary paperwork, the last step is to fill out the trust document following your state’s laws.
Step #4: Funding the Trust and Transferring Assets
The funding process will differ depending on the type of asset you wish to add to the trust.
However, most physical assets require a simple document to fund all assets in a broad category. For example, all “cash,” “furniture,” or “clothes.”
You require the specific documents outlined in the relevant organization's process to transfer assets like property, business stakes, or finance accounts.
For example, banks typically have designated forms to fill out to transfer a bank account to a trust. The property will require the deed or title of ownership to be transferred.
Contact all parties and companies involved if you have a more specific or complex situation. They will likely tell you directly what is required for them to be able to transfer the asset.
Step #5: Managing and Distributing Trust Assets After Your Parent's Death
After your parent passes away, the trustee will notify the necessary organizations and file the trust with the probate court.
The organizations that need to be notified are the social security administration and the Department of Health. Next, the trustee will notify the beneficiaries of the passing.
The trustee, if responsible, will pay off the grantor’s debts before finally distributing the assets according to the trust’s will. The trustee must legally distribute the assets exactly as the trust dictates.
It is also important to note that depending on the type and amount of the asset a beneficiary receives, they may have to pay taxes for the additional capital.
You should include additional capital, property, or assets when you file your taxes. If not given by a trustee, the beneficiary can legally request exact amounts and values of any assets they receive to aid in filing taxes correctly.
Step #6: Seeking Professional Guidance and Advice
We highly recommend professional guidance to help in the drafting process, distribution of assets, and legal matters. Professional guidance or advice will ensure legal compliance to avoid complications after receiving or distributing assets.
You can request the assistance of trust attorneys, corporate trustees, accountants, or financial advisors. Contact a professional and assemble the relevant documents before drafting your trust. The extra cost will save you effort and ensure a smooth process.
Frequently Asked Questions
What is the best trust for older people?
The best trust for older parents depends on your parent’s specific needs.
A revocable trust will allow them to edit or cancel it anytime. It also protects them from outside forces or beneficiaries from changing the trust. With a revocable trust, your parent can also assign a trusted successor trustee.
On the other hand, an irrevocable trust may not affect your parent’s ability to qualify for Medicaid. It also protects their assets from taxation and ensures the spouse does not lose their home upon passing away.
What type of bank account is best for a trust?
You can set up a trust account at your bank to deposit into or make payments from. The account will not belong to any individual but will be under the trust itself. This ensures the money in the account is subject only to the wishes of the grantor outlined explicitly in the trust.
What assets are best in trust?
The best assets to include in a trust are bank accounts, property, business equity, physical objects, insurance policies, and bonds or stocks. These assets will provide for easy distribution to beneficiaries and avoid excessive taxation.
What is the negative side of trust?
The downsides of a trust are the seemingly complex process and decisions that go into its creation. Giving up control of your assets can be scary, and a trust requires detailed and exact information to be considered legal and valid. There is also the risk of losing tax benefits or being subject to extra taxation with the transfer of assets.
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