Setting Up Trusts for Grandchildren

A lot of grandparents with significant assets want to give something to their grandchildren to help them with their future, but recognize that the children are not prepared for the responsibility of owning the property directly. A trust is an excellent way to provide for grandkids, while ensuring that the property is maintained by a responsible individual. While trusts are organized under state law, the Uniform Trust Code (UTC) offers an outstanding basis for speaking of these devices generally. The UTC has been endorsed by the American Bar Association and AARP, adopted as law in 23 states and has been introduced in three other state houses for enactment.

Instructions

1. Identify the beneficiaries. Trusts can be designed for specific individuals ("to Tim and Susan") or for a class ("my grandchildren"). If your children are planning on having more kids, it is best to set up the trust for “grandchildren.” However, if your children do not plan on having any more children, it may be better to identify the children by name to avoid confusion.

2. Find a trustee. The trustee is the individual who will have the responsibility to manage the assets in the trust for the benefit of the beneficiaries, or grandchildren. It is best to choose a trusted family friend for this position, but the trustee can even be a grandchild, so long as she is not the only trustee and sole beneficiary.

3. Assign to the trustee specific tasks to accomplish in maintaining the property. The trustee is required to have some responsibility over the trust’s assets, and this responsibility must be defined by the donor when the trust is created. Generally this responsibility involves maintaining the trust’s property, filing relevant governmental statements and filing trust tax returns.

4. Determine which property you will put into the trust. Once the property is transferred into the trust you surrender all rights of ownership to the trust, so make sure that you are comfortable with losing the property.

5. Draft a document signifying the intent to create a trust and its purpose. The trust document satisfies the legal requirement of signifying intent to create a trust, as well as codifies what the trust is supposed to do and how it is to be managed. Contained within should be all of the tasks assigned to the trustee and the beneficiaries of the trust.

6. Transfer the property to the trust. If these are investments, transfer the assets to an account in the trust’s name. If it is real property, sign the deed over to the trust.

7. Investigate to see if you have any specific filing requirements with the state where the trust is located. All trusts are defined by state law, and states may have different forms, filing or reporting requirements for trusts. Inquire at the secretary of state’s office where the trust is located.

8. Apply for an employer identification number (EIN) with the IRS. An EIN is the means that the IRS uses to organize and process non-personal returns and trusts are required to have one. The best way to apply for an EIN is on the IRS website. To complete the application, you will need the trustee’s Social Security number.

Tips & Warnings

• Assumed in these steps is that the creator of the trust has capacity, or is able to sign contracts and is aware of the consequences of his decision. Trustees will have to file annual tax returns (Form 1041) with the IRS and provide K-1s to the trust beneficiaries. When creating a trust, consult with a licensed attorney in your area, to ensure that it conforms to all state legal requirements. While every effort has been taken to ensure this article’s completeness and accuracy, it is not intended to be legal advice.

References

• USLegal: Trusts Law & Legal Definition
• Uniform Law Commission; Trust Code; National Conference of Commissioners on Uniform State Laws
• PennLaw; Uniform Trust Code; National Conference of Commissioners on Uniform State Laws; 2010
• IRS.gov; Tax Topic 755 – Employer Identification Number (EIN) – How to Apply; 2011