How to Set Up a Trust for an Elderly Parent: 6 Easy Steps - Trustworthy: The Family Operating System® (2024)

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 start the process, and we’re here to help. 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 don’t 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.

Why You Should Set Up a Trust for Your Parent

A trust is an arrangement to organize and distribute the assets of a living grantor.

A trust involves three parties:

1. 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.

2. 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.

3. 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 scams 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.

That’s because each type of trust 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.

Step #3: Drafting the Trust Agreement

Drafting a trust agreement may be more straightforward than you think.

The first step in drafting a trust 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.

According to Travis Christiansen, attorney at Boyack Christiansen Legal Solutions in St. George, Utah, it’s also important to bear in mind that the assets in your parent’s trust will inherently guide how the trust can be used later on. He explains:

“If the trust is being established to ensure the person’s assets provide care for them it would be best to put those into the trust to have them fund the care needed until that is depleted. One thing to remember is that a trust must own something. What it owns will depend on the purposes of the trust.”

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 offer some much-needed support.

Trustworthy is a dynamic Family Operating System® that enables you to create, securely store, and manage all of the important family documents in your life. That includes everything from digital property deeds and trust documents to passports, stock share certificates, will documents, and everything in between.

And with our advanced AI-powered Autopilot feature, organizing and navigating those documents is a breeze.

Autopilot can instantly analyze all the documents you upload and extract key details, provide document summaries, and recommend tags to make your documents more searchable.

Ready to learn more? Check out Trustworthy’s range of features.

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 complete the trust document according to 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.”

David Fritch, attorney at Fritch Law in Jasper, Indiana, advises:

“The best way to fund a trust is with the parent's major assets, like a home, investments, life insurance, retirement funds, and bank accounts. Work with a lawyer to properly transfer ownership and beneficiary designations to the trust.”

You’ll 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.

But according to David Light, chief development officer at Land Broker MLS, it’s also crucial that you consider less traditional assets when transferring ownership into the trust. He advises:

“When drafting your parents' trust agreement, consider their digital legacy. In today's digital age, managing online assets and accounts after someone passes can be complex. Include provisions for digital assets, like social media, emails, and online banking.”

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.

A platform like Trustworthy can streamline this process.

You can use Trustworthy to tag and organize your documents to simplify reviewing and maintaining important tax documents and easily share secure access to relevant parties like your lawyer, accountant, or other family members.

This guarantees everyone is on the same page about how the trust is being settled, which can go a long way toward preventing any arguments or miscommunications in the future.

Step #6: Seeking Professional Guidance and Advice

We highly recommend professional guidance for the drafting process, asset distribution, and legal matters. This will ensure legal compliance and avoid complications after receiving or distributing assets.

“You need help from an attorney or lawyer (who is an estate planner) to set up a trust. While there are online programs, I don’t recommend them,” says attorney Travis Christiansen.

He continues: “Trusts can be quite complex and an online program is more a ‘one size fits all’ option. They aren’t usually able to take the law and the specifics of your circ*mstances and ensure that your trust is set up to meet your goals.”

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. On the other hand, an irrevocable trust may not affect your parent’s ability to qualify for Medicaid.

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 a trust?

Bank accounts, property, business equity, physical objects, insurance policies, and bonds or stocks are the best assets to include in a trust. These assets will facilitate easy distribution to beneficiaries and avoid excessive taxation.

What is the negative side of a 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.